Price Dynamics and Cointegration among Markets for Abaca Fiber

in the Bicol Region, Philippines1

Erwin E. Torres

2

ABSTRACT

This study explored the interrelationship of buying prices of barangay traders and grading and baling establishments (GBEs) to capture the interaction among the factors affecting supply and demand in the market for the different grades of abaca fibers. Econometric models were estimated using real prices in the different provinces in the Bicol region from 1998 to 2010 to describe the dynamics of prices. Results show that, generally, there is a bilateral relationship between the prices of graded abaca fibers at the GBE-level and all-in abaca fibers at the barangay trader-level. However, to some extent, prices of all-in abaca fibers Granger-caused prices of all-in abaca fibers especially in provinces where there are no GBEs. The presence of GBEs can also explain the speed of price transmission in the event of market shocks. Price transmission is also faster between excellent and good grade abaca fibers. Based on the foregoing findings, recommendations were forwarded which are focused on the improvement of the local demand for excellent and good grades abaca fibers and to increase the volume of production of these grades.

Key words: abaca, abaca fiber grades, Bicol region, price dynamics. 1. INTRODUCTION In this era of expanding global markets, competitiveness in different industries has become the driving force of growth and development. The cornerstones of agricultural competitiveness are improving productivity, increasing efficiency, and strengthening Science and Technology-based enterprises (PAEDA 2011). Abaca is one of the top foreign exchange earners of the Philippines. In 2010, Philippines was able to export US$13.41 Million worth of abaca products

(Bureau of Agricultural Statistics 2011). Philippine

abaca industry is driven to the international market due to the increasing demand for abaca fibers for tea bags and meat casing in India, China and Eastern Europe; abaca-based fiber paper and wrapper of cigarette in United States of America and Russia

(PCARRD). One of the major destinations of abaca pulp

is Europe due to their shift to natural fibers for use in the interiors of their automobiles (Benaning 2011). The abaca fiber industry in the Philippines is an oligopolistic market. Based on the study conducted by Abamo, et. al. in 2008, there are five major supply chains of abaca fibers in the country. Three of them were pulp millers, namely, Specialty Pulp Manufacturing Inc., (SPMI) of Hilapnitan, Baybay, Leyte, Albay Industrial Development Company (ALINDECO) of Malinao, Albay, New Tech Pulp Inc. of Iligan City, Philippines. And the two were cordage processors, namely Manila Cordage Company (MANCO) and the Pacific Cordage Corporation at Sto. Domingo, Albay. In January to June 2011, Philippines was able to produce 36, 1600 metric tons of abaca fibers amounting to P1,417,470.00

(BAS 2011). The volume of production and value of production in 2011 are

1 Research paper presented during the 49

th Philippine Agricultural Economics and Development Association (PAEDA) Convention

on October 23-25, 2013 at Central Mindanao University, Musuan, Maramag, Bukidnon. 2 Technical Staff, Bicol University Research and Development Center, Legazpi City, Albay.

Affiliate faculty, Department of Economics, College of Business, Economics and Management, Bicol University, Daraga, Albay.

1.20 percent higher and 16.24 percent higher compared to the data on the same period in 2010, respectively. The top abaca producing provinces in terms of volume of production the Philippines in 2011 are Eastern Visayas (34%), Bicol Region (34%) and Davao region (17%) according to the Bureau of Agricultural Statistics. In the Bicol region, 81 percent of the volume of abaca fibers came from Catanduanes, nine percent from Sorsogon and seven percent from Albay. Abaca fibers are used in cordage products (i.e. ropes, twines, marine cordage, binders and cords), pulp and paper products (i.e. tea bags, filter paper, mimeograph stencil and currency paper), fiber crafts (i.e. handbags, hammocks, placemats, rugs, carpets, purses, wallets, fish nets and doormats), and hand-woven fabrics (i.e. sinamay, pinukpok, tinalak, dagmay sacks, and wall papers)

(Abamo, et.al.

2009). The different industries that use abaca fibers require specific qualities of abaca fibers for their finished products. The quality of abaca fiber is determined by its strength, cleaning, color, texture and length. To be able to assist them in getting the right quality for their products, the abaca fiber industry adopted a grading and standardization system. The official grades of abaca fibers being adopted in the Philippines are divided into three (3) depending on the manner of extraction, namely: hand-stripping, spindle-stripping, and decortication (FIDA, ___). Strength, length and color of abaca fibers depend not only on the variety of abaca but also on the leaf sheath where it was obtained. The cleaning of abaca fibers depend on the type of stripping apparatus or knife used and on the leaf sheath where it was obtained. The standard grades for hand- and spindle stripped are presented in the following table: Table 1. Different abaca fiber grades based on the leaf sheath used and degree of cleaning.

