integration of global rice market after the … · 1.1 characteristics of the global rice market:...
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2016-2017
INTEGRATION OF GLOBAL RICE MARKET AFTER
THE AGRICULTURAL TRADE LIBERALIZATION
Choe, Kyoungin
Promotor: Prof. Jeroen Buysse
Co-promoter: Prof. Doo Bong Han
Thesis submitted in partial fulfilment of the requirements
for the joint academic degree of International Master of Science in Rural Development from Ghent University (Belgium), Agrocampus Ouest (France), Humboldt University of Berlin (Germany), Slovak
University of Agriculture in Nitra (Slovakia) and University of Pisa (Italy) in collaboration with Wageningen University (The Netherlands),
This thesis was elaborated and defended at Ghent University within the
framework of the European Erasmus Mundus Programme “Erasmus Mundus
International Master of Science in Rural Development " (Course N° 2010-0114 –
R 04-018/001)
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I
Integration of Global Rice Market after the
Agricultural Trade Liberalization
KYOUNGIN CHOE
Abstract
Japan and Korea partially opened its rice market through the Uruguay Round Agreement implemented in 1995, and
widened it through tariffication in 1999 and 2014, respectively. To this day, however, they are considered protective
markets in the global trade. This is because these countries have implemented several protective measures, such as price
and income support programs as well as a diversion program in rice farming. Therefore, an attempt was made in this
study to determine if the two aforementioned markets have actually been separated from the global rice market since after
the implementation of the UR agreement. In this study, cointegration and causality tests were mainly performed to
examine the existence and direction of market integration among rice markets. Especially, the Korean and Japanese rice
markets for the periods before and after the implementation of the UR agreement in 1995 were focused on. Three main
study results were obtained. First, there is a long-run relationship among global rice prices (prices of Thailand, Arkansas
and California in the United States). Second, the Korean and Japanese wholesale rice prices were found to have no long-
run relationship with other global rice prices in both periods. Third, it may be expected that the Korean rice market will
be temporarily isolated from global market based on the Japanese rice market case. In the long-term perspective, however,
the border protection measures will be continuously reduced. Therefore, it may be inevitable for the Korean rice market
to compete with the global rice markets.
Keywords: Uruguay Round Agreement, Rice market, Cointegration test, Causality test, Korea, Japan
II
CONTENTS
List of Tables ................................................................................................................................ III
List of Figures ............................................................................................................................... IV
1. Introduction .................................................................................................................................. 1
1.1 Characteristics of the global rice market: Thin and volatile ................................................. 1
1.2 Global rice trade: Indica and Japonica rice........................................................................... 3
1.3 Rice market opening in Japan and Korea ............................................................................. 4
1.4 Objectives and structure of the study.................................................................................... 6
2. Korean and Japanese Rice Economies ....................................................................................... 7
2.1 Structural changes in the rice market.................................................................................... 7
2.2 Changes in the rice policies in Korea and Japan ................................................................ 13
3. Literature Review ....................................................................................................................... 17
4. Data and Methodology ............................................................................................................... 21
4.1 Data .................................................................................................................................... 21
4.2 Methodology ...................................................................................................................... 23
5. Empirical Results ....................................................................................................................... 26
5.1 Cointegration tests ............................................................................................................. 27
5.2 Causality tests .................................................................................................................... 31
5.3 Impulse response and variance decomposition analyses ................................................... 33
6. Conclusion ................................................................................................................................... 43
References ...................................................................................................................................... 46
III
List of Tables
Table 1. The share of rice market of leading exporting countries ........................................................ 3
Table 2. Japan’s minimum access tenders (1995-2014) ....................................................................... 5
Table 3. Korea’s minimum access tenders (1995-2014) ...................................................................... 6
Table 4. Significance of rice farming in Korea .................................................................................... 8
Table 5. Direct payment program: Implemented in rice sector in Korea ........................................... 14
Table 6. Unit root tests ....................................................................................................................... 26
Table 7. Multivariate cointegration tests (October 1987-December 1994) ........................................ 29
Table 8. Multivariate cointegration tests (January 1995-September 2016)........................................ 29
Table 9. Bivariate cointegration tests (October 1987-December 1994) ............................................. 30
Table 10. Bivariate cointegration tests (January 1995-September 2016) ........................................... 30
Table 11. Causality tests (October 1987-December 1994) ................................................................. 32
Table 12. Causality tests (January 1995-September 2016) ................................................................ 32
Table 13. Variance decomposition of Arkansas rice price .................................................................. 40
Table 14. Variance decomposition of Thai rice price ......................................................................... 41
Table 15. Variance decomposition of Californian rice price .............................................................. 41
Table 16. Variance decomposition of Korean rice price .................................................................... 41
Table 17. Variance decomposition of Japanese rice price .................................................................. 42
IV
List of Figures
Figure 1. The share of trade volume: Rice, wheat, corn and soybeans ................................................ 2
Figure 2. Global trade in rice and share of production ......................................................................... 2
Figure 3. Per-capita rice consumption in Korea ................................................................................... 9
Figure 4. Harvested area and production of rice in Korea ................................................................... 9
Figure 5. Per-capita rice consumption in Japan ................................................................................. 11
Figure 6. Production and harvested area of rice in Japan ................................................................... 11
Figure 7. Changes in ending stocks and stock-to-use ratio of rice in Japan ...................................... 12
Figure 8. Monthly rice price in five markets ...................................................................................... 22
Figure 9. Impulse responses for the first period ................................................................................. 34
Figure 10. Impulse responses for the second period .......................................................................... 36
1
1. Introduction
1.1 Characteristics of the global rice market: Thin and volatile
Rice is a major staple food for almost half of the world’s population, and is one of the primary sources
of calories. Since recently, around 480 million metric tons of rice have been produced per year
(Muthayya et al., 2014). The international rice market is generally regarded as thin and volatile
because the global trade volume of rice is relatively small. Compared to 41.6% for soybeans, 23.5%
for wheat, and 14% for corn, only 8.5% of the global rice production has been traded in the current
year (2016) (Figure 1). This is due to the geographic concentration of rice production and
consumption as well as the government intervention with both the rice exporters and importers. Rice
is not only a main source of income for rural economies but is also a politically sensitive good in
those countries. Therefore, the governments have intervened in the domestic and global markets to
stabilize their respective rice economies. In particular, the major rice-exporting countries introduced
export restrictions after the food crisis in 2008, and those actions caused a 40% reduction in the export
volume of rice (United States International Trade Commission, 2015). Meanwhile, some rice-
importing countries, such as Korea, Japan, and Taiwan, set minimum market access (MMA) and
imposed a high level of tariff on imported rice to secure their rice economies.
Nevertheless, the global rice trade has gradually expanded over the last 50 years. It started to increase
in the late 1980s as a result of the trade liberalization in many countries and the implementation of
the General Agreement on Tariffs and Trade (GATT)・Uruguay Round (UR) agricultural agreement
in 1994. Specifically, the volume of international rice trade has been extended about sixfold. It rose
from 6.4 million tons in 1960 to 40.9 million tons in 2016. Moreover, trade as a share of the total
production has more than doubled from 4.2 to 8.5% over such periods (Figure 2). The international
rice trade involves a small number of exporting countries and a relatively large number of importing
countries (Dorosh & Wailes, 2010). Furthermore, the market concentration of the leading rice-
2
exporting countries increased over the last decades. In the 1970s, the top five rice exporters accounted
for 69% of the world market. This share gradually increased and reached 77% in the 2000s. More
recently, the top five rice-exporting countries accounted for about 83% of the global rice exports in
2015 (Table 1). On the other hand, the rice imports are geographically scattered. The imports by five
major countries (China, Nigeria, Philippines, EU, and Saudi Arabia) accounted for only 30% of the
global trade in 2015 (USDA, 2016b).
Figure 1. The share of trade volume: Rice, wheat, corn and soybeans (1965-2016)
Figure 2. Global trade in rice and share of production (1960-2016)
0
5
10
15
20
25
30
35
40
45
1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015
(%)
(Year)
Soybeans Wheat Corn Rice
02468101214161820
05
101520253035404550
1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015
(%)(Million tons)
(Year)
Share (%) Export volume (million tons)
Source: USDA
Source: Calculated from USDA data
3
Table 1. The share of rice market of leading exporting countries (Unit: %)
1970s 1980s 1990s 2000s 2015
United States 21 Thailand 33 Thailand 28 Thailand 29 India 26
Thailand 18 United States 19 Vietnam 13 Vietnam 15 Thailand 23
China 19 Pakistan 9 United States 13 India 13 Vietnam 14
Pakistan 6 China 8 India 10 United States 11 Pakistan 11
Myanmar 5 Italy 5 China 7 Pakistan 9 United States 9
Sub-total 69 Sub-total 74 Sub-total 71 Sub-total 77 Sub-total 83
Source: Calculated using the data from FAOSTAT and USDA PS&D online
1.2 Global rice trade: Indica and Japonica rice
Two major types of rice are traded globally: Indica and Japonica rice. Indica rice is long-grain with a
low level of moisture, and accounts for more than 75% of the global rice trade. Japonica rice, on the
other hand, is medium- and short-grain, with a sticky texture; it accounts for about 10% of the global
rice trade (Marton, 2014). Indica rice is produced mainly in Southeast Asia, including Thailand and
Vietnam; in the United States, outside California; and in Latin America. Japonica rice, on the other
hand, is produced and consumed mainly in Northeast Asia, including Korea, Japan, Northern China,
and Taiwan; and in California in the United States. Northeast Asia is the largest market for Japonica
rice, importing almost half of the global Japonica shipments. Japan and Korea are the largest and
third-largest buyers of U.S. Japonica rice, respectively (USDA, 2016b). However, the highest degree
of protection in the global rice trade is aimed at Japonica rice due to the protection provided mostly
by Japan, Korea, and Taiwan. Durand-Morat and Wailes (2011) showed that the trade-weighted ad-
valorem tariff was 111% in 2008 for the medium-grain Japonica rice. This is extremely high compared
to that of the long-grain variant (21%). The UR agreement implemented in 1995, however, has played
a crucial role in the Japonica rice market. The imports of such rice product into the importing countries
will continue to be restricted to some extent. Nonetheless, it is obvious that the partial rice market
opening in Korea and Japan will most likely influence the Japonica rice market.
