DESCRIPCIÓN DE LA VIABILIDAD DE LA PROPUESTA

Overview

During the expansion of the last paper, an interest grew for the specific case of the North Eastern (NE) region of Brazil. This is the poorest region of the country and is second in terms of population. Here rice is a staple diet item and in the poorest states it is responsible for more than 30% of the total caloric consumption. This, together with the fact that the NE imports around 75% of its consumption, was what caught our attention and interest. Such a sensible region in terms of food security must be analyzed separately; by doing so, it is possible to provide policy markers a firm bases to protect the health and the quality of life for these people.

The relationships among the states of the NE and the rest of Brazil as well as the international principal exporters were analyzed. The Vector Error Correction Model (VECM) proposed by Johansen (1995) was applied. Additionally, in order to allow for the presence of structural breaks, the process suggested by Lütkepohl, Saikkonen and Trankler (2004) was included.

The results suggest that the NE is partially isolated from the rest of the markets since only 40% of the relationships share a common long run path. Nonetheless, most of the significant integrated relationships show elasticities of cointegration above 0.65. However, the two poorest states, Maranhão and Piauí, show the lowest number of cointegrated relationships which are weak in terms of the elasticity and speed of adjustment. This means that the food security of the poorest NE region does not face the high risk of an elevated increment in the prices in response to the movement of its trading partners` prices.

Nevertheless, the document also included a second part in which four possible variables which could change the integration relationship were examined. These variables are in part drawn upon from the preceding research analysis, and are the following: GDP, access to a main unloading port, geographical distance between the markets and, in the case of a relationship with international markets, what the trading partner country is. In this respect, distance and having a main port were found significant in the definition of the integration. Taking the investment in improvement of road and port quality into consideration as well, from the policy making point of view these results suggest an increment in the integration of the NE with its partners in the foreseeable future, and therefore the need for a periodic analysis of the integration behaviour of this region.

An unexpected finding was that the probability of finding an integrated relationship with Argentina is higher than with Uruguay, even though the latter exports a larger amount of rice. It could be related to the fact that in Uruguay the prices are defined by means of an agreement negotiated between the industry and the producer while in Argentina it is through the markets forces.

Discussion

The contents and ideas of this document mainly contribute to the policy analysis toolkit. Two principal findings have been presented. Firstly, the results point out that the NE is isolated from the rest of the markets, especially its poorest states. Secondly, this will change in the near future in response to the improvement of roads and ports. Nonetheless, other relevant points also emerge from the analysis. For instance, the findings suggest that Pernambuco is the NE state with the highest amount of cointegrated relationships, which seems counter-intuitive since the consumption and production of rice here are some of the lowest in the region. However, what is shown is the relevance of having access to the external market by maritime route given that this state has two of the most important NE ports in terms of rice entry.

Next, another notable outcome is that the adjustments to deviations from the long run equilibrium are made as much for the NE markets as for the international market. The latter, as mentioned above, corresponds to Argentina´s prices. This means that prices of the NE are susceptible to price increments and events happening in Argentina. This was also verified by the fact that the crisis in Argentina provoked structural changes in the integrated relationships. Therefore, it could be necessary to evaluate consumer protection measures in the case of a crisis in this market.

2.4. Spatial Price Transmission of the Rice Market of Northeastern Brazil and Variables which Affect It

17 Additionally, future research should take the net benefit ratio, which is the difference between the importance of the product for consumers (as percentage on the total household expenditures) or producers (as percentage on the total household income), into consideration. The NE is a producer and a consumer region, where the importance of rice in the total expenditures vs. the total income vary among states, therefore the policy recommendations per state also vary. For instance, the policy measures required in a state with an important loading port will be different whether the net benefit ratio is positive or negative. In this regard, the fact that Argentina has lower level of prices than Brazil, in case of a positive change in integration with international prices, would probably result in a decrease in rice prices. This means a gain of welfare when the net benefit ratio is negative or a lost when is positive. Moreover, as mentioned before, the net benefit ratio related to the poorest people would be different than the state one. This is especially relevant In the NE since the most vulnerable group of Brazilian in terms of food security is located here. Moreover, the policy coherence between measures apply to rice market and other policy objectives, for instance improvement in the nutrition of children, should be analysed in the light of the conjunction between price transmission results and the net benefit ratio, for example, estimating the latter for the subgroup of poor household with children. In addition, in this research is applied the cointegration framework suggested by Johansen (1995) while the last paper applied Engle and Granger’s (1986) two step procedure. The decision to apply a different approach in the analysis of the NE is due the different strengths and weaknesses that each methodology has, and by doing so, to be able to compare whether the results are reliable. One of the weaknesses of Engle and Granger’s approach which led us to this decision was that in the last paper an important amount of observations (44%) were excluded since this methodology requires one of the two prices to be designated as exogenous. In order to fulfil this, the pairs of prices which affect each other were excluded. Nevertheless, this methodology has the possibility to include more than one unknown structural break as an advantage while in the case of Johansen it is not possible. In this regard, taking the relationships of all Brazilian sectors and the equations which included structural breaks into consideration, it is particularly noticeable that with the Johansen methodology cointegration was more likely to be rejected. This might be associated with the fact that the Johansen approach only allows for one structural break in the constant coefficient while, according to the results from the Engle and Granger`s approach, there are relationships which show more than one significant break with changes in the intercept as well as in the slope. It also should be added that Engle and Granger’s approach without a break shows a higher probability of rejecting cointegration.

Regarding the timing of the breaks, the results are strong; estimates were made using the Johansen approach with the modifications suggested by Lütkepohl, Saikkonen and Trankler (2004), where in most of the cases similar to those obtained with Engle and Granger’s methodology using the procedure recommended by Bai and Perron (1998) and modified by the significant values proposed by Kejriwal and Perron (2010). The break times are concentrated around two main events in both cases: the Plan Real and the crop failures of Rio Grande do Sul. Nevertheless, in the last document, when more than one event is allowed to occur, the liberalization of the currency in 1999 was also significant.

With regard to the variables with an effect on integration, geographical distance and the presence of a main port presented the same sign in both documents. However, the effect of the latter was higher in the second paper. Nevertheless, both approaches support the idea of a future growth in integration.