Price dynamics of domestic and international cotton markets: A vector error correction mechanism (VECM) approach

Market integration plays an important role for all agricultural commodities in both developed and developing countries. Market Information such as price and other types of information are not properly transmitted, which will lead to a gap between demand and supply. The proper amalgamation, the strength of interdependence of one market with another market and the speed of changes are determining the degree of market integration and the global markets efficiency. This type of method and analysis helps to examine the long-run and short-run integration of major cotton markets with the framework of Vector Error Correction Mechanism (VECM). Major Cotton producing states of India were selected on the basis of their share in the total cotton production of the country such as Madhya Pradesh, Gujarat, Punjab, Andhra Pradesh, Telangana and Tamil Nadu were selected along with the major international cotton market such as the United States. Time series data regarding monthly cotton prices and arrivals in the major markets were also collected from various secondary sources for analysis from the year of January 2008 and December 2017. Findings revealed that the prices became stationary only upon first differencing. The existence of integration was confirmed among markets implying that there is price transmission. The error coefficients exposed that in Andhra Pradesh, Gujarat and Madhya Pradesh markets disequilibrium got corrected within a month by changes in its own prices with speed of convergence at 25, 14 and 35 per cent in the long-run path. But for other markets, the speed of convergence ranged from 11 per cent to 79 per cent for short-run price movements to become stable along long-run equilibrium path in one or two-month lagged period.