4
1.3 Rice market opening in Japan and Korea
Japan and Korea had refused to import rice and exclusively controlled their rice trade over several
decades. They started to open their respective rice markets, however, as a result of the implementation
of the GATT・UR agricultural agreement in 1995. A special exception measure of tariffication was
applied to the rice trade in Japan and Korea. Instead, they had to import a mandatory rice quota every
year, and the volumes have gradually increased. The grace period that was given for removing the
tariff barriers was six years (1995-2000) for Japan and ten years (1995-2004) for Korea. In Japan’s
case, the minimum access (MA) rice import started from 4% of the base-period consumption (1986-
88) in 1995, and increased by 0.8% per year until it reached 8% in 2000 (Table 2). At the same time,
Korea started to import the MA quota in 1995 as 1% of the base-period consumption (1986-88). Then
it was gradually expanded by 0.2% per year until it reached 2% in 2000 and 4% in 2004 (Table 3).
Meanwhile, Japan shifted to a tariff rate quota (TRQ) in 1999. It set the out-of-quota rate at 341 yen
per kg, which is equivalent to 778% in ad-valorem tax. Consequently, the mandatory import volume
decreased to 682,000 metric tons in 2000. As the out-of-quota rate is extremely high, only around 100
tons of rice was imported per year (Kako, 2013). Moreover, the simultaneous buy and sell (SBS)
import formula was introduced as a part of MA rice, and was mainly used for foods. Meanwhile,
579,000 metric tons of MA rice were imported in 2005, and the volume was gradually increased up
to 666,000 metric tons in 2014 (Table 3). MA rice was mainly used for processing and as a food aid
and feed. Thus, imported rice have less effected on Japan’s domestic rice market. On the other hand,
Korea waived rice tariffication for another 10 years, from 2005 to 2014. Instead, under the World
Trade Organization (WTO) regulations, it had to increase the volume of its rice imports. The MA
volume increased from 4.4% of the domestic consumption in 2005 to 8% of the domestic
consumption in 2014. Moreover, a portion of the imported rice had to be sold directly to the
consumers for table use. This was begun from 10% of the total imported volume in 2005, and then
5
increased to 30% in 2014. Therefore, during the second special treatment period in Korea, the
oversupply of rice became a serious problem. The Korean government imported 409,000 metric tons
of rice in 2014, which is equivalent to 9.7% of the rice consumption in the same year. In 2014, the
Korean government decided to introduce tariffication and imposed an extremely high level of tariff
(513%) on the over-the-quota imports.
Japan and Korea opened its rice market by allowing several agricultural trade flows, and widened it
through tariffication. To this day, however, they are considered protective markets in the global trade.
This is largely because such countries have protected their respective markets using several protective
measures. For example, they have implemented a series of price/income support programs, and have
purchased domestic rice. Furthermore, the domestic consumers have supported the domestic rice
price, and this has made the producer price much higher than the other global Japonica rice prices
(Wailes, 2005). Consequently, such actions may distort the rice market, and may isolate the two
aforementioned countries from the global rice market. Through this study, therefore, an attempt was
made to determine if such two markets are well integrated to the other international rice markets after
the agricultural trade liberalization, and to compare the level of integration to that before the
liberalization.
Table 2. Japan’s minimum access tenders (1995-2014)
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004
MA
(1,000 MT) 398 444 489 512 533 573 580 629 571 585
SBS
(1,000 MT) 11 22 55 120 120 120 100 50 100 94
Total 409 466 544 632 653 693 680 680 671 679
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
MA
(1,000 MT) 579 578 517 581 520 640 581 580 515 666
SBS
(1,000 MT) 100 100 100 100 91 37 100 100 60 12
Total 679 678 617 681 611 677 681 680 575 678
Source: Ministry of Agriculture, Forestry and Fisheries (MAFF)
6
Table 3. Korea’s minimum access tenders (1995-2014)
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004
MA
(1,000 MT) 51 64 77 90 103 103 128 154 180 205
Portion of
Consumption
(%)
1 1.3 1.5 1.8 2 2 2.5 3 3.5 4
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
MA
(1,000 MT) 226 246 266 287 307 327 348 368 388 409
Table Use (%) 10 14 18 22 26 30 30 30 30 30
Source: Ministry of Agriculture, Food and Rural Affairs (MAFRA)
1.4 Objectives and structure of the study
This study had three objectives: (1) to identify the structural changes and major policies implemented
in the rice sector, and how such actions have affected the rice markets in Korea and Japan, respectively;
(2) to investigate the integration of the Korean, Japanese, and international rice markets by
determining if there was integration among the selected markets before and after the implementation
of the UR agreement, and if so, determining the direction of such integration, through cointegration
and causality tests, and by examining the short-run linkages among the markets through impulse
response and variance decomposition analyses; and (3) to find some lessons for the Korean rice
market from the Japanese rice market case. Japan shifted to TRQ in 1999, ahead of Korea, and has
implemented a set of protective measures similar to those implemented by Korea. Thus, by examining
the Japanese rice market, some useful insights for the Korean rice economy may be derived.
The remainder of this paper is organized as follows. Chapter 2 presents an overview of the rice
economies in Korea and Japan, and Chapter 3 reviews the related literature. In Chapter 4, the data
and methodology that were used in this study are discussed. In Chapter 5 and 6, the study’s empirical
results and conclusion are discussed, respectively.
7
2. Korean and Japanese Rice Economies
2.1 Structural changes in the rice market
2.1.1. Korea
Table 4 shows the significance of rice farming in Korea from 1970 to 2015. Specifically, the number
of rice farm households was around 2 million in 1970, which was 81% of the total farm households
then. This portion increased to 86.3% in 1990 but started to decrease thereafter. The value dropped to
66% in 2010, and then to 58% in 2015. Moreover, the portion of the income from rice farming was
55.6% in 1970, but it has gradually decreased since then. The portion of the rice income was about
40% in 2000, and even decreased to 19% in 2015. Lastly, the portion of the paddy field area has also
generally decreased since 1990. It was 52.3% in 1970 and increased to 59% in 1990. It dropped to
52% in 2010, however, and further decreased to 47.6% in 2015. This is because since after the
implementation of the UR agreement, the scale of the rice industry has decreased, and the farmers
have kept changing their crops from rice to industrial crops, for instance (Cho & Park, 2014).
The rapid economic growth and urbanization have caused a dramatic shift in the Asian diet from the
staples to other products, such as livestock, dairy, and fruits (Pingali, 2007). Consequently, the rice
consumption has gradually decreased, and this is especially true in Korea. In 1978, the per-capita rice
consumption was 182.7 kg, which is the highest value over five decades (Figure 3). It started to
decrease, however, thereafter. The decrease rate was 1.12% per year in the 1980s, and increased to
2.39% in the 1990s. It even increased to 2.6% in 2000 (Song et al., 2014). Finally, the per-capita rice
consumption was 84.8 kg in 2015, which was only 46.4% of the value in 1978.
Figure 4 shows the areas where rice is harvested, and the production of rice. The rice-planted areas
increased to 1.26 million ha in 1988 due to the rice production encouragement policy. It started to
decrease, however, in the late 1980s. This is because the good harvest continued but the rice
consumption kept decreasing. Consequently, the rice stock increased dramatically, which virtually
8
reduced the rice price and the rice-harvested areas. As a result, the total rice-harvested area decreased
to 1 million ha in 1996. Then the cultivated area increased until 2001 but has decreased since then
until the recent year. The total rice-harvested area was 0.78 million ha in 2015, which was only 63%
of that in 1990. Meanwhile, rice production has shown a decreasing trend since 1990. This is because
the rice-harvested area decrease rate is faster than that of the yield increase rate. The rice production
decreased by 1.6% per year after 1990, and by 1.2% per year after 1995.
