Removing the CWB As a Single Desk Grain Marketer: Assessing the Initial Effects on the Canada–US Feed Barley Market Thesis Supervisor: Dr
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REMOVING THE CWB AS A SINGLE DESK GRAIN MARKETER: ASSESSING THE INITIAL EFFECTS ON THE CANADA–US FEED BARLEY MARKET A Thesis Submitted to The College of Graduate Studies and Research In Partial Fulfillment of the Requirements For the Degree of Master of Science In the Department of Bioresource Policy, Business and Economics University of Saskatchewan Saskatoon, Saskatchewan by Haoyu Li © Copyright Haoyu Li, November 2013. All Rights Reserved. PERMISSION TO USE In presenting this thesis in partial fulfillment of the requirements for a Master of Science degree from the University of Saskatchewan, I agree that the Library of the University may make it freely available for inspection. I further agree that permission for copying of this thesis in any manner, in whole or in part, for scholarly purposes may be granted by the professor or professors who supervised my thesis work or, in their absence, by the Head of the Department or the Dean of the College in which my thesis work was done. It is understood that any copy or publication or use of this thesis or parts thereof for financial gain shall not be allowed without my written permission. It is also understood that due recognition shall be given to me and to the University of Saskatchewan in any scholarly use which may be made of any material in my thesis. Requests for permission to copy or to make other use of material in this thesis in whole or part should be addressed to: Head of the Department of Bioresource Policy, Business and Economics University of Saskatchewan 3D34–51 Campus Dr. Saskatoon, Saskatchewan, S7N 5A8 CANADA i ACKNOWLEDGEMENT I would like to express my gratitude to people who have selflessly offered their help during my graduate study. Without the guidance of my committee, the help from my fellows, and the support from my family, I could never complete this. I would like first and foremost to thank my thesis supervisor, Dr. James Nolan, in every possible way for his guidance and patience. I have never learned as much as I did in the past three years, not only about conducting academic work but also about my attitude to life. I am also indebted to my committee members, Dr. Richard Gray and Dr. Robert Roy, for their thoughtful considerations and everlasting inspirations. The mentorship from all of them has extended more than a thesis and deeply impacted my personal development into the future. I am also grateful for the support from people who have walked me through the challenges. I would like to thank Professor Klein who have thoroughly examined this thesis and offered valuable comments, thank Professor Rosaasen who provided suggestive recommendations, thank Professor Kerr and Hobbs for their guidance in the early stage of my graduate study, thank the Canadian Wheat Board for providing funding for this research. I would like to finally express my gratefulness to my parents and friends for standing by me all the time. Wherever you are, your encouragement and love are always the warm and bright light guides me through the cold and dark prairie winters. You make me a better person. ii ABSTRACT Li, Haoyu, M.Sc., University of Saskatchewan, Saskatoon, November, 2013. Removing the CWB as a Single Desk Grain Marketer: Assessing the Initial Effects on the Canada–US Feed Barley Market Thesis Supervisor: Dr. James F. Nolan Key Words: barley, Canadian Wheat Board, market integration, spatial price transmission, cointegration. This thesis examines some of the economic effects associated with the elimination of single desk marketing on Canadian feed barley exports. It focuses on the interactions between Canadian and US spot feed barley markets in transition after this policy change in Canada. A brief introduction about world and regional barley markets is provided. The role of the CWB single desk and its role in Canadian barley marketing are discussed to motivate analysis about the effects of its absence. This study postulates there should be no significant change in Canada–US regional feed barley markets, based on conclusions from previous studies. This postulate is broken down into three testable hypotheses under the framework of spatial price analysis. With respect to the Canada–US regional feed barley market as single desk marketing was eliminated in Canada; (1) There should not be a significant structural break in the feed barley prices; (2) There should not be a significant change in market integration; (3) There should not be a significant change in the direction of price transmission. To test these hypotheses, the study employs econometric tests on Canadian and US prices spot prices for substitutable feed barley. The hypotheses are tested using a structural break test, a cointegration test, a Granger causality test, and associated impulse response functions. Since structural break tests do not find significant breakpoints in the data, the first hypothesis cannot be rejected. Next, the sample is split into two subsamples at the date when single desk was eliminated. An Engle-Granger procedure and the Johansen procedure are used to test cointegrating relationships between the variables. The results do not allow us to reject the second hypothesis of no significant change in market integration. In contrast, the third hypothesis is rejected, as a significant change is uncovered using the Granger causality test. Simulated impulse responses are also consistent with this finding. iii TABLE OF CONTENTS PERMISSION TO USE ................................................................................................................... i ACKNOWLEDGEMENT .............................................................................................................. ii ABSTRACT ................................................................................................................................... iii TABLE OF CONTENTS ............................................................................................................... iv LIST OF FIGURES ....................................................................................................................... vi LIST OF TABLES ........................................................................................................................ vii LIST OF ABBREVIATION ........................................................................................................ viii CHAPTER ONE INTRODUCTION .............................................................................................. 1 1.1 Problem Statement .............................................................................................................................. 1 1.2 Objectives and Hypothesis ................................................................................................................. 2 1.3 Structure of the Study ......................................................................................................................... 3 CHAPTER TWO LITERATURE REVIEW: BARLEY MARKETS ............................................ 5 2.1 Global Barley Market ......................................................................................................................... 5 2.1.1 Production of Barley ................................................................................................................... 5 2.1.2 Barley Trade ................................................................................................................................ 7 2.2 US Barley Market ............................................................................................................................... 9 2.2.1 US Barley Production ................................................................................................................. 9 2.2.2 US Trade of Barley .................................................................................................................... 11 2.2.3 US Trade Barriers in the Regional Barley Market ................................................................... 12 2.3 Canadian Barley Market ................................................................................................................... 13 2.3.1 Canadian Barley Production .................................................................................................... 13 2.3.2 Trade of Western Barley ........................................................................................................... 15 2.3.3 The Historical Role of the CWB in Western Barley Marketing ................................................. 16 2.4 CWB Market Power in Western Barley Marketing .......................................................................... 19 2.4.1 Theory of Market Power ........................................................................................................... 20 2.4.2 Pricing of Western Canadian Barley ........................................................................................ 25 2.4.3 Price Discrimination and the CWB ........................................................................................... 26 CHAPTER THREE CONCEPTUAL FRAMEWORK ................................................................ 29 3.1 Price Transmission and Market Integration ...................................................................................... 29 3.1.1 Market Integration .................................................................................................................... 29 3.1.2 Price Transmission ...................................................................................................................