The Effects of Various Policy Regimes in the Integration of North American Grain Markets

Abstract

This paper examines the integration between U.S. and Canadian grain prices using cointegration and error correction approach. Price relationships are examined in four different subperiods: pre‐NAFTA (January 1986 to December 1993), post‐NAFTA (January 1994 to July 1999), pre‐WGTA (January 1986 to July 1995) and post‐WGTA (August 1995 to July 1999). A free trade agreement implemented in 1989 that later folded into NAFTA affected price integration in the North American grain market, but Canada's elimination of freight subsidies in 1995 strengthened it. Empirical results indicate that longterm relationships exist among the price series. Prices are found to be first‐difference stationary and cointegrated during the four subperiods. However, cointegration analysis shows significant post‐WGTA improvement in market integration, particularly in the speed at which the market adjusts to departures from its long‐run equilibrium.