Efficiency of resource allocation in agriculture depends on
the functioning of commodity markets. Although the larger markets that
are better connected with the transport and communication network are
expected to be well-integrated, the same cannot be said about the
smaller, more remote markets. This paper tests integration of
agricultural commodity markets in Southeastern Punjab. The region is
located off the main trading axis of Pakistan, the Peshawar-Karachi
highway, and is mostly served by relatively small markets known as
mandis. This study focuses on markets for cotton, wheat, and rice in
five towns in the region. Cotton and wheat are the main crops in the
area while rice is mostly grown as part of crop rotation aimed at
controlling salinity. The analytical framework developed by Ravallion
was used to conduct tests of market integration for the three selected
commodities. Within this framework, it is possible to test for short-run
integration, long-run integration or complete market segmentation. The
results indicate that, generally, markets are integrated only in the
long run, with short-run integration limited to some special cases.
Moreover, the smaller markets are more likely to be isolated as compared
to the larger markets. The small markets also take longer to fully
adjust to the price shock originating from a more dominant central
market. Finally, in the case of rice, it is more likely that a market
would be isolated if it were small. This implies that farmers’
incentives to grow rice as a means of combating salinity may be
constrained by local demand conditions.
Commodity Markets, Long-Run Predictability, and Intertemporal Pricing