Economics COINTEGRATION ANALYSIS OF THE WORLD’S SUGAR MARKET: THE EXISTENCE OF THE LONG-TERM EQUILIBRIUM Elena Kuzmenko1, Luboš Smutka2, Wadim Strielkowski3, Justas Štreimikis4, Dalia Štreimikienė5 1 Czech University of Life Sciences, Faculty of Economics and Management, Department of Economics, Czech Republic, ORCID: 0000-0002-2091-4630, [email protected]; 2 Czech University of Life Sciences, Faculty of Economics and Management, Department of Economics, Czech Republic, ORCID: 0000-0001-5385-1333, [email protected]; 3 Czech University of Life Sciences, Faculty of Economics and Management, Department of Economics, Czech Republic, ORCID: 0000-0001-6113-3841, [email protected]; 4 University of Economics and Human Science in Warsaw, Faculty of Management and Finances, Finance and Accounting Department, Poland, ORCID: 0000-0003-2619-3229, [email protected]; 5 Vilnius University, Kaunas Faculty, Institute of Social Sciences and Applied Informatics, Lithuania, ORCID: 0000-0002-3247-9912, [email protected] (corresponding author). Abstract: This paper addresses the issue of interconnection among major sugar markets and commodity/exchange stocks in different parts of the world using the Johansen cointegration approach and vector error correction model. Due to a high degree of sugar market fragmentation and corresponding diversity in price levels and its volatility in different regions, the results of our analysis sheds some light on the very fact of a ‘single’ global sugar market existence and can be important not just with regard to producers and buyers of sugar but for the international investors as well, both in the light of risk governance and maximizing profitability. Using the evaluation of the extent of connection among regional sugar markets, one can assess potential benefits available to investors through international diversification between the analyzed markets. Our analysis has revealed the presence of mutual interaction among the selected sugar markets/commodity stock exchanges in individual regions and confirmed the long-term equilibrium among them. Therefore, despite an obvious diversity in price level and their fluctuations in different world regions, the selected for the analysis regional sugar markets are acting together as a single organism. The determining of the extent to which the analyzed sugar markets are interconnected have significantly strengthen the understanding of the latest sugar price developmental trends. In addition, the results of this study opened space and mapped out clear objectives and measurable targets for potential research – to reveal what markets can be referred to as leading ones in a sense that namely they primarily serve as a source of price turbulence. In summary, our results revealed and confirmed the long-term equilibrium among them and the outcomes of this study opened the new research realms and identified the clear and measurable targets for the future empirical research in this field. Keywords: Sugar, exchange/commodity stocks, cointegration, VECM, equilibrium. JEL Classification: O13, Q13, Q18. APA Style Citation: Kuzmenko, E., Smutka, L., Strielkowski, W., Štreimikis, J., & Štreimikienė, D. (2020). Cointegration Analysis of the World’s Sugar Market: The Existence of the Long- term Equilibrium. E&M Economics and Management, 23(4), 23–38. https:///doi.org/10.15240/ tul/001/2020-4-002 DOI: 10.15240/tul/001/2020-4-002 4, XXIII, 2020 23 EM_4_2020.indd 23 18.11.2020 12:27:45 Economics Introduction production is realized and sold being based on In general, sugar markets are among the mutual contracts between sugar producers and fastest developing markets in the world (Huang foodstuff producers (Reinbergr, 2018). As it was & Xiong, 2020). The significant global market specified the global sugar price formation and liberalization resulted in the fast growth of supply mutual price interaction at the level of world and stocks (Zuckerindustrie, 2018). At the market is extremely difficult process and there same time, continuous changes in consumption are numerous factors and various stakeholders patterns are affecting the global demand for that may and do influence this process sugar and sugar products (Muhammad et al., (Zuckerindustrie, 2017). In order to understand 2019). On the other hand, global sugar market the process of sugar price formation at least at is still influenced by the existing protectionists the level of sugar production, which is directly measures (see Solomon, 2014). It is of note contracted, it is necessary, first, to understand that protectionist policies are applied in sugar the relations existing among individual markets markets by both developed and developing all around the world. countries (Haley, 2016). Eventually, global The problem of