Cleaning Outer sheath Inner sheath

Excellent : S2/S-S2 (Streaky Two) S3/S-S3 (Streaky Three) Good : I (Current)/S-I G (Soft Seconds)/S-G, H (Soft Brown)/S-H Fair : JK (Seconds)/S-JK M1 (Medium Brown)/S-M1 Residual : Y1 (Damaged Fine) Y2 (Damaged Coarse), O (Strings), T (Tow)

SOURCE: Fiber Industry Development Authority (FIDA) Regional Office V Spindle-stripped abaca fibers are indicated by the letter “S” before the official grade, i.e. S-S2, S-I. For decorticated abaca, the official grades are AD-1, AD-2 and AD-3. Grading system makes the market work efficiently by facilitating trade, allowing the use of samples of products in trade, and reducing marketing costs

(Tomek and Robinson 1981). Through the aid

of a certified fiber inspector, the buyers and sellers are assured of the quality of fibers because the grades already indicate the physical attributes of the fibers. With an effective grading system transaction cost is reduced because there is no need for them to personally inspect the fibers for the specific quality that they require. It also makes possible trade using contracts by specifying only grades. Grades do not just summarize the distinguishing quality attributes of abaca fibers, it also reflect the price of a specific lot of abaca fiber. Price is a reflection of the demand and supply situation of different abaca fiber grades in the abaca fiber industry. This is an important element that defines the movement of different abaca fiber grades from plantations to utilization areas. Prices of the different grades of abaca fibers flow through the different levels of the supply chain and it carries with it vital information on the condition of the market and the interrelationship among market players. The prices of different grades tend to move up and down together although price premiums and discounts between grades often change from season to season and may exhibit trends over time. Thus, the analysis of prices can be a basis for evaluating the efficiency of the abaca fiber marketing system. Generally, there is lack of market information in the abaca marketing system. The farmers' main source of information is the traders while the lower level-traders are mainly dependent on the higher-level traders on price information Piadozo (2005). GBEs possess more market knowledge because they can rely on other traders for information on prices and the general demand and supply conditions in the market. Almost half of the processors also relied on their buyers for market information as well as on the

internet in their buying and selling decisions. The processors exercise secrecy when it comes to their price, sales and other marketing strategies. Lower-level traders set the price based on the buying price of higher-level traders. This asymmetric information situation in the market causes farmers to have very weak bargaining power when dealing individually with the traders. Price distortion was highest for grades G and I and lowest for OT and S3 grades. This is further confirmed by the marketing margins increasing as one goes higher through the marketing chain (Piadozo 2005). The research conducted by Abamo et. al. in 2008 was a detailed analysis of the five major abaca fiber supply chains in the country. It revealed that flow of price, supply and technical information was more asymmetric at the farmers’ level than at the traders’ level. This implies that essential marketing information is not effectively transmitted to the upstream end or the farmers’ level of the chain. Analysis on the performance of the five major supply chains also revealed that there is high transaction cost incurred at the farmers’ level, which is the major factor explaining a relatively low (between 50 to 60 percent) overall supply chain efficiency rating. Two of the major problems that were commonly identified as sources of inefficiency in the five major abaca supply chains were (1) the information asymmetry on price and quality of abaca fibers and (2) non-differentiated pricing of abaca fibers at the farmers’ level. The practice of selling ungraded abaca fibers (“all in” abaca fiber grade) doubly penalizes the farmers because the actual buying price they get from selling ungraded/”all-in” fibers are one grade lower than usual e.g. from G to JK or from I to G. The price difference between grades is about 3 to 5 pesos per kilo in 2009. It also reduces the farmers’ bargaining position in the market. They stressed the importance of grading at the farmers’ level to be able to get the premium price for the different grades of abaca fibers that they produce (Abamo, et. al., 2009). 2. OBJECTIVES OF THE STUDY

This study generally intends to describe the dynamics of different prices of abaca fibers in the Bicol region. Specifically, this seeks to:

1. determine the existence of (horizontal) cointegration among provincial markets for all-in abaca

fibers, (horizontal) among markets for graded abaca fibers, and (vertical) cointegration among provincial markets for all-in abaca fibers and markets for graded abaca fibers;

2. estimate the speed of prices adjustment among cointegrated prices in the event of price shocks; 3. establish the occurrence of price leader(s) in the markets for all-in and graded abaca fibers; and 4. recommend policies to enhance the competitiveness of the abaca fiber industry in the region.