Table 4. Significance of rice farming in Korea (1970-2015)
1970 1980 1990 1995 2000 2005 2010 2015
Total Farm
Households
(thousands, A)
2,483 2,155 1,767 1,501 1,384 1,273 1,177 1,089
Rice Farm
Households
(thousands, B)
2,011 1,837 1,525 1,205 1,078 938 777 635
B/A (%) 81 85.2 86.3 80.3 77.9 73.7 66 58.3
Income from
Farming
(1000Won, C)
248 2,342 9,078 16,012 19,514 26,496 27,221 33,654
Income from Rice
Farming
(1000won, D)
138 1,140 4,380 5,450 7,758 7,264 5,368 6,373
D/C (%) 55.6 48.7 48.2 34.0 39.8 27.4 19.7 18.9
Total Arable Area
(1000ha, E) 2,298 2,196 2,109 1,985 1,889 1,824 1,715 1,679
Paddy Field
(1000ha, F) 1,203 1,233 1,244 1,056 1,072 980 892 799
F/E (%) 52.3 56.1 59 53.2 56.7 53.7 52 47.6
Source: Ministry of Agriculture, Food and Rural Affairs (MAFRA)
9
Figure 3. Per-capita rice consumption in Korea (1960-2016)
Figure 4. Harvested area and production of rice in Korea (1960-2016)
0
20
40
60
80
100
120
140
160
180
200
1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015
(kg/capita)
(Year)
0
200
400
600
800
1000
1200
1400
0
1000
2000
3000
4000
5000
6000
7000
1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015
(1,000 ha)(1,000 ton)
(Year)
Production Harvested area
Source: USDA
Source: USDA
10
2.1.2. Japan
The rice consumption in Japan has gradually decreased since the 1960s, mainly due to the changes in
the food consumption patterns. The per-capita rice consumption was about 118 kg in 1971, but it
dropped to 86.5 kg in 1980, and then to 77.5 kg in 1990 (Figure 5). As a result, the Japanese
government was heavily faced with an oversupply of rice (Fukuda et al., 2003). Thus, several rice
diversion programs have been implemented since 1970 (Kako et al., 1997). Consequently, the total
rice-harvested area decreased from 2.4 million ha in 1980 to 1.8 million ha in 2000 and 1.6 million
ha in 2015. The level of production was highest in 1967 at 13.1 million tons, but it declined to 7.7
million tons in 2015 (Figure 6). Nevertheless, Japan still faces oversupply issues as its per-capita rice
consumption dropped to less than 70 kg in 2016, and as the rice imports have gradually increased
over the decades. Figure 7 shows the changes in the rice stocks and the stock-to-use ratio. The ending
stocks started to be an issue in Japan in the 1970s and generally became a bigger issue until 1990.
They then showed a decreasing trend in the 1990-1995 period. As the Japanese government agreed
to import rice under the UR agreement in 1994, however, the ratio started to increase again. The
ending stock was around 1.7 million tons in 2015, which accounted for 38.8% of the Japanese rice
trade. Moreover, the stock-to-use ratio is much higher than the adequate level of 16% recommended
by FAO.
11
Figure 5. Per-capita rice consumption in Japan (1960-2016)
Figure 6. Production and harvested area of rice in Japan (1960-2016)
0
20
40
60
80
100
120
140
160
180
200
1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015
(kg/capita)
(Year)
0
500
1000
1500
2000
2500
3000
3500
0
2000
4000
6000
8000
10000
12000
14000
1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015
(1,000 ha)(1,000 ton)
(Year)
Production Harvested area
Source: USDA
Source: USDA
12
Figure 7. Changes in ending stocks and stock-to-use ratio of rice in Japan
0
5
10
15
20
25
30
35
40
45
0
500
1000
1500
2000
2500
1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015
(%)(1,000 ton)
(Year)
Ending stock (1,000 ton) Stocks-to-use ratio (%)
Source: USDA
13
2.2 Changes in the rice policies in Korea and Japan
2.2.1 Korea
From the late 1940s to 2005, the Korean government purchased a vast amount of rice outputs, which
virtually influenced the domestic rice prices. Moreover, the government even paid more for rice in
the 1970s due to the self-sufficiency issues. The subsidies for rice farming were provided by banning
the imports over several decades, and this made the Korean rice prices remain much higher compared
to the global rice prices. The support mechanisms continued until the early 1990s, but they were
restricted in 1995 by the UR agreement. Under the WTO rules, Korea had to change its policy from
the provision of price subsidies to the provision of direct income support. Consequently, the Korean
government introduced a series of direct payment programs to cope with the agricultural liberalization
(Table 5). Such policies mainly aimed to enhance the income of the rice farm households and to
increase the scale of rice farms (Choi et al., 2016a). The government started by introducing a direct
payment program for the aged farmers’ retirement in 1997. After the rice re-negotiation in 2004, the
Direct Payment Program for Rice Income Compensation was introduced. The direct payment contains
both the area and deficiency payment methods while the area payment is given to the owner of the
rice paddy, and the amount is determined by the size of the paddy field. The deficiency payment is
available for the farmers who are currently producing rice on a registered farmland. The deficiency
payment amount is determined based on the difference between the target price and each year’s
postharvest price. If the postharvest price is lower than the target price, the farmers can receive 85%
of the difference after deducting the fixed payment. In addition, in the mid-2000s, the Korean
government encouraged the farmers to cultivate less rice because of the oversupply issue (Choi &
Smith, 2012).
The rice purchasing program was ended in 2005, and the Korean government has introduced the
Public Food Grain Stockholding Program (PFSP). This program was designed mainly for stabilizing
14
the rice price and for the establishment of food security in Korea. Under this program, the government
purchases domestic rice at the average market price during the harvest season, and then sells it at the
domestic market price during the non-harvest season (Choi et al., 2016b). The Korean government
purchased 360,000 metric tons of rice in 2015-2016. Moreover, it bought 240,000 metric tons of rice
to support the price of rice (Choi & Myers, 2016). As a result, the rice stocks rose to 34% of the
consumption level in 2015 (Choi et al., 2016b).
Table 5. Direct payment program: Implemented in rice sector in Korea
Types of direct payment Introducing-ending period Main objective
Early retirement of aged farmers 1997-current Structural adjustment
Paddy-Field environment
conservation 2001-2004
Environmentally friendly
farming
Rice farmers’ income stabilization 2002-2004 Income stabilization
Set-aside of paddy-field 2003-2005 Structural adjustment
Rice income stabilization payment 2005-current Income compensation
Source: Im (2013)
15
2.2.2. Japan
The rice policies in Japan was based on the Food Control Law until 1995, but it was abolished and
transformed to the Staple Food Law. Japanese government has mainly focused on three types of
policies to cope with the market price and over-supply issues. First, Japanese government has
purchased some portions of domestic production and sell it for food and non-food uses. Second, they
implemented various income stabilization programs and the subsidies were given to farmers who
participated in acreage control program. The Rice Farming Income Stabilization Program began in
1998. Under this program, there is no direct support to the rice market prices. Instead, rice farmers
are compensated when the market price in a harvesting year drops below a standard price, which is
calculated by the moving average market price of previous years (Fukuda et al., 2003). Moreover, a
new farm income support program has implemented for all rice farmers in 2010. In the end of the
year 2013, however, Japan announced the plan for reforming the agricultural policy. They set a plan
to abolish the direct payment for rice. It is mostly because the cost of support program was a big
burden for Japanese government. Specifically, the budget for direct payment of rice was 307 billion
yen in 2010, and 155 billion yen in 2012. Moreover, due to those programs, over supply issues were
ineffectively handled. Therefore, variable payment was abolished starting from the harvested crops
in 2014, and fixed payment was decreased to half of value in the same year. Moreover, fixed payment
will be abolished in 2018 (OECD Publishing, 2014). Instead, Japanese government has tried to
support more for rice which used as feed and powder to cope with the oversupply issue. Lastly,
Japanese government introduced a rice diversion program in 1971 to deal with the oversupply of rice.
Through this program, the government encouraged farmers to use rice paddy fields for producing
other crops such as wheat and soybeans. Before the diversion program, rice planted area was around
3.3 million ha in 1968, but it has gradually decreased. Specifically, it declined to 2.1 million ha in
1995, and further decreased to 1.6 million ha in 2010 (Maclean et al., 2013). Moreover, those acreage
16
control programs have contributed to increase the market price by diminishing the production of rice
(Takahashi, 2012).
17
3. Literature Review
In recent decades, several authors have examined the rice market integration, and the studies can be
categorized into three streams. The first comprises studies that test market integration within domestic
rice markets. These studies were mostly conducted by developing countries, and found long-run
relationships among domestic markets. For example, Silvapulle and Jayasuriya (1994) used multiple
cointegration approach to explore the market integration in the Philippines. They found that domestic
rice prices have a long run relationship. Ismet et al. (1998) applied multivariate cointegration
methodology to capture the price linkages in Indonesian rice markets. They used the period of 1982-
1993 to evaluate the factors affecting the integration, and found that government intervention has
positively affected the market integration. Dawson and Dey (2002) investigated the long-run
integration in Bangladesh after the trade liberalization. They applied dynamic VAR framework and
found that rice markets are perfectly integrated to each other. Nga and Lantican (2009) analyzed the
spatial integration of domestic rice price in Vietnam and the export prices. The results showed that
only 9 out of 34 rice markets are integrated, but prices are well transmitted among the rice markets.