sugar price development sugar market appears to be suffering because at the level of selected commodity stock of high-applied tariffs, limited tariff quotas and exchanges was addressed in the following production subsidies (da Costa et al., 2015). As several studies published in the past. Tahir et a result, this is reflected in price transmission al. (2016) examined contemporaneous as well and significant sugar price differences existing as causal relationship among trading volume, among individual regions in the world. Another returns and sugar price volatility. Resende specific feature of global sugar market is its and Candido (2015) assessed the existing notable price fluctuation which is a result of relationship among the sugarcane sector speculative trade activities. This obviously (represented by Ethanol and Sugar), Oil, happens since financial instruments proliferated BRL/USD Exchange Rate and Brazilian stock and became in turn objects of speculation market (represented by the BOVESPA – Bolsa (Svatoš et al., 2013). Especially within the last de Valores de São Paulo – Index). Lázaro decade the global sugar market attracted short- (2013) analyzed a sugar price index of Havana term-oriented investors. Those are interested Stock Exchange. Čermák (2009) analyzed the in dynamic and rapid changes in price state of global sugar market in general and the development as their activities are both price role of NYSE (New York) and LIFFE (London). reduction and price growth oriented (Smrčka et Tanner et al. (2018) analyzed sugar price al., 2012). This eventually results in a particular development in the process of world economy fragmentation in development of global sugar financialization and influence of speculations. market which bears corresponding problems According to their findings considerable reflected in mutual price determination and sugar price volatility to a large extent was its adequate transmission. With this regard, it due to operations in speculative funds (hedge becomes hard to talk about the existence of funds). Gevorkyan (2018) studied short-term such a single global market of sugar. It is, in sensitivity among exchange market pressure fact, represented by several regional markets and various domestic and external factors that are more or less interconnected (Licht, in primary commodity-exporting emerging 2008). Nevertheless, the very degree of markets. Agbenyegah (2014) analyzed sugar interconnections among these regional markets market specific and the role of commodity that may exist through particular bilateral or stock exchange operators at the level of Brazil, multilateral agreements (Reinbergr, 2018), is Thailand and China in relation to NYSE. Savant not evident and, thus, is worth to be studied. (2011) identified the basic fundamentals of the At the same time the sugar price is also global sugar market. He analyzed sugar market a specific category, since its value is a result specifics in relation to commodity market, sugar of mutually determined supply and demand and sugar crops production, intercontinental interactions related only to a marginal exchange and world market. portion of real production. It is estimated that In the light of the discussed above, the approximately only forty percent of global sugar interconnection among major sugar markets in production is realized through free market the world may have critical relevance not just to (Reinbergr, 2018). The majority of global sugar producers and buyers, but to international equity 24 2020, XXIII, 4 EM_4_2020.indd 24 18.11.2020 12:27:45 Economics investors both in the light of risk governance 1. Methodology and maximizing profitability. By evaluating the 1.1 Data Description extent of connection among sugar markets in The raw data, consisted of daily closing prices different parts of the world, we can estimate at the selected stock exchanges, were retrieved the existence of potential gains for investors from Licht-Interactive. The corresponding through international diversification between stock exchanges were selected according the examined markets (Giot, 2003). Because to a principle of representativeness. The if the level of cointegration among them three important representatives of American increases, the benefit of diversification falls continent’s sugar are Brazil, Mexico and USA. (Narayan, 2005). Nevertheless, the very fact of Brasil Bolsa Balcao is typical representative the existence of such a long-term equilibrium of Latino American sugar market, NYSE (which can be referred to as a hypothesis of is representative of North American sugar a ‘single global sugar market’) bears important market and Bolsa Mexicana de Valores can be implications as for potential investors, so as for referred to as a bridge between