Yan Xia, Dwi Susanto, & Parr Rosson Testing the Market Integration in Regional Cantaloupe & Mellon Markets between the U.S. and Mexico: An Application of Error Correction Model Yan Xia, Dwi Susanto, & Parr Rosson Department of AgEcon Texas A&M University

Overview Cantaloupe and Melon Markets – import tariffs Data and Methodology Estimation and Results Conclusions

Cantaloupe U.S. is net importer Mexico is the major supplier to U.S. 24% of supply in 1990’s Mexico is the major supplier to U.S. U.S. phasing out tariffs on Mexican imports Mexico phasing out tariffs with a faster pace Major tariffs eliminated on Dec 31, 2002

Watermelon Mexico is the major supplier of watermelon to the U.S. 92% since NAFTA, 1994 Very little are exported from U.S. to Mexico Less than 1 percent of U.S. crop Major tariffs are mutually eliminated Jan 1, 2003

NAFTA Major tariffs were removed in 1994 and agricultural markets become much more integrated Intensifies the integration process over the last 12 years

Data & Methodology Monthly prices, Jan 1996 – July 2006 ADF test for the order of integration AIC to determine lag length Price series are integrated of order one I(1)

Unit root test results by ADF ADF test statistics Variables Level 1st Diff. USPC -0.8051 -11.9574 USPW -1.3036 -15.0388 MEPC -0.7692 -8.3876 MEPW -0.3803 -12.8115 5% significance level. Critical value = -2.98 PC = cantaloupe price PW = watermelon price

Data & Methodology II Johansen approach to test cointegration Trace test Maximum Likelihood Ratio Test (MEV)

Estimation & Results I 01/1996 – 07/2006 Vars. Null Trace 95% MES 95% USPC & r=0 24.67 19.99 15.31 15.67 MEPC r<=0 9.36* 9.13 9.36* 9.24 USPW & r=0 46.74 19.99 39.30 15.67 MEPW r<=0 7.44 9.13 7.44 9.24 Fail to reject the null hypothesis at 1% significance level.

Estimation & Results II 01/1996 – 12/2002 Vars. Null Trace 95% MES 95% USPC & r=0 16.69 19.99 9.30 15.67 MEPC r<=0 7.39 9.13 7.39 9.24 USPW & r=0 22.20 19.99 18.34 15.67 MEPW r<=0 3.85 9.13 3.85 9.24 No evidence of cointegration of cantaloupe prices before 12/02.

Estimation & Results III 01/1996 – 12/2002 Vars. Null Trace 95% MES 95% USPC & r=0 31.47 19.99 25.05 15.67 MEPC r<=0 6.42 9.13 6.42 9.24 USPW & r=0 41.54 19.99 31.83 15.67 MEPW r<=0 9.71* 9.13 9.71* 9.24 Fail to reject the null hypothesis at 1% significance level.

Estimation & Results IV Long run price transmission elasticities 01/96-07/06 01/96-12/02 01/03-07/06 Vars. Can. Wat. Can. Wat. Can. Wat. USPC 1.00 - 1.00 MEPC -.8474 - -1.8458 USPW 1.00 1.00 1.00 MEPW -.2313 -.1201 -2.1438

OLS estimates using ECM 01/96-07/06 01/96-12/02 01/03-07/06 DVars. ΔUSPC ΔUSPW ΔUSPC ΔUSPW ΔUSPC ΔUSPW Inter. -.0014 -.0012 -.0021 -.0002 .0005 ΔUSPC(-1) -.5257 -.3925 (8.08) (3.27) ΔMEPC(-1) .5570 .4116 (5.35) (1.97) ΔUSPC(-1) -.4446 -.4075 -.4363 (6.43) (4.42) (3.88) ΔUSPC(-1) .8397 .8624 .9307 (5.29) (4.62) (2.67) EMC(-1) .7983 .4649 .3642 .6579 (9.89) (5.98) (3.61) (4.45)

Conclusions I Cantaloupe prices & watermelon prices are cointegrated 01/96-07/06 Watermelon prices are cointegrated pre- and post- 2002 Cantaloupe prices are cointegrated after 2002 only

Conclusions II Market integration significantly enhanced in watermelon sector after the removal of major tariff in 2002 0.12 to 2.14 Dramatic improvement of market integration in cantaloupe sector after 2002 0.85 to 1.85

Conclusions III U.S. and Mexican prices tend to return to their long-run equilibrium from any deviations in the normal relationships. Time taken to return to long-run equilibrium is faster during post-2002 than pre-2002 period. The removal of major tariff in 2002 sped up market integration.

Thank You!