Moreover, they confirmed the cointegration between two export prices. Hossain and Verbeke (2010)
examined whether the domestic rice markets in Bangladesh are well integrated to each other after
liberalization of the rice market. They used Johansen co-integration test, and found that there is a
long-run relationship among rice markets, but the speed of price transmission has been weakened.
Acharya et al. (2012) examined the integration among Indian wholesale rice markets, showing that
there was long run linkage even among geographically dispersed markets.
The second stream tests the market integration between international and domestic rice markets,
generally concluding that they are well integrated. For example, Alam et al. (2012) analyzed the
relationship between Bangladesh and international rice price. Using an error correction framework,
they concluded that there is a unidirectional long-run relationship, from the world to domestic prices.
18
John (2013) conducted causality and impulse response analysis to examine the price transmission
between Thailand’s domestic and export rice markets. He found that there is a bi-directional price
transmission between markets. Moreover, Thailand’s paddy pledging program distorted price in the
short run, but export price transmitted to domestic prices afterwards. Ahmad and Gjølberg (2015)
analyzed the rice market integration within Pakistan's markets and between Pakistan and international
markets. They found that Pakistan's domestic rice markets generally were well integrated, and those
markets were also integrated with international markets, Thailand and Vietnam. They chose the data
period which includes the major policies took place. They found that the abolishment of price support
policy positively affected on domestic integration, but export related policies negatively affected on
the integration with international rice markets.
The third stream is to test the market integration between international rice markets. Those studies
generally tried to identify which country acts as a price leader in selected rice markets. Yang and Cho
(1997) examined dynamic relationship between Japonica and Indica rice by conducting causality and
cointegration test. They concluded that law of one price does not hold for selected rice markets.
Yavapolkul et al. (2006) examined the price linkages between developed and developing countries
after the UR agreement. They found that partial market integration exists among developed and
developing countries, and developed countries acted as a price leader in those markets. Chulaphan et
al. (2013) investigated cointegration and causal relationships among major rice exporting countries:
United States, Thailand and Vietnam. They found that those markets are well integrated, and there
are bi-directional causal relationships in high and low-quality rice markets. John (2014) examined
price transmission among five rice exporting countries, Thailand, Vietnam, Pakistan, United States
and Argentina. He conducted Granger and Toda-Yamamoto causality tests, and found that price
relations are strong among Asian rice markets, and those markets act as price leaders for exporting
markets. Sirikanchanarak et al. (2016) examined the co-movement between rice export prices of
19
Thailand and Vietnam using Causality test and impulse response functions. The authors found that
there are price transmission between two markets, and the Vietnam act as a price leader.
In the last 20 years, several relevant studies were conducted in Korea, with focus on rice market
opening. Most of the previous studies analyzed the impact of MMA and derived some policy
implications for securing the Korean rice economy (Park, 1997; Han et al., 1999; Kim & Kim, 2004;
Kim & Lee, 2005; Im et al., 2005). A number of studies, on the other hand, examined the effects of
choosing either tarification or special treatment for rice (Lee & Kim, 2000; Lee, 2001; Shin & Ito,
2009). Other studies examined the Japanese and Taiwanese rice markets and derived some
implications for the Korean markets (Kim, 1995; Park, 1996; Kim & Jung, 2004; Lee & Cho, 2010).
This is because the Japanese and Taiwanese rice markets are similar to that of Korea, and they
returned to tariffication from MA ahead of Korea. Specifically, Japan and Taiwan returned to the
tariffication system in 1999 and 2003, respectively. As Korea opened its rice market only in 2015, the
Japanese and Taiwanese markets could provide a lesson for the Korean rice market. For example, Lee
and Cho (2010) examined the relationships between the domestic and imported rice in Japan. They
conducted a cointegration test under the error correction framework, and showed that there is a long-
run relationship between the Japanese and imported rice markets. Moreover, based on the Japanese
case, the researchers expect that the rice imported from the United States and China will affect the
Korean rice market in the future.
This study followed but extended the previous studies in the following aspects. First, there have been
numerous studies that handled the rice market integration, but few studies have included Northeast
Asia, such as Japan, Taiwan, and Korea. These countries have been leading rice-importing countries
especially in the Japonica rice market. Moreover, the policies within such markets have severely
affected the global rice market. Therefore, conducting a study on Northeast Asia may be helpful in
understanding not only the countries situated in such region but also the global rice market. Second,
20
some Korean studies examined the Japanese and Taiwanese rice markets after the tariffication.
Specifically, those studies focused on how these two countries have handled the imported rice, and
which domestic policies have been implemented. Overall, the authors tried to identify the effects of
the rice market opening after the tariffication in Japan and Taiwan, and tried to derive important
lessons for the Korean rice economy. Most of the previous relevant studies, however, did this through
qualitative analysis. As this study includes both qualitative and quantitative analyses, it may provide
more concrete information on the related countries.
21
4. Data and Methodology
4.1 Data
Monthly data are used in this study which covers the data periods from October 1987 to September
2016. The periods are selected based on the data availability and divided into two parts, before and
after the trade liberalization. Specifically, the first period is from October 1987 to December 1994
and the second period is from January 1995 to September 2016. This study focuses on five rice
markets: Korea, Japan, Thailand, Arkansas and California in the United States. Korean wholesale rice
price1 were taken from aT (Korea Agro-Fisheries & Food Trade Corporation) for the prices from
January 1996 to September 2016. Moreover, rice producer price indices from October 1987 to
September 2016 were collected from Statistics Korea. Using those indices, we derived the Korean
rice price for the whole period, which is considered in this study. Japanese wholesale rice price2 were
provided by Prof. Shoichi Ito which originally collected from Nikkei Shimbun, a daily newspaper in
Japan. The data analysis for Japanese rice price is conducted only after the UR agreement because of
the limitation of data. For the international rice markets, Arkansas and California in the United States
and Thailand are included. The data for spot prices of Arkansas and California were obtained from
Bloomberg which originally collected from market news published by USDA. No. 2 Medium grain
for Californian rice and long grain for Arkansas rice are used. Thai 100% broken FOB price (grade
B) were obtained from Rice Yearbook and Outlook published by USDA. The reason of choosing
those regions is that Arkansas is the largest rice producing state in the United States. It produces about
58% of total U.S. Indica (long grain) rice production (USDA, 2016a). California is the second leading
rice producing state in the United States, and produces about 62.3% of the U.S. Japonica (medium
and short grain) rice production (USDA, 2016a). Moreover, Japan and Korea are the major importers
1 Medium quality of Korean wholesale price are used for analysis and price includes indirect cost such as management
and labor costs. 2 Akitakomachi rice price are used because it is the most representative rice in Japan.
22
for Californian rice. Specifically, Korea have imported more than 1 million tons of Californian rice
since 1995 (Choi et al., 2016), and Japan imports around half of California’s export volume (Childs
et al., 2005) Lastly, Thailand is the second largest rice exporters, and the export volume accounts for
about 23% of global trade (USDA, 2016a).
All the time series are expressed in U.S. dollar per metric ton and transformed into natural log form
to remove trends. Figure 8 presents logged form of prices which considered in this study. The
fluctuations of international rice prices seem to have closely followed each other. Especially, the
prices of Arkansas and Thailand closely correlated each other. It is reasonable because they are
competing each other in the same market as Indica rice. However, Japanese and Korean rice prices
are different from global rice markets in several aspects. The prices of Japan and Korea never falling
below the global price, and have shown much higher level than global prices in whole period.
Moreover, even when international prices soared in 2008, Japanese and Korean rice prices seem stable.
Nevertheless, Compared to before the UR agreement, the gap between Korean and international rice
prices narrowed after the UR agreement. More recently, it can be clearly seen that the differences
virtually went down.
Figure 8. Monthly rice price in five markets (October 1987-September 2016)
4
4.5
5
5.5
6
6.5
7
7.5
8
8.5
9
1987 1990 1993 1996 1999 2002 2005 2008 2011 2014
(Log o
f U
S d
oll
ars
per
ton)
(Year)
Japan Korea California Arkansas Thailand
Source: USDA
23
4.2 Methodology
First, unit root tests are performed to find out whether the variables are integrated of the same order.
For this purpose, we apply the Augmented Dickey-Fuller (1979) test (ADF) and the Phillips and
Perron (1988) test (PP) under the null hypothesis that there is a unit root. The PP tests differ from the
ADF tests regarding how they deal with serial correlation and heteroscedasticity of errors.
