1. 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

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

3. 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

4. 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

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

6. 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)

7. Unit root test results by ADF
ADF test statistics
Variables Level 1st Diff.
USPC
USPW
MEPC
MEPW
5% significance level. Critical value = -2.98
PC = cantaloupe price
PW = watermelon price

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

9. Estimation & Results I 01/1996 – 07/2006 Vars. Null Trace 95% MES 95%
USPC & r=
MEPC r<= * *
USPW & r=
MEPW r<=
Fail to reject the null hypothesis at 1% significance level.

10. Estimation & Results II
01/1996 – 12/2002
Vars Null Trace % MES %
USPC & r=
MEPC r<=
USPW & r=
MEPW r<=
No evidence of cointegration of cantaloupe prices before 12/02.

11. Estimation & Results III
01/1996 – 12/2002
Vars Null Trace % MES %
USPC & r=
MEPC r<=
USPW & r=
MEPW r<= * *
Fail to reject the null hypothesis at 1% significance level.

12. Estimation & Results IV
Long run price transmission elasticities
01/96-07/ /96-12/ /03-07/06
Vars Can. Wat Can Wat Can Wat.
USPC
MEPC
USPW
MEPW

13. OLS estimates using ECM
01/96-07/ /96-12/ /03-07/06
DVars ΔUSPC ΔUSPW ΔUSPC ΔUSPW ΔUSPC ΔUSPW
Inter
ΔUSPC(-1)
(8.08) (3.27)
ΔMEPC(-1)
(5.35) (1.97)
ΔUSPC(-1)
(6.43) (4.42) (3.88)
ΔUSPC(-1)
(5.29) (4.62) (2.67)
EMC(-1)
(9.89) (5.98) (3.61) (4.45)

14. 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

15. 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

16. 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.

17. Thank You!