3. SCOPE AND DELIMITATION The interrelationship among the traders in the abaca fiber industry was analyzed based only on the buying prices of the grading and baling establishments for graded abaca fibers and buying prices of the local traders for “all-in” abaca fibers in each province. The dynamics of the prices was only determined in terms of co-integration of markets, speed of price adjustment and price leadership. Price leaders among the GBEs in the region were not also analyzed because of the absence of price series for individual GBE from 1998-2010. The prices from 1998 to 2010 were considered because there are no available data for 1997 and 1994. 4. RESEARCH METHODOLOGY

Integration of markets may have important implications for price formation and discovery, and can give a lot of insights to analysts on the operation of commodity markets since sustained deviations form integration may imply the presence of risk-less profit opportunities for traders (Goodwin & Piggott, as cited by Rufino). Co-integration can be considered as the empirical counterpart of the theoretical notion of a long-run equilibrium relationship. If two separated price series are co-integrated, there is a tendency for them to co-move in the long-run according to a linear relationship. In the short run, the prices may drift apart, as shocks in one market or level may not be instantaneously transmitted to the others; these divergences from the underlying long-run (equilibrium) relationship are transitory and not permanent (Dang and Lantican, 2011). Barret(1996, as cited by Dang and Lantican, 2011) provided a more general interpretation of vertical, spatial and inter-temporal market integration. Vertical integration involves stages in marketing and processing channels, spatial integration relates to spatially distinct markets, and inter-temporal integration refers to arbitrage across periods. The degree to which market shocks are transmitted up and down the marketing chain has long been considered to be an important indicator of the market performance (Goodwin, 1996 as cited by Dang and Lantican, 2011). The distinction between short-run and long-run price transmission is important and the speed by which prices adjust to their long-run relationship is essential in understanding the extent to which markets are integrated in the short-run (Dang and Lantican, 2011). Sources of Data Buying price of traders for all-in abaca fiber per province and buying price of GBEs by grade were used to determine the dynamics of prices in the abaca fiber industry. These were obtained from the monthly reports on prices of the Fiber Industry Development Authority Regional Office V (FIDA-ROV) from 1998 to 2010. These prices were deflated using the monthly consumer price index from 1998 to 2010 obtained from the CountryStat website of the Bureau of Agricultural Statistics. Statistical Treatment of Data The gathered nominal prices of all-in and graded abaca fibers from 1998-2010 were expressed as real prices with 1998 as base year to remove the effect of inflation and to be able to attribute the fluctuations in prices to the forces of demand and supply. The following formula was used:

(1)

where:

Real price t = price of abaca fibers in year t (e.g. 2005) when the effect of inflation is removed. CPI 1998 = consumer price index in year 1998 CPI t = consumer price index in year t (e.g. 2005) Nominal price t = price of abaca fibers in year t (e.g. 2005) that is not adjusted for inflation.

Price Co-integration Before proceeding to the tests of co-integration, an initial condition has to be met by time series variables to make the tests valid. Test for co-integration can only be applies to price series that are co-integrated of order one or I(1). This means that both price series in the regression model must be non-stationary in its level form but stationary in its first difference. Augmented Dickey Fuller test was used to determine the level of integration of the different series of prices. To determine whether the prices of “all-in” and graded abaca fibers exhibit long term relationship, their prices were tested for co-integration. This test was used to determine whether the relationship between pairs of prices exhibit co-movement or simply spurious. Spurious relationship occurs when the regression between two price series results to a meaningless relationship (Garcia and Salayo 2009). Engle and Granger-Augmented Dickey-Fuller (EG-ADF) test was used to establish the stationarity or randomness of the error term of the price series regression. The idea behind this test is that if the error term is found to be stationary, then the two prices are co-integrated or they have a long term synchronized movement. (a) Among provincial markets for all-in abaca fibers Co-integration among provincial markets for all-in abaca fibers was tested between pairs of deflated provincial prices of “all-in” abaca fibers using the data from 1998-2010. The co-integrating model that was used to test for stationarity was specified as: BP Province A = α + β BP Province B + μ (2) where:

BP Province A = buying price of “all-in” abaca fibers in province A

BP Province B = buying price of “all-in” abaca fibers in province α and β = regression coefficients μ = error term

In the above regression model, the buying price of “all-in” abaca fibers in province B is the independent variable while the buying price of “all-in” abaca fibers in province A is the dependent variable. (b) Among markets for different grades of abaca fibers Co-integration among abaca fiber grades at the GBE level was tested between pairs of deflated buying prices (BP) of the different grades of abaca fibers in the region using the data from 1998-2010. The co-integrating regression between the buying prices of graded abaca fibers was specified as: BP Grade A = α + β BP Grade B + μ (3) where:

BP Grade A = buying price of grade A

BP Grade B = buying price of grade B α and β = regression coefficients μ = error term

(c) Among provincial markets for all-in and markets for different grades of abaca fibers Co-integration between “all-in” abaca fibers by province and graded abaca fibers at the GBE level was tested using the data from 1998-2010. The co-integrating model that was used to test for stationarity was specified as: BP Province A = α + β BP Grade A + μ (4) where:

BP Province A = buying price of “all-in” abaca fibers in province A BP Grade A = buying price of grade A α and β = regression coefficients μ = error term

Engle-Granger Augmented Dickey-Fuller test was used for every regression model to determine the stationarity of the error term. If the error term is found to be stationary, then the pair of buying prices is co-integrated or has long term relationship or exhibit common trend. If it is non-stationary, then the relationship between the prices is simply spurious and their trends are considered independent. Speed of Price Adjustment If the prices of abaca fibers among the different markets are co-integrated, then it can be concluded that there is a long run trend that is followed by prices. However, external shocks can cause disequilibrium to occur in the short run. Error-correction model is a useful tool in measuring the speed of price adjustment with respect to a market shock that may disturb their long-run equilibrium. It measures the length of time it takes for the two price series to return to their long-run trend. The following error correction models were used in determining speed of price adjustment: (a) Among provincial markets for all-in abaca fibers Δ BP Province A = α + β Δ BP Province B + δμt-1 + ε1 (5) where:

Δ P Province A = change in the price of abaca fibers in province A Δ P Province B = change in the price of abaca fibers in province B μt-1 = lagged error term between provinces A and B α, β and δ = regression coefficients ε1 = error term of the equation

(b) Among markets for different grades of abaca fibers Δ BP Grade A = α + β Δ BP Grade B + δμt-1 + ε2 (6)

where:

Δ P Grade A = change in the price of abaca fibers of grade A Δ P Grade B = change in the price of abaca fibers of grade B μt-1 = lagged error term between grades A and B

α, β and δ = regression coefficients ε2 = error term of the equation

(c) Among provincial markets for all-in and markets for different grades of abaca fibers Δ BP Province A = α + β Δ BP Grade A + δμt-1 + ε2 (7) where:

Δ P Province A = change in the price of abaca fibers in province A Δ P Grade A = change in the price of abaca fibers of grade A μt-1 = lagged error term between province A and grade A α, β and δ = regression coefficients ε3 = error term of the equation

The ΔBP in the models captures the short run disturbances between prices and δ captures the proportion of the disturbance in the long run equilibrium of prices that can be corrected in the next period (i.e. next month). If δ is not zero, then the model is in disequilibrium and the size of δ determines how quickly the equilibrium can be restored (Garcia and Salayo 2009). The speed of price adjustment (in months) in which the prices adjust to their long run equilibrium is determined by the inverse of δ in each Error Correction Model (ECM). Price Leadership The existence of price leaders in each pair of price series was tested using Granger-causality. By definition, the price in market A Granger-causes the price in market B when the change in price A precede the change in price B. Thus, the following pairs of model specifications were used: (a) Among provincial markets for all-in abaca fibers BP Province A,t = ΣαiBP Province A,t-i + ΣβjBP Province B,t-j + μ1t (8a) BP Province B,t = ΣγiBP Province B,t-i + ΣθjBP Province A,t-j + μ2t (8b) where:

P Province A,t = Price of “all-in” abaca fibers in province A at time t P Province A,t-1 = Price of “all-in” abaca fibers in province A in the previous month P Province B,t-1 = Price of “all-in” abaca fibers in province B in the previous month β and θ = regression coefficients of prices α and γ = constants μ1t and μ2t = error terms of the two regression models

(b) Among markets for different grades of abaca fibers BP Grade A,t = ΣαiBP Grade A,t-i + ΣβjBP Grade B,t-j + μ1t (9a) BP Grade B,t = ΣγiBP Grade B,t-i + ΣθjBP Grade A,t-j + μ2t (9b)

where:

P Grade A,t = Price of grade A abaca fiber at time t P Grade A,t-1 = Price of grade A abaca fiber in the previous month P Grade B,t-1 = Price of grade B abaca fiber in the previous month β and θ = regression coefficients of prices α and γ = constants μ1t and μ2t = error terms of the two regression models

(c) Among provincial markets for all-in and markets for different grades of abaca fibers BP Province A,t = ΣαiBP Province A,t-i + ΣβjBP Grade A,t-j + μ1t (10a) BP Grade A,t = ΣγiBP Grade A,t-i + ΣθjBP Province A,t-j + μ2t (10b) where:

P Grade A,t = Price of grade A abaca fiber at time t P Grade A,t-1 = Price of grade A abaca fiber during the previous month P Province A,t-1 = Price of “all-in” abaca fibers in province A in the previous month β and θ = regression coefficients of prices α and γ = constants μ1t and μ2t = error terms of the two regression models

There are four possible cases of relationships that can exist between prices from two markets, say market A and market B, namely:

a) unidirectional relationship between price from market A to market B (i.e. Σβi = 0 and Σθj ≠ 0). b) unidirectional relationship between price from market B to A (i.e. Σβi ≠ 0 and Σθj = 0). c) bilateral relationship between prices in markets A and B (i.e. Σβi ≠ 0 and Σθj ≠ 0). d) independent relationship between prices in market A and B (i.e. Σβi = 0 and Σθj = 0).