Specifically, the ADF tests use a parametric auto-regression to approximate the ARMA framework of
the errors in the regression. However, the PP tests ignore the serial correlation in the test regression
(Zivot and Wang, 2007). In this study, we consider both ADF and PP tests for the unit roots. For the
ADF test, we estimate the following regression:
Δ ln 𝑃𝑡 = 𝑐 + 𝜌 ln 𝑃𝑡−1 + ∑ Γ𝑗Δ ln 𝑃𝑡−𝑗 + 𝛽𝑇 + 𝜖𝑡𝑝𝑗=1 (1)
Where ln 𝑃𝑡 denotes the logged price series and ∆ is a first-difference operator. We may rewrite ρ =
γ − 1, where γ is the AR(1) coefficient of ln 𝑃𝑡. Γ𝑗 is the coefficients for the ρ lagged difference terms,
ln 𝑃𝑡−𝑗, 𝑇 is the time trend, and 𝜖𝑡 represents a white noise error term. By using equation (1), we can
test the null hypothesis that there is a unit root (ρ = 0 , which implies γ = 1 ). For the PP test,
following equation is used:
ln 𝑃𝑡 = 𝛼 + 𝛽t + 𝛾 ln 𝑃𝑡 + 𝜐𝑡 (2)
where ln 𝑃𝑡 is the logged price series. The null hypothesis is that ln 𝑃𝑡 contains a unit root (𝛾 = 1).
Next, Johansen (1988) and the Johansen and Juselius (1990) cointegration tests are used to determine
the long-run relationship among rice markets. The cointegration framework can be represented by a
vector auto regressive (VAR) model, expressed as the following equation:
Δln 𝑃𝑡 = Π ln 𝑃𝑡−1 + ∑ Γ𝑗Δ ln 𝑃𝑡−𝑗 + 𝜔𝑡𝑝−1𝑗=1 (3)
where ln 𝑃𝑡 is k × 1 vector of logged prices, and 𝜔𝑡 is a random error term that follows a Gaussian
white noise process. In addition, Π = ΓΑ′, Α is k × r matrix and each column indicates cointegrating
vector. Using the rank of matrix Π(r) , we show the long-run relationships among the variables.
24
Specifically, when Π has a full rank, namely r = k (where k is the number of endogenous variables),
any linear combination of ln 𝑃𝑡 variables will be stationary. On the other hand, If Π has zero rank,
r = 0 , then any linear combination of ln 𝑃𝑡 variables will be nonstationary, which means that the
variables are not cointegrated. The Johansen method is applied to test whether we can reject the
restriction introduced from the reduced rank of Π. The eigenvalues are used to construct two test
statistics for testing the existence of the number of unique cointegrating vectors between variables,
known as the trace test and the maximum eigenvalue test. The trace and maximum eigenvalue tests
can be expressed as the following equation:
𝜆𝑡𝑟𝑎𝑐𝑒 = −𝑇 ∑ ln(1 − �̂�𝑖)𝑘𝑖=𝑟+1 (4)
𝜆𝑚𝑎𝑥 = −𝑇 ln(1 − �̂�𝑟+1) (5)
where �̂�𝑖 is the estimated values of the ordered eigenvalues obtained from the estimated matrix, and
𝑇 is the number of observations. The trace statistic tests have the null hypothesis that there are at most
r cointegrating vectors. The maximum eigenvalue tests have the null hypothesis that the cointegrating
vector is r against the alternative of r + 1.
Following the cointegration test, a Granger causality test (1969) was conducted to examine the
existence and direction of price transmission across markets. The test was based on the bivariate VAR
model using the following equations:
ln 𝐴𝑡 = ∑ α𝑖 ln 𝐴𝑡−𝑖 + ∑ β𝑗 ln 𝐵𝑡−𝑗 + 𝜖1𝑡𝑝𝑗=1
𝑝𝑖=1 (6)
ln 𝐵𝑡 = ∑ γ𝑖 ln 𝐵𝑡−𝑖 + ∑ δ𝑗 ln 𝐴𝑡−𝑗 + 𝜖2𝑡𝑝𝑗=1
𝑝𝑖=1 (7)
Where ln 𝐴 and ln 𝐵 are log prices of two rice markets among the five studied in this paper. In
equation (6), the null hypothesis is 𝐻0: 𝛽1 = 𝛽2 = ⋯ = 𝛽𝑖 = 0 , indicating that ln 𝐵𝑡 does not
Granger cause ln 𝐴𝑡. In equation (7), the null hypothesis is 𝐻0: δ1 = δ2 = ⋯ = δ𝑖 = 0, indicating
that ln 𝐴𝑡 does not Granger cause ln 𝐵𝑡. A rejection of the null hypothesis in both equations would
suggest that there is a bi-directional causal relationship between the two variables.
25
Lastly, the impulse response functions (IRFs) and the variance decomposition are employed to
analyze the short-run dynamics of the rice prices. The purpose of those methods is to quantify the
impact of the shocks in each of the variable. The IRFs give an estimate of the response of a variable
to a one standard deviation shock in another variable. IRFs is a practical way to assess the direction,
magnitude and persistence of shocks, and thus provides information about the relations between
markets. Moreover, the variance decomposition analysis provides information about the proportion
of the movements in response to other variables.
26
5. Empirical Results
First, unit root tests for the whole and sub-periods are conducted using two different methods,
Augmented Dickey-Fuller (ADF) and Phillips-Perron (PP) tests. Table 6 presents the result of unit
root tests, showing that all the series are non-stationary at their level both in ADF and PP tests.
Specifically, the null hypothesis that there is a unit root cannot be rejected even at the 10% critical
value. Then, we conducted a unit root test for first differenced variables. Under the first differences
form, the null hypothesis can be rejected at the 1% confidence level. Thus, we concluded that all
variables became stationary in the first differences, meaning all the series are integrated of the same
order.
Table 6. Unit root tests
Whole period: October 1987-September 2016
Market Level First-difference
ADF PP ADF PP
Arkansas -0.120987 -0.083128 -10.43321*** -10.33390***
Thailand 0.151649 0.155205 -11.86694*** -11.71961***
California 0.269735 0.220934 -17.11691*** -17.21125***
Korea 0.184848 0.213313 -12.44312*** -12.24129***
Sub-period 1: October 1987-December 1994
Market Level First-difference
ADF PP ADF PP
Arkansas -0.505780 -0.543925 -5.760685*** -5.761197***
Thailand -0.016108 -0.076953 -6.765567*** -6.759464***
California 0.062161 0.062472 -6.962897*** -7.085897***
Korea 2.480562 1.847999 -6.238619*** -6.235822***
Sub-period 2: January 1995-September 2016
Market Level First-difference
ADF PP ADF PP
Arkansas 0.172740 0.308399 -8.092637*** -8.154351***
Thailand 0.154259 0.221511 -10.37027*** -9.631533***
California 0.306394 0.275544 -15.15460*** -15.15203***
Korea -0.269157 -0.233977 -10.86641*** -9.781304***
Japan -0.565515 -0.537279 -11.57323*** -11.63388***
Note: *, **, *** denote significance at 10%, 5%, and 1% respectively.
27
5.1 Cointegration tests
Next, we conducted multivariate cointegration tests to examine long-run relationships among rice
markets. Lag lengths are determined by following Akaike information criterion (AIC) respectively
for each analysis. Table 7 shows the result of multivariate cointegration tests for the first sub-period.
Trace statistics indicate that cointegrating vector is one in four rice markets: Arkansas, California in
the United States, Thailand, and Korea. On the other hand, maximum eigenvalue statistics fail to
reject the null hypothesis that the cointegrating vector is equal to zero in those markets. Johansen and
Juselius (1990) note that the power of the trace test is lower than the maximum eigenvalue test, hence
they suggest that the maximum eigenvalue test may be better. Therefore, we conclude that there is no
cointegration relationship among four rice prices according to maximum eigenvalue tests.
Multivariate cointegration tests also confirm that the cointegrating vector is one among Arkansas,
Thai and Californian rice both in trace and maximum eigenvalue test. Thus, we can conclude that the
international rice markets had a long-run relationship before the UR agreement. However, the tests
show that there is no long-run relationship among Indica rice (Arkansas and Thai rice) and Korean
rice.
Table 8 shows the result of multivariate cointegration tests for the second period. In this sub period,
we also include Japanese rice price, and find that there is no long run relationship among five rice
markets based on the maximum eigenvalue test. On the other hand, multivariate cointegration tests
confirm that there are two cointegrating vectors among Arkansas, Thailand and California both in
trace and maximum eigenvalue test. It means that the linkages became stronger in the second period
than that of first period. While mixed results are shown between Korean and Indica rice prices, also
among Japanese and Indica rice prices. Specifically, trace tests confirm that there is one cointegrating
vector between Indica and Korean rice prices, and between Indica and Japanese rice prices. However,
maximum eigenvalue tests confirm that cointegrating vector is zero in both cases. Based on the
28
Johansen and Juselius (1990), we may conclude that there is no long-run linkage among those
markets. Hence, we failed to reject the null hypothesis that cointegrating vector is zero among
Californian, Korean and Japanese rice prices in both trace and maximum eigenvalue tests. It shows
that even those rice are the same type, Japonica rice, they have no long run linkage for the second
period.
Then, we employed bivariate cointegration tests for the first period to examine the long-run
relationship between two rice markets. Table 9 indicates that we can reject the null hypothesis that
the cointegrating vector is equal to zero between Arkansas and Californian prices at the 5% significant
level. In addition, we cannot reject the null hypothesis that there is, at most, one long-run relationship
between variables. Thus, the results suggest that those markets are cointegrated and have a long-run
relationship. There is also one cointegration between Thai and Californian prices in both tests. For
Korean rice price, however, there is no long-run relationship with any other markets. Moreover, the
results also confirm that there is no long-run linkage between Arkansas and Thailand.
