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.

CHAPTER ONE 
INTRODUCTION 
Background of the study 
Market integration can be defined as the markets that are connected through a process of arbitrage. There is undisputable importance of well integrated markets to a country. Linkages to marketing centres have been found to contribute significantly to rural households’ escape out of poverty (Krishna, 2004; Krishna et al., 2004). 

Sugar is a vital product that nearly all households in Kenya hardly miss among their daily meals. Kenya’s sugar consumption continues to grow and outpace production in line with the increasing population. Domestic production supplies about 70 percent of total consumption and the shortfall must be met through imports. Kenya Sugar Board forecasts consumption to grow at an annual rate of 4 percent (KSB, 2011), and this is nearly the same rate of growth in population. The other factor driving consumption increase is the expansion in industrial use. The use of sugar in industrial activities such as manufacturing soft drinks, biscuits, other beverages and confectionary products is rising steadily (KSB, 2011). It is this fact that necessitates a well- informed study to heighten development of sugar marketing in Kenya. 

Past literature shows that very few studies have been done concerning market integration in Africa. Indeed, the most innovative studies on market integration are on markets in developed economies (Spiller and Huang, 1986; Ardeni, 1989; Sexton et al., 1991; Goodwin and Schroeder, 1991; Goodwin and Piggott, 2001). Since it is through marketing that the surplus commodities in a production region can be adequately distributed to areas of scarcity, studies that focus on market integration are thus important. 

Distribution of the processed sugar in Kenya is done by company agents or wholesalers. These distributers use their own transportation vessels save some retailers. The country does not have any competitive advantage in the world and regional market. However, according to Mumias Sugar bulletin (2011), regional cross border trade remains a common occurrence with Mumias Sugar Company exporting ten percent of its produce to the neighbouring Uganda, Sudan, Rwanda and Ethiopia. 

To increase sales and product identification, local sugar mills have not only segmented the consumer market but also branded their products. They have packaged both white and brown sugar in different sizes (2kg, 1kg, 1/2kg, 1/4kg, 100g and 5g) to cater for different markets and different pockets (KSB, 2011). Producer companies have adopted different strategies to market their sugar. 

According to Kenya Sugar Board Report (2011), Kenyan millers sourced 80 percent of their brown sugar from Egypt in marketing year 2010, while South Africa and Saudi Arabia supplied 47 and 42 percent of refined sugar, respectively. However, the occasional sugar shortage in the country sometimes lead to sugar rationing where an individual is not allowed to purchase more than 2 kilograms of sugar in leading supermarkets. Such shortage often aggravates the increase in sugar prices which the traders pass to consumers. 

Market integration can be vertical, spatial or inter-temporal. Spatial market integration refers to a situation in which prices of a commodity in spatially separated markets move together and price signals and information are transmitted smoothly across the markets (Ghosh, 2000). An integrated market is synonymous with pricing efficiency, that is, prices as defined by Fama and Eugene (1970), should always reflect all information. For instance, prices move from time to time and their margins are subject to various shocks that may drive them apart or not. If in the long run the prices exhibit a linear constant relation then it is said that they are cointegrated. 

The study focuses on investigating the price co integration among Kenya’s major sugar markets. These involve several issues, namely, whether causality exist within pair-wise markets. It also involves the mechanisms to achieve the causality, for example to establish which market is the first-mover within a particular model. The issues involved relate to whether pair time- series variables are co integrated. If co integrations exist between paired markets then the information about their causality is also investigated. Potential long run co integration relation between different markets is a good indicator of price efficiency. Price efficiency in an economy acts as a major motivation to development. It also eliminates unwarranted government control and other factors that might accentuate market distortion. This research was therefore focused to investigate whether regular price fluctuation in Kenya is as a result of poorly integrated sugar markets in Kenya or other factors that are beyond the scope of this study. 

Statement of the problem 
Sugar is a major commodity that is consumed almost on daily basis by many households in Kenya. In addition, other consumers include learning institutions, hotels and restaurants as well as industrial users. These consumers obtain the commodity from outlets within their vicinity. Given this extensive market, the relationship between different markets has not been established though the information is latent in prices charged in different outlets. Despite an apparent irregular pattern exhibited in different markets, there is thin knowledge concerning whether the sugar market in the country is integrated or segmented. Many research studies that have been conducted in Kenya on sugar relate to productivity but little has been done on market integration. The information from this study would expose sugar market inefficiency/efficiency. 

General objective 
The broad objective of the study was to contribute to knowledge on market integration of sugar in Kenya so as to establish the basis of policy design within sugar market. 

Specific objectives 
i. To establish the determinants of price differences and spatial integration. 
ii. To analyse price differentials of the identified sugar markets. 
iii. To determine the existence or non-existence of integration between the selected sugar markets. 
iv. To establish the existence or non-existence of causality between the selected sugar markets. 

Hypotheses 
i. Road networks and transaction cost are not the only factors influencing price differences and spatial integration. 
ii. There are no price differentials in the selected sugar markets. 
iii. There is no integration between the selected sugar markets. 
iv. There is no causality between the identified markets. 

Justification of the study 
Market efficiency is the goal of each economy and efficient product movements can be designed through knowledge of market integration. The extent of market integration also has consequences for designing successful agricultural price stabilization policies (Fackler and Goodwin, 2001). A well improved marketing sector in terms of product movement and information availability especially when all determinants of price transmission and spatial integration are carefully looked into will boost not only the marketing of the sugar industry in Kenya but also the development of the country as a whole. Causality results generated from this study will inform predictability of price formation which will infiltrate to consumers through rational decision making. 

When market integration is well understood in the sugar sector, even other markets will enjoy the positive externalities such as improved road network as well as informed policies that will be made by the government thereafter. On the other hand, a well networked economy in terms of transport system smoothen the arbitrage of goods between markets in that economy. Well informed government policies eliminate duplication of resources in ventures which can be sorted out by efficient market integration in the economy. 

Scope and limitations 
The study was conducted in four markets in Kenya namely Kisumu, Garissa, Machakos and Nairobi. Commodity prices were used in this study since it is easier to acquire time series data on prices of sugar than any other data. Average sugar prices from 2008 to 2012 per kilograms were used. 

The study was limited to sugar which is one of the many products of sugarcane. Other sugarcane products that were left out of the study include molasses, bagasse and press mud. These by-products are used either in making fertilizer, animal feed or food processing. 

Definition of terms 
Market integration: Market integration concerns the free flow of goods and information, (and thus prices) over form, space, and time through the process of arbitrage. Market integration therefore is concerned about linkages among markets. 

Cointegration of markets: An alternative procedure for evaluating spatial market linkage in the presence of stochastic trends in price series. It requires that deviations from equilibrium conditions between two economic variables, (which are individually non-stationary in the short- run) be stationary in the long-run. 

Causality: An elusive concept that shows the relationship between two or more variables as well as the direction of relationship that exists between those variables. Segmentation of markets: Occurs if the price movement in one market is completely irrelevant to forecast price movement in another market.

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Item Type: Kenyan Project Material  |  Attribute: 61 pages  |  Chapters: 1-5
Format: MS Word  |  Price: KSh900  |  Delivery: Within 30Mins.
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