5. RESULTS AND DISCUSSION There are five provinces in the Bicol region that produce abaca fiber. These are Albay, Camarines Norte, Camarines Sur, Catanduanes and Sorsogon. Abaca fibers are transferred from the point of production to the point of utilization through a series of middlemen. These middlemen include barangay traders, municipal traders, buying stations and grading and baling establishments (GBEs). Table 2 shows the distribution of licensed traders in the Bicol region in 2010. Majority of the traders (41.43%) can be found in the province of Albay and all types traders can be found in the province. The concentration of these traders in the province can be attributed to the strategic location of the province near the production areas of abaca and major transportation systems to the other parts of the country. GBEs can only be found in the provinces of Albay, Camarines Sur and Catanduanes. Albay and Catanduanes have buying stations that supply abaca fibers to the GBEs. Majority of the processors can only be found in Albay.

Table 2. Number of licensed traders by province and by type of trader, Bicol region, Philppines, 2010.

TYPE OF TRADER

PROVINCE

Albay Sorsogon Camarines

Sur Camarines

Norte Catanduanes

All Provinces

GBE 2 -- 1 -- 1 4

Buying Stations 2 -- -- -- 3 5

Local Traders 35 25 19 12 59 148

Processors 38 1 -- -- -- 39

Classifiers 12 -- 2 -- -- 14

All Traders 76 26 22 12 63 210

41.43% 12.38% 10.48% 5.71% 30.00% 100.00%

Source: Fiber Industry Development Authority Regional Office V (FIDA ROV)

The transfer of abaca fibers from abaca farmers to the series of marketing channels is facilitated by price. This section presents the dynamics of price formation among the vertically and horizontally integrated market players in the abaca fiber industry in the Bicol region. The abaca fibers produced and sold by the farmers to the traders are classified as “all-in” because it is composed of several grades but are sold at one price. The “all-in” abaca fibers are classified according to the industry-accepted grades at the GBE level. At this level, each grade commands different price. As can be seen in Figure 2, the real buying price of “all-in” abaca fibers in the five abaca producing provinces in the Bicol region and the real buying price of graded abaca fibers at the GBE level follow the same trend from 1998 to 2010. However, it can also be observed on the same figure that prices fell slowly during the first quarter of 2001 and a drastic decline during the second quarter of 2009. Among the five abaca-producing provinces in the Bicol region, Camarines Sur has the highest price (P26.28) for all-in fibers followed by Albay (P17.76), Catanduanes (P16.38), Sorsogon (P15.73) and Camarines Norte (P15.58) based on 13-year average real price. Among the different grades of abaca fibers, S2 has the highest average real price of P25.86 based on the 1998-2010 data at 1998 prices. It is followed by I at P24.51, G at P21.07 and JK at P16.81. G and JK are considered to be good and fair grades, respectively. They are considered to be the cheaper substitutes for grades S2 (excellent grade) and I (good grade).

According to Food and Agriculture Organization (FAO), prices of abaca in the world market peaked late in 1999 and fell markedly through to early 2002 with supply in excess of demand. According to them, the average price of abaca fell from US$155 per bale in September 1999 to US$100 in March 2002, and in January 2004 had risen slightly to US$107

2 in the world market. The sudden drop in prices in

2009 can be explained by the global financial crisis which started in the United States of America. Since USA is one of the major markets of abaca fibers from the Philippines

3, the decrease in demand for abaca

products in the USA coupled with increasing supply of abaca fibers from the Bicol region, caused a decrease in prices of all grades of abaca fibers in the region.

Figure 2. Trend in the real price of “all-in” abaca fibers by province (Upper panel) and real price by grade (Lower panel) in the Bicol region, Philippines, 1998-2010.