Table 10 presents the result of bivariate cointegration tests for the second sub-period. The tests
confirm that there is one cointegrating vector between Arkansas and Thailand, Arkansas and
California, and California and Thailand at the 5% significant level. For Korean and Japanese rice
prices, however, there is no long-run relationship with any other markets. Therefore, cointegration
tests confirm that Korean rice price are separated to other rice markets both before and after the UR
agreement. It is not only with Indica rice but also with Japonica rice, such as Californian and Japanese
rice. Japanese rice also show that their market separated to other rice markets even after the
tariffication in 1999.
29
Table 7. Multivariate cointegration tests (October 1987-December 1994)
H0 H1 Trace test Max-eigenvalue test
Statistic C. V. (5%) Statistic C. V. (5%)
Arkansas,
Thailand,
California,
Korea
r=0 r≥1 54.54683* 47.85613 26.90466 27.58434
r≤1 r≥2 27.64217 29.79707 16.17702 21.13162
r≤2 r≥3 11.46515 15.49471 10.19443 14.26460
r≤3 r≥4 1.270717 3.841466 1.270717 3.841466
Arkansas,
Thailand,
California
r=0 r≥1 30.27903* 29.79707 21.91960* 21.13162
r≤1 r≥2 8.359434 15.49471 7.353141 14.26460
r≤2 r≥3 1.006294 3.841466 1.006294 3.841466
Arkansas,
Thailand,
Korea
r=0 r≥1 45.70614* 29.79707 24.59103* 21.13162
r≤1 r≥2 21.11511* 15.49471 15.06920* 14.26460
r≤2 r≥3 6.045908* 3.841466 6.045908* 3.841466
Note: * denotes rejection of the hypothesis at the 0.05 level.
Table 8. Multivariate cointegration tests (January 1995-September 2016)
H0 H1 Trace test Max-eigenvalue test
Statistic C. V. (5%) Statistic C. V. (5%)
Five selected
rice markets
r=0 r≥1 73.94591* 69.81889 30.94408 33.87687
r≤1 r≥2 43.00183 47.85613 16.60583 27.58434
r≤2 r≥3 26.39600 29.79707 13.85663 21.13162
r≤3 r≥4 12.53937 15.49471 10.24371 14.26460
r≤4 r≥5 2.295659 3.841466 2.295659 3.841466
Arkansas,
Thailand,
California
r=0 r≥1 37.89296* 29.79707 21.63187* 21.13162
r≤1 r≥2 16.26109* 15.49471 15.04972* 14.26460
r≤2 r≥3 1.211368 3.841466 1.211368 3.841466
Arkansas,
Thailand, Korea
r=0 r≥1 32.80749* 29.79707 18.95551 21.13162
r≤1 r≥2 13.85199 15.49471 11.35940 14.26460
r≤2 r≥3 2.492583 3.841466 2.492583 3.841466
Arkansas,
Thailand, Japan
r=0 r≥1 31.27547* 29.79707 16.85649 21.13162
r≤1 r≥2 14.41898 15.49471 12.17105 14.26460
r≤2 r≥3 2.247926 3.841466 2.247926 3.841466
California,
Korea, Japan
r=0 r≥1 27.43560 29.79707 12.54976 21.13162
r≤1 r≥2 14.88584 15.49471 10.70498 14.26460
r≤2 r≥3 4.180861* 3.841466 4.180861* 3.841466
Note: * denotes rejection of the hypothesis at the 0.05 level.
30
Table 9. Bivariate cointegration tests (October 1987-December 1994)
H0 H1 Trace test Max-eigenvalue test
Statistic C. V. (5%) Statistic C. V. (5%)
Arkansas-
Thailand
r=0 r≥1 27.25952* 15.49471 21.22324* 14.26460
r≤1 r≥2 6.036272* 3.841466 6.036272* 3.841466
Arkansas-
California
r=0 r≥1 17.17774* 15.49471 17.00184* 14.26460
r≤1 r≥2 0.175902 3.841466 0.175902 3.841466
Thailand-
California
r=0 r≥1 17.49285* 15.49471 15.77428* 14.26460
r≤1 r≥2 1.718563 3.841466 1.718563 3.841466
California-
Korea
r=0 r≥1 20.50166* 15.49471 15.23943* 14.26460
r≤1 r≥2 5.262234* 3.841466 5.262234* 3.841466
Thailand-
Korea
r=0 r≥1 31.39669* 15.49471 17.14525* 14.26460
r≤1 r≥2 14.25144* 3.841466 14.25144* 3.841466
Arkansas-
Korea
r=0 r≥1 27.65983* 15.49471 16.35884* 14.26460
r≤1 r≥2 11.30099* 3.841466 11.30099* 3.841466
Note: * denotes rejection of the hypothesis at the 0.05 level.
Table 10. Bivariate cointegration tests (January 1995-September 2016)
H0 H1 Trace test Max-eigenvalue test
Statistic C. V. (5%) Statistic C. V. (5%)
Arkansas-
Thailand
r=0 r≥1 17.35442* 15.49471 15.03198* 14.26460
r≤1 r≥2 2.322439 3.841466 2.322439 3.841466
Arkansas-
California
r=0 r≥1 18.28342* 15.49471 16.12635* 14.26460
r≤1 r≥2 2.157067 3.841466 2.157067 3.841466
Thailand-
California
r=0 r≥1 17.60124* 15.49471 16.46213* 14.26460
r≤1 r≥2 1.139109 3.841466 1.139109 3.841466
California-
Korea
r=0 r≥1 13.68827 15.49471 9.706270 14.26460
r≤1 r≥2 3.981997* 3.841466 3.981997* 3.841466
Thailand-Korea r=0 r≥1 14.46976 15.49471 12.15885 14.26460
r≤1 r≥2 2.310913 3.841466 2.310913 3.841466
Arkansas-Korea r=0 r≥1 17.44484* 15.49471 12.15731 14.26460
r≤1 r≥2 5.287535* 3.841466 5.287535* 3.841466
Arkansas-Japan r=0 r≥1 13.00948 15.49471 9.090599 14.26460
r≤1 r≥2 3.918876* 3.841466 3.918876* 3.841466
Thailand-Japan r=0 r≥1 13.02053 15.49471 10.81862 14.26460
r≤1 r≥2 2.201908 3.841466 2.201908 3.841466
31
California-
Japan
r=0 r≥1 12.86215 15.49471 10.28936 14.26460
r≤1 r≥2 2.572795 3.841466 2.572795 3.841466
Korea-Japan r=0 r≥1 22.48477* 15.49471 12.29396 14.26460
r≤1 r≥2 10.19081* 3.841466 10.19081* 3.841466
Note: * denotes rejection of the hypothesis at the 0.05 level.
5.2 Causality tests
Table 11 provides the result of the Granger causality tests for the first period. It shows that
bidirectional causal relation exists between rice prices of United States (Arkansas and California) at
the 5% significant level. Moreover, there is unidirectional linkage between prices of Thailand and
U.S. Specifically, Thailand acts as a price leader in those markets. There is price transmission from
Thailand to California, and to Arkansas. It can be easily understood because Thailand was the biggest
rice exporter for the first period, from 1987 to 1994. For the Korean rice price, on the other hand, we
cannot reject the null hypothesis at 5% critical value. Therefore, we may conclude that Korean rice
market had no causal relationship with other markets for the first period.3
Table 12 shows the result of causality test for the second period. It shows that bidirectional price
transmission exists across the Indica rice prices. Specifically, rice prices in Arkansas and Thailand
have a bidirectional causal relationship that is statistically significant at 5% critical level. While
Californian rice price has only one-way relationship with Indica rice prices from Indica to Californian
rice. Therefore, Indica rice markets act as a price leader among international rice markets in the
second period. It is also reasonable because they account more than 70% of global trade after the
trade liberalization. On the other hand, there is no price transmission between Korean and other
3 Korean rice price has causal relationship with Arkansas and Thailand at 10% critical value, but we may think those
results as an exchange rate effect. After conducting the causality test with Korean currency, we found that most of causal
relationships disappeared even at 10 % significance level.
32
markets only except for the causal relationship from Thailand to Korea. This exception can be
explained as the effect of exchange rates. Specifically, we also conduct the Granger causality test with
Korean local currency. According to the Granger causality tests with Korean currency, causal relation
from Thailand to Korea disappeared. Hence, there is no causal relation between Korean rice and other
rice markets. Therefore, it implies that the linkage appeared due to the variation of exchange rate not
because of the actual causal relation. In addition, Japanese rice market has no causal relationship with
other markets except for the linkage from Japanese rice to Arkansas rice price. However, this causal
relation also disappeared when conducting the test with Japanese currency. Based on the causality
tests, we could conclude that Korean and Japanese rice market still distinct from international rice
markets even after the trade liberalization.
