Market Integration of Domestic and International Cotton Prices

Abstract

Market integration is perceived as a precondition for effective market reform in developing countries. The current study on cointegration analysis was taken up to analyse how different spatially separated cotton markets are inter-connected and impact the price change in one market on other markets. Monthly prices for the period January 2010 to February 2024 from the markets viz., Cotlook-A Index, Chinese spot market, Rajkot in Gujarat, Hinganghat in Maharashtra, Adilabad and Warangal in Telangana were used for the analysis. Augmented Dickey-Fuller (ADF), Johansen's multivariate Cointegration approach, Granger causality test, and Vector Error Correction Model (VECM) were used to test the study the long-run spatial integration. The study confirmed the presence of market cointegration. The pair-wise Granger causality test identified the bidirectional and unidirectional relationship between markets chosen. Cotlook A- Index, China and Adilabad markets affected most of the markets unidirectionally and acted as lead markets. The VECM inferred that China, Rajkot and Hinganghat markets attained equilibrium rapidly in short run. Thus, the cotton markets were highly integrated in India. Thus, Stabilizing the prices in one market would influence the other markets improving competitiveness and market efficiency.