Horizontal and Vertical Co-integration among provincial markets for all-in fibers and markets for graded abaca fibers Before proceeding to the tests of co-integration, an initial condition has to be met by time series variables to make the tests valid. Test for co-integration can only be applies to price series that are co-integrated of order one or I(1). This means that both price series in the regression model must be non-stationary in its level form I(0) but stationary in its first difference I(1) (Garcia and Salayo 2009). Augmented Dickey Fuller test was used to determine the level of integration of the different series of prices. Table 3 shows the level of integration of each deflated price of “all-in” abaca fibers in the five abaca producing provinces in the Bicol region. Only the prices of all-in abaca fibers in Albay is integrated at its level form I(0) which make it unqualified for further co-integration tests. The stationarity of prices in Albay suggests randomness in the behavior of prices of all-in abaca fibers which can be attributed to the level of competition among traders in Albay which stabilized price movement. Majority of the market players in the abaca fiber industry in the Bicol region (41.43%) can be found in Albay. There were two GBEs, two buying stations, 33 local traders, 38 processors and 12 classifiers. This competition must be very strong that it made prices more stable in the province. Table 3. Level of integration of deflated buying prices of “all-in” abaca fibers using Augmented Dickey

Fuller Test by province, 1998-2010.

Province

Buying Price (Level Form)

Buying Price (First Difference)

Level of Integration

Tau statistic a P-value

b Tau statistic

a P-value

b

Albay -3.026* 0.0326 -16.810** 0.0000 I(0)

Camarines Norte -2.859 ns

0.0503 -18.081** 0.0000 I(1) Camarines Sur -2.562

ns 0.1011 -13.529** 0.0000 I(1)

Catanduanes -2.150 ns

0.2249 -10.835** 0.0000 I(1) Sorsogon -2.594

ns 0.0942 -14.297** 0.0000 I(1)

a The critical values for ADF test is at 5% is 2.886 and at 1% is 3.492

b P-values are based on MacKinnon approximate for Z (t)

*statistically significant at α=5% **statistically significant at α=1% ns

not significant I(0) integrated of order 0

I(1) integrated of order 1 As can be seen in Table 4, the prices of each grade are all integrated at first difference. This implies that stochastic properties (i.e. mean and variance) of the series remain unchanged over time

7 at

its first difference. Tables 3 and 4 serve as basis in determining which price series can be used in the co-integration analysis.

Table 4. Level of integration of deflated buying prices of GBE using Augmented Dickey Fuller Test by

grade, 1998-2010.

Grade Buying Price (Level Form)

Buying Price (First Difference)

Level of Integration

Tau statistic a P-value

b Tau statistic

a P-value

b

S2 -1.156 ns

0.6924 -8.263 0.0000 I(1) S3 -1.206

ns 0.6711 -9.829 0.0000 I(1)

I -0.946 ns

0.7724 -7.496 0.0000 I(1) G -1.985

ns 0.2931 -14.502 0.0000 I(1)

H -1.325 ns

0.6176 -9.439 0.0000 I(1) JK -1.784

ns 0.3883 -12.729 0.0000 I(1)

M1 -1.349 ns

0.6064 -9.387 0.0000 I(1) Y1 -2.053

ns 0.2636 -11.884 0.0000 I(1)

Y2 -1.473 ns

0.5467 -10.110 0.0000 I(1) a The critical values for ADF test is at 5% is 2.886 and at 1% is 3.492

b P-values are based on MacKinnon approximate for Z (t)

*statistically significant at α=5% **statistically significant at α=1% ns

not significant I(0) integrated of order 0

I(1) integrated of order 1 Results of the co-integration analysis between pairs of provincial markets can be seen in Table 4. The p-value of each Tau statistic can be found in Appendix Table 1. This shows that horizontal integration exists among the provincial markets for all-in abaca fibers in the four provinces of Camarines Norte, Camarines Sur, Catanduanes and Sorsogon. The prices exhibit common trend from 1998-2010 which implies that long-term relationship exists among the provincial markets. This also means that the local traders in these provinces may consider the buying prices of traders in other provinces in the formation of their own buying price. Table 4. Matrix of tau values showing horizontal co-integration of deflated prices for all-in abaca fibers

using Augmented Dickey-Fuller (ADF) Tau test between pairs of provinces, Bicol region, 1998-2010.

Provinces Provinces

Camarines Norte Camarines Sur Catanduanes Sorsogon

Camarines Norte Camarines Sur -6.329** Catanduanes -4.999** -4.609** Sorsogon -7.484** -7.272** -4.187**

**Significant at α= 1% based on MacKinnon approximate of p-value for Z (t), critical value= -3.492. The following table (Table 5) shows pairs of co-integrated markets for graded abaca fibers in the Bicol region. The p-value of each Tau statistic can be seen in Appendix Table 2. It can be observed that good grades (G and H), fair grades (JK and M1) and residual grades (Y1 and Y2) exhibit long-term relationship because the trends of their prices move in a synchronized manner from 1998-2010. It can also be observed that few grades move together with grades S2 and I. S2 move together only with G, JK and Y1 whereas I move together only with G. This is consistent with the observation of Abamo et. al. (2009) that are G and JK are the cheaper substitutes to the more expensive S2 and I grades.