Table 11. Causality tests (October 1987-December 1994)
Arkansas Thailand California Korea
Arkansas→ 1.80313 3.87597*** 3.00756*
Thailand→ 3.50953*** 4.24161*** 4.24428*
California→ 2.15206** 1.39059 0.67487
Korea→ 2.93730* 0.20282 0.23139
Note: ***, **, * rejection of the null hypothesis at 1%, 5% and 10% respectively
Table 12. Causality tests (January 1995-September 2016)
Arkansas Thailand California Korea Japan
Arkansas→ 3.13620** 3.89101*** 0.63906 0.19322
Thailand→ 7.37870*** 9.74809*** 3.11587*** 0.17754
California→ 0.67491 1.46851 0.59705 0.44954
Korea→ 1.02942 1.28973 0.32595 1.21179
Japan→ 3.37261* 0.52067 1.00874 0.99551
Note: ***, **, * rejection of the null hypothesis at 1%, 5% and 10% respectively
33
5.3 Impulse response and variance decomposition analyses
Figure 9 and 10 present the impulse responses for the first and second periods of selected rice markets,
respectively. Figure 9 confirms that changes on the international rice price generally bring the
responses each other. Specifically, the first line shows the response of Thailand’s price to a shock
originating in prices of Arkansas. The impact of the shock gradually rises until 5 month, and persists
until 6 month. The responses of Arkansas price to a shock from Thailand’s price show that the shock
persists only until 2 month. Responses of Californian price to the shock from Arkansas price persist
until 7 month. Arkansas price responses to a shock from Californian rice only until 3 month. However,
between Californian and Thai prices, there is no response each other in the first period. Therefore, we
generally found that short-run linkage exists between international rice prices, but it was weak in the
first period. Meanwhile, the changes of international rice prices have no linkage with Korean price.
The lines from 4 to 6 show the impulse responses of the Korean rice price, and the dotted lines
represent the critical values. We confirm that shocks originating in the international market are not
transmitted to Korean rice market, and vice versa. Those results may help clear up the mixed results
obtained from the previous cointegration and causality tests.
From observing Figure 10, one can see that the impact of shocks has increased and remains longer
times compared to that of first period. For example, the first line shows the response of Thailand’s
price to a shock from Arkansas price. The impact of the shock gradually increases until around 5
month, and it stays until 29 month. Moreover, the response of Arkansas price to Thai price shock also
shows that the shock persists until 23 months. The stronger linkages also have shown between
Arkansas and Californian price. The response of Californian price to a shock from Arkansas price
shows that the shock persists from 3 to 30 month. Moreover, the magnitudes stay over 0.02 in those
periods. The price transmission from Arkansas to Californian price persists until 18 month. There is
only one-way response from Thai to Californian rice for 8 month. However, Korean and Japanese
34
rice prices found to have no price transmission with any other rice markets even after the trade
liberalization. Those results are in the line with the previous cointegration and causality tests.
Figure 9. Impulse responses for the first period (October 1987-December 1994)
Response of Thai to Arkansas price Response of Arkansas to Thai price
-.08
-.06
-.04
-.02
.00
.02
.04
.06
.08
5 10 15 20 25 30 35 -.08
-.06
-.04
-.02
.00
.02
.04
.06
.08
5 10 15 20 25 30 35
Response of Californian to Arkansas price Response of Arkansas to Californian price
-.08
-.06
-.04
-.02
.00
.02
.04
.06
.08
5 10 15 20 25 30 35 -.08
-.06
-.04
-.02
.00
.02
.04
.06
.08
5 10 15 20 25 30 35
Response of Californian to Thai price Response of Thai to Californian price
-.08
-.06
-.04
-.02
.00
.02
.04
.06
.08
5 10 15 20 25 30 35 -.08
-.06
-.04
-.02
.00
.02
.04
.06
.08
5 10 15 20 25 30 35
35
Response of Korean to Californian price Response of Californian to Korean price
-.08
-.06
-.04
-.02
.00
.02
.04
.06
.08
5 10 15 20 25 30 35 -.08
-.06
-.04
-.02
.00
.02
.04
.06
.08
5 10 15 20 25 30 35
Response of Korean to Thai price Response of Thai to Korean price
-.08
-.06
-.04
-.02
.00
.02
.04
.06
.08
5 10 15 20 25 30 35 -.08
-.06
-.04
-.02
.00
.02
.04
.06
.08
5 10 15 20 25 30 35
Response of Korean to Arkansas price Response of Arkansas to Korean price
-.08
-.06
-.04
-.02
.00
.02
.04
.06
.08
5 10 15 20 25 30 35 -.08
-.06
-.04
-.02
.00
.02
.04
.06
.08
5 10 15 20 25 30 35
Cholesky ordering: Korean, Californian, Arkansas, Thai rice prices
36
Figure 10. Impulse responses for the second period (Jan. 1995-Sep. 2016)
Response of Thai to Arkansas price Response of Arkansas to Thai price
-.04
-.02
.00
.02
.04
.06
.08
5 10 15 20 25 30 35 -.04
-.02
.00
.02
.04
.06
.08
5 10 15 20 25 30 35
Response of Californian to Arkansas price Response of Arkansas to Californian price
-.04
-.02
.00
.02
.04
.06
.08
5 10 15 20 25 30 35 -.04
-.02
.00
.02
.04
.06
.08
5 10 15 20 25 30 35
Response of Californian to Thai price Response of Thai to Californian price
-.04
-.02
.00
.02
.04
.06
.08
5 10 15 20 25 30 35 -.04
-.02
.00
.02
.04
.06
.08
5 10 15 20 25 30 35
37
Response of Korean to Californian price Response of Californian to Korean price
-.04
-.02
.00
.02
.04
.06
.08
5 10 15 20 25 30 35 -.04
-.02
.00
.02
.04
.06
.08
5 10 15 20 25 30 35
Response of Korean to Thai price Response of Thai to Korean price
-.04
-.02
.00
.02
.04
.06
.08
5 10 15 20 25 30 35 -.04
-.02
.00
.02
.04
.06
.08
5 10 15 20 25 30 35
Response of Korean to Arkansas price Response of Arkansas to Korean price
-.04
-.02
.00
.02
.04
.06
.08
5 10 15 20 25 30 35 -.04
-.02
.00
.02
.04
.06
.08
5 10 15 20 25 30 35
38
Response of Japanese to Arkansas price Response of Arkansas to Japanese price
-.04
-.02
.00
.02
.04
.06
.08
5 10 15 20 25 30 35 -.04
-.02
.00
.02
.04
.06
.08
5 10 15 20 25 30 35
Response of Japanese to Thai price Response of Thai to Japanese price
-.04
-.02
.00
.02
.04
.06
.08
5 10 15 20 25 30 35 -.04
-.02
.00
.02
.04
.06
.08
5 10 15 20 25 30 35
Response of Japanese to Californian price Response of Californian to Japanese price
-.04
-.02
.00
.02
.04
.06
.08
5 10 15 20 25 30 35 -.04
-.02
.00
.02
.04
.06
.08
5 10 15 20 25 30 35
39
Response of Korean to Japanese price Response of Japanese to Korean price
-.04
-.02
.00
.02
.04
.06
.08
5 10 15 20 25 30 35 -.04
-.02
.00
.02
.04
.06
.08
5 10 15 20 25 30 35
Cholesky ordering: Korean, Japanese, Californian, Arkansas, Thai rice prices
The results of variance decomposition are shown in Table from 13 to 17. We found that international
rice prices are generally well linked each other. Hence, Indica rice (Arkansas and Thai rice) are
explained more each other than Californian rice in both sub-periods. For example, Table 13 reports
the variance decomposition of Arkansas price after 12, 24 and 36 month. For the first period of
Arkansas price, 11.45% is explained by the Thai price and 10.89% is explained by Californian price
after 12 months. It then changes to 12.37% and 10.56% respectively after 3 years. For the second
period, those values increased to 24.08% and 16.96% respectively.
Table 14 shows the variance decomposition of Thai rice price. For the first period of Thai price, 34.74%
is explained by Arkansas price, and 4.38% is explained by Californian price after 12 month. Moreover,
those values are increased to 36.71% and 4.55% after 36 month, respectively. On the other hand, for
the second period, 28.53% is explained by Arkansas price, and 11.98% is explained by Californian
price after 36 month. Moreover, Thai rice price are much less likely to affected by Californian rice
price. Nonetheless, the effects have increased for the second period compared to that of the first period.
Table 15 reports the variance decomposition of Californian price for 12, 24 and 36 month. For the
first period of Californian price, 18.85% is explained by the Arkansas price and 7.93% is explained
by Thai price after 12 months. It then changes to 18.82% and 10.64% respectively after 3 years. For
40
the second sub-period, those values are further increased. Specifically, 23.24% is explained by
Arkansas price and 12.54% is explained by Thai price after three years. Therefore, we may conclude
that international rice prices became more linked each other for the second period. On the other hand,
Korean and Japanese rice prices have merely effected on international prices.
Lastly, table 16 and 17 show the variance decomposition of Korean and Japanese rice, respectively.
