Detecting Price Links in the World Cotton Market
33 Pages Posted: 20 Apr 2016
Date Written: July 1998
Links between international cotton prices have improved in the past decade-in the short run largely because prices are now transmitted more quickly. To a lesser extent, and for different reasons, prices should also converge somewhat more in the long run. Baffes and Ajwad examine the degree to which international cotton prices are linked and test whether such links have improved over the past decade. They conclude that the degree of linkage has improved over the past decade, in the short run largely as the result of short-run price transmission-and to a lesser extent because of long-run comovement. Improvements in information technology have made it much easier for information about demand to be disseminated across markets, so changes in cotton prices attributable to a price shock in one place are soon transmitted to prices in other places. Moreover, many countries have liberalized their cotton subsectors, and in some countries the government`s role has changed substantially. In East Africa, for example, cotton marketing and trade was handled entirely by government parastatals. Now Tanzania, Uganda, and Zimbabwe have liberalized their marketing and trade regimes, to varying degrees. In the former Soviet Union (FSU) cotton shipped from Central Asia to other parts of the FSU were considered part of domestic trade. Now cotton exports from Uzbekistan are the most important component of that country`s foreign trade. With such changes, one should expect cotton prices to converge somewhat more in the long run. Price links between West Africa and Central Asia are much greater than between the United States and other markets-in part because most West African and Central Asian cotton is exported, compared with only 40 percent of U.S. cotton (and 60 percent of Greek cotton). Prices in countries that export most of their cotton are more likely to converge than prices in countries where prices are subject to both domestic and international demand conditions. To improve price risk management, there should be futures contracts other than those traded on the New York Cotton Exchange, which mostly serves domestic U.S. needs and is not used extensively by non-U.S. hedgers and speculators. This paper - product of the Development Research Group - is part of a larger effort in the group to investigate the behavior of world prices. Copies of the paper are available free from the World Bank, 1818 H Street NW, Washington, DC 20433. John Baffes may be contacted at email@example.com.
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