Table 5. Matrix of tau values showing horizontal co-integration between pairs of deflated buying prices of

abaca fibers using Augmented Dickey-Fuller (ADF) Tau test between pairs of grades, Bicol region, Philippines, 1998-2010.

GRADES a

Excellent Good Fair Residual

S2 S3 I G H JK M1 Y1 Y2

Excellent S2

S3 -1.695

ns

Good

I -2.824ns

-1.347ns

G -6.347** -2.469ns

-7.451**

H -1.718ns

-4.025** -1.311ns

-2.715ns

Fair JK -2.898* -3.174* -2.748

ns -4.408** -2.933*

M1 -1.736ns

-3.817** -1.308ns

-2.668ns

-4.882** -3.123*

Residual Y1 -4.516** -5.120** -2.506

ns -3.911** -5.080** -5.251** -4.531**

Y2 -2.442ns

-3.334* -2.400ns

-4.170** -3.305* -6.024** -3.041* -6.186** a Shaded pairs of prices exhibit co-integration at 1% and 5% levels of significance.

*Significant at α= 5% based on MacKinnon approximate of p-value for Z (t), critical value= -2.886 **Significant at α= 1% based on MacKinnon approximate of p-value for Z (t), critical value= -3.492 ns

Not significant at α=5% It can be observed in Table 6 that there is vertical co-integration between the provincial markets for all-in abaca fibers and markets for graded abaca fibers in the Bicol region. The p-value of each Tau statistic can be seen in Appendix Table 3. This implies that there is vertical integration between local traders in the provinces and the GBEs. The supply chain of abaca fibers in the Bicol region shows that fibers flow from the farmers to the GBEs through a series of barangay and municipal traders. The sources of price information of each market player are their buyers and other traders. Table 6. Matrix of tau values showing vertical co-integration of deflated prices of using augmented

Dickey-Fuller (ADF) Tau test between pairs of “all-in” fibers by province and abaca fiber grades at the GBE level, Bicol region, 1998-2010.

Grade Province

Camarines Norte Camarines Sur Catanduanes Sorsogon

S2 -5.188** -7.285** -3.461** -5.253** S3 -6.975** -4.451** -3.250* -6.032** I -5.129** -6.739** -3.063* -4.892** G -5.069** -7.054** -3.189* -4.986** H -6.063** -3.755** -2.972* -5.220** JK -5.952** -5.476** -3.089* -6.450** M1 -5.911** -3.709** -2.966* -5.188** Y1 -5.618** -4.664** -3.237* -5.365** Y2 -5.179** -4.690** -2.824

ns -5.195**

a Shaded pairs of prices exhibit co-integration at 1% and 5% levels of significance.

*Significant at α= 5% based on MacKinnon approximate of p-value for Z (t), critical value= -2.886 **Significant at α= 1% based on MacKinnon approximate of p-value for Z (t), critical value= -3.492 ns

Not significant at α=5%

Abaca fiber industry in the Bicol region is highly integrated. Majority of the pairs of price series that were tested moved in synchronized manner from 1998 to 2010. Horizontal integration exists between provincial markets for all-in abaca fibers in the region. Horizontal integration also exists among the markets for different good, fair and residual grades of abaca fibers. Vertical integration is also inevitable between provincial markets for all-in fibers and markets for graded abaca fibers. These imply that the industries that utilize these grades have some degree of competition for the abaca fibers. Their buying prices for abaca fibers are formed not only based on their own cost structure but also based on the prices of their competing traders and immediate buyers. Speed of Price Adjustment This section presents the speed of adjustment of the different pairs of prices of horizontally and vertically integrated markets from 1998 to 2010. Error Correction Model was used to capture the proportion of short run disequilibrium between the two prices that can be corrected in the next period. Appendix Tables 4, 5 and 6 shows the δ coefficients for each paired prices for the horizontally and vertically co-integrated markets of abaca fibers. If found significant, the inverse of δ (1/ δ) is the speed of price adjustment. As shown in Table 7, markets for all-in abaca fibers in Camarines Sur and Sorsogon exhibit the fastest adjustment in the price in the event of short-run shocks in the demand and supply. The prices in the two provinces adjust to their long-run equilibrium or common trend after short-run shocks in less than a month. The values of δ can be seen in Appendix Table 4. Price adjustment is also fast between Camarines Norte and Sorsogon markets which take approximately 2.3 months to converge to their common trend. On the other hand, prices in Catanduanes and Sorsogon markets were the slowest to adjust to their long run equilibrium. It took approximately 8.7 months for the prices in the two provinces to converge to their common trend. Table 7. Matrix of speed of price adjustment (in months) of deflated buying prices of “all-in” abaca

fibers between pairs of provincial markets, Bicol region, Philippines, 1998-2010.