The results show that those two markets are highly exogenous in global rice markets. For example,
for the first period of Korean price, 4.63% is explained by Arkansas price, 7.96% by Thai price and
1.86% by Californian price after 36 month. Moreover, those values further decreased in the second
period to 3.43%, 0.82% and 3.61% after 36 month, respectively (Table 16). Therefore, Korean rice
market is merely affected by other rice markets both before and after the UR agreement. For the
second period of Japanese price, 0.60% is explained by Arkansas price, 2.96% by Thai price and 3.28%
by Californian price after 36 month (Table 17). It means that even after the rice market opening in
1999, Japanese rice market has hardly affected by other rice prices and vice versa. Those results also
support the previous cointegration and causality tests.
Table 13. Variance decomposition of Arkansas rice price
Period 1: October 1987-December 1994
Month Arkansas Thailand California Korea
12 77.24749 11.45368 10.88657 0.412259
24 76.58768 12.24158 10.55193 0.618809
36 76.44537 12.36826 10.55852 0.627850
Cholesky ordering: Korean, Californian, Arkansas, Thai rice price
Period 2: January 1995-September 2016
Month Arkansas Thailand California Korea Japan
12 68.15245 16.73073 7.293360 3.994924 3.828541
24 52.29349 22.68281 14.05242 4.512066 6.459205
36 47.35712 24.07951 16.95666 3.725760 7.880955
Cholesky ordering: Korean, Japanese, Californian, Arkansas, Thai rice price
41
Table 14. Variance decomposition of Thai rice price
Period 1: October 1987-December 1994
Month Arkansas Thailand California Korea
12 34.74415 56.93759 4.376582 3.941674
24 36.57487 55.05152 4.533917 3.839690
36 36.70996 54.91382 4.547474 3.828744
Cholesky ordering: Korean, Californian, Arkansas, Thai rice price
Period 2: January 1995-September 2016
Month Arkansas Thailand California Korea Japan
12 26.08447 64.99929 3.596066 0.008486 5.311693
24 27.92737 56.12975 8.828951 0.010007 7.103924
36 28.53061 51.64914 11.97977 0.016251 7.824233
Cholesky ordering: Korean, Japanese, Californian, Arkansas, Thai rice price
Table 15. Variance decomposition of Californian rice price
Period 1: October 1987-December 1994
Month Arkansas Thailand California Korea
12 18.85033 7.925021 70.71092 2.513730
24 18.76761 10.55399 67.93054 2.747859
36 18.81688 10.63641 67.76238 2.784332
Cholesky ordering: Korean, Californian, Arkansas, Thai rice price
Period 2: January 1995-September 2016
Month Arkansas Thailand California Korea Japan
12 13.63912 8.092711 77.64655 0.125416 0.496196
24 20.98140 10.69929 67.12967 0.107276 1.082359
36 23.23709 12.53872 62.36149 0.149985 1.712719
Cholesky ordering: Korean, Japanese, Californian, Arkansas, Thai rice price
Table 16. Variance decomposition of Korean rice price
Period 1: October 1987-December 1994
Month Arkansas Thailand California Korea
12 3.143592 7.034525 1.541228 88.28066
24 4.573444 7.862390 1.864383 85.69978
36 4.627173 7.962769 1.864753 85.54531
Cholesky ordering: Korean, Californian, Arkansas, Thai rice price
Period 2: January 1995-September 2016
Month Arkansas Thailand California Korea Japan
12 1.138560 0.645674 2.977430 94.29987 0.938465
24 3.332715 0.832534 3.628779 89.02320 3.182769
36 3.431345 0.822647 3.611258 88.46916 3.665587
42
Cholesky ordering: Korean, Japanese, Californian, Arkansas, Thai rice price
Table 17. Variance decomposition of Japanese rice price
Period 2: January 1995-September 2016
Month Arkansas Thailand California Korea Japan
12 0.526817 1.004949 1.145629 1.477851 95.84475
24 0.479614 2.314741 2.703909 4.873799 89.62794
36 0.595043 2.960167 3.275268 5.884440 87.28508
Cholesky ordering: Korean, Japanese, Californian, Arkansas, Thai rice price
43
6. Conclusion
The global rice market is generally considered a volatile and thin market due to the low proportion of
rice trade the world over. One of the reasons for this is that the major rice-importing and rice-exporting
countries have protected their respective markets through border protection and export restrictions.
Rice is a main source of income as well as a politically sensitive crop in such countries. Especially,
the Asian countries have highly relied on the rice economy, and Japan and Korea are among such
countries. They had strictly secured their domestic rice markets but started to open these through the
UR agreement under MMA. Moreover, Japan and Korea returned to the tariffication system in 1999
and 2015, respectively. Even though Japan and Korea opened their respective rice markets, they are
still considered protective markets in the global rice trade. This is because these countries have
implemented several price and income support programs in rice farming. In addition, a large portion
of their imported rice is used for purposes other than as foods, for which reason it affects the domestic
rice markets less. Therefore, in this study, whether the two aforementioned markets have actually
been separated from the global rice market since after the implementation of the UR agreement was
determined. Generally, the measurement of market integration has been viewed as a basic mechanism
of understanding how specific markets work (Ravallion, 1986). Thus, cointegration and causality
tests were conducted to examine the existence and direction of market integration among rice markets.
Especially, the periods before and after the implementation of the UR agreement in 1995 were focused
on.
Three major study results were obtained. First, there is a long-run relationship among the rice
exporters in both subperiods. According to the results of the multivariate cointegration tests, the rice
prices in Thailand, Arkansas, and California are integrated with one another. The integrating vector
was 1 for the first period, and it changed to 2 for the second period. The bivariate cointegration tests
also confirmed that the rice-exporting markets are generally well integrated with one another. The
44
Granger causality tests for the first period showed that bidirectional price transmission exists between
the rice prices in Arkansas and California. Hence, there is one-way price linkage between the Thai
and U.S. rice prices: from the Thai to the U.S. prices. This is reasonable because Thailand was the
largest rice exporter in the first subperiod. Thus, Thailand acts as a price leader for the global rice
markets. For the second period, the causality test confirmed that there is a bidirectional price linkage
between the Indica rice prices in Arkansas and Thailand. There is one-way transmission, however,
between Californian and Indica rice: from the Indica to the Californian rice prices. This is also
understandable because Indica rice accounts for 75% of the global rice trade. Thus, Indica rice
dominates the international rice trade as a leader for the second subperiod. The impulse response and
variance decomposition analyses also confirmed that the changes in the prices set by the rice exporters
are generally responses to one another. Moreover, the impact of shocks remained for a longer time in
the second period compared to the first period.
Second, the Korean and Japanese rice were found to have no long-run relationship with the other rice
markets in both periods. The multivariate cointegration tests for the first period confirmed that there
is no cointegrating vector among the rice markets in Arkansas, California, Thailand, and Korea. The
second period also showed that there is no long-run relationship among the five selected rice markets,
namely those of Arkansas, Thailand, California, Korea, and Japan. This was also found in the results
of the bivariate cointegration tests, showing that there is no linkage between the Korean and global
rice markets and also between the Japanese and global rice markets. The Grander causality tests
confirmed that the Korean and Japanese rice prices have no causal relationship with the other rice
prices. This was clearly shown in the analysis with the local currency. In the impulse response
function, the Korean and Japanese rice prices have no response to a shock from any other rice markets,
and vice versa. Thus, it can be concluded that Korea and Japan are independent from the global rice
markets both in the long and short run for the whole periods. This means that both markets have been
45
completely isolated from the international rice markets even after their rice market opening.
Third, it may be expected that the Korean rice market will be temporarily isolated from the global
rice market based on the Japanese market for the second period. Through the UR agreement in 1994,
Japan agreed to import rice under the TRQ. Specifically, 682,000 tons (about 6.4% of the base year’s
consumption) of rice are imported annually. Much of the imported rice, however, was used for
processing and as feeds and food aid. Thus, even after the tariffication in 1999, Japan imported only
100 tons of out-of-quota rice per year, and the amount further decreased to around 50 tons in 2009.
Moreover, the Japanese government has introduced a series of income support programs: Rice
Farming Income Stabilization Program in 1998, Direct Payment Program for Paddy- and Upland-
Field Farming in 2007 to more-than-4-ha farms, and Income Support Direct Payment Program in
2010 to all farmers (Fukuda et al., 2003; Kako, 2013). Through these protective measures, Japan was
able to stabilize its rice market. These actions, however, have isolated the Japanese rice market from
the global rice markets even after the agricultural trade liberalization. In this regard, it may be
expected that the Korean rice market will also follow the Japanese rice market flow to some extent.
This is because Korea also imposed a high tariff over MMA and set a special safeguard (SSG) as well
as the rice direct payment to protect the domestic market. Thus, even though Korea switched to
tariffication in 2015, it may be expected that the Korean rice market will also be isolated from the
global rice markets for a while. In the long-term perspective, however, the border protection measures
will be continuously reduced in the future as a result of several agricultural trades. Moreover, the
income support program in the rice sector may be gradually abolished, as in Japan, because of the
heavy burden that imposes on the budget as well as the rice oversupply issue. Under these
circumstances, the Korean rice market will inevitably compete with the global rice markets.
46
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