Analysis of price transmission and market integration of sugar. A case of selected markets in Kenya

Abstract

Measuring market integration is one of the most important aspects that can be used to assess the impacts of market development and liberalization policies. The study used cointegration approach to evaluate market integration in the sugar industry in Kenya. The approach used appreciates the existence of transaction cost and other determinants of market integration including effective communication as well as good transport network. The nature of movement of sugar prices in different markets in Kenya was established. The objectives of the study were: to determine the existence of integration between the sugar markets selected; to establish the existence of causality between the sugar markets identified; and to establish the determinants of price differences and spatial integration between the sugar markets. Data was obtained for average monthly prices of sugar from January 2008 to December 2012. The analysis of the objectives was done using Cointegration model, Granger Causality model and descriptive statistics. Statistical Package for Social Sciences, Microsoft Excel and STATA computer programs were used to process the data. The result obtained from the study revealed that market integration is greatly affected by road networks, communication networks, consumers’ purchasing power and the distance between the markets. The study observed that only markets that were connected with good road networks experienced arbitrage. The information generated by this study is important in guiding policy makers to identify points of interventions as well as in designing effective and efficient sugar marketing channels. The study observed that there is need to effectively design communication network systems in order to disseminate necessary information to sugar traders.