Integration of Agricultural Commodity Markets in Punjab

Efficiency of resource allocation in agriculture depends on the functioning of commodity markets. Although the larger markets that are better connected with the transport and communication network are expected to be well-integrated, the same cannot be said about the smaller, more remote markets. This paper tests integration of agricultural commodity markets in Southeastern Punjab. The region is located off the main trading axis of Pakistan, the Peshawar-Karachi highway, and is mostly served by relatively small markets known as mandis. This study focuses on markets for cotton, wheat, and rice in five towns in the region. Cotton and wheat are the main crops in the area while rice is mostly grown as part of crop rotation aimed at controlling salinity. The analytical framework developed by Ravallion was used to conduct tests of market integration for the three selected commodities. Within this framework, it is possible to test for short-run integration, long-run integration or complete market segmentation. The results indicate that, generally, markets are integrated only in the long run, with short-run integration limited to some special cases. Moreover, the smaller markets are more likely to be isolated as compared to the larger markets. The small markets also take longer to fully adjust to the price shock originating from a more dominant central market. Finally, in the case of rice, it is more likely that a market would be isolated if it were small. This implies that farmers’ incentives to grow rice as a means of combating salinity may be constrained by local demand conditions.