Provinces a

Provinces a

Camarines Norte Camarines Sur Catanduanes Sorsogon

Camarines Norte Camarines Sur 3.2 Catanduanes 4.3 4.6 Sorsogon 2.3 0 8.7

The quick convergence in the prices of “all-in” abaca fibers in Camarines Sur and Sorsogon can be attributed to their geographical location. The fibers coming from the traders in these provinces are delivered to either buying stations in Albay or GBEs in Albay and Camarines Sur. Slow price adjustment between provinces that are paired with Catanduanes can be explained not only by its geographical location but also by the presence of a monopsony in the island. Manila Hemp Trading Corporation is the only GBE in the province of Catanduanes in 2010. And even with the presence of Virac Central Logistics (VCL) before 2010, MHTC has the largest share of abaca fiber procurement in the province. The abaca fibers procured by MHTC in Catanduanes is delivered to New Tech Pulp Inc. in Iligan City. Co-integration exists among the abaca producing provinces in the region but price adjustment is slow because Catanduanes have different route for its fibers. Thus traders in Catanduanes have limited interaction with other traders in mainland Bicol. The limited interaction among traders explains the slow adjustment in prices. Shown in Table 8 are the speeds of price adjustment for each pair of co-integrated prices of grades of abaca fibers at the GBE level. The values of δ can be seen in Appendix Table 5. The quick

convergence of prices to their long run equilibrium can be observed among grades S2, I, JK and G. Convergence to long term equilibrium takes approximately 3.6 months for I and G, 4.2 months for JK and G, and 4.3 months for S2 and G. JK and Y2 as well as G and Y1 also show fast adjustment by approximately 3.9 months and 5.8 months, respectively. Y1 and Y2 exhibit the fastest convergence of prices in approximately 2.4 months. Table 8. Matrix of speed of price adjustment (in months) of deflated buying prices of abaca fibers between

pairs of grades, Bicol region, Philippines, 1998-2010.

Grades ab

Grades ab

Excellent Good Fair Residual

S2 S3 I G H JK M1 Y1 Y2

Excellent S2 S3

Good I G 4.3 3.6 H 5.0

Fair JK 8.7 7.7 4.2 11.5 M1 5.6 3.9 9.3

Residual Y1 10.7 6.0 5.8 9.6 7.6 13.1 Y2 7.6 4.6 11.0 3.9 13.5 2.4

a Highlighted grades can be extracted from the outer sheaths of abaca stalk.

b Highlighted values refer to pairs of prices that adjust to their common trend in less than six months.

The quick convergence in prices that was observed among grades S2, I, JK and G can be attributed to their substitutability in the factors market. JK and G are the cheaper substitutes for S2 and I. Whenever the buying price of S2 or I increases, demand for JK or G also increases because these are relatively cheaper. When there is deficit in the markets for grades JK or G, their equilibrium prices adjust by increasing in the short run until they converge with the trend of grades S2 or I that are relatively expensive. When there is an increase in the price of excellent grade abaca fiber, it takes shorter period of time for good and fair grades to adjust their prices to converge with their long term trend with excellent fiber grades. The fast adjustment between grades JK and Y2 as well as G and Y1 can be explained by the “degrading” of abaca fibers. According to a key informant in the Fiber Industry Development Authority Regional Office V who is in-charge of grading and standardization, “degrading” happens when excellent or good grades have some form of discoloration or damage on the fiber. Grades S2, G and I are usually degraded to Y1 while grades H, M1 and JK are usually degraded to Y2. “Degrading” of abaca fibers plays an important role in the speed of price adjustment. When the price of grades G and JK increased, more of these grades will be produced. Since there is substitutability between grades JK and Y2 as well as G and Y1, there will be trade-off and supply of Y1 and Y2 grades decreases. When the demand for Y1 and Y2 grades does not change the decrease in supply of Y1 and Y2 will cause an increase in equilibrium price in the short-run and convergence in the prices of JK and Y2 grades as well as G and Y1 grades occurs. Table 9 shows the speed of price adjustment between vertically integrated provincial markets for all-in abaca fibers with the markets for graded abaca fibers. The values of δ can be seen in Appendix Table 6. It can be noted that the prices of “all-in” abaca fibers in the four provinces quickly converge with the price of S2 when there are market shocks in the short run. The market for all-in abaca fibers in Catanduanes quickly adjusts towards long-run equilibrium with grade S2 in approximately 3.9 months in the event of market shock from 1998-2010. Adjustment to long-run equilibrium is also quick for grades G and H. Catanduanes exhibits relatively fast adjustment towards long-run equilibrium between all-in abaca fibers and grade G because majority of the abaca fibers that are produced in Catanduanes is grade G. It takes approximately 2.4 months for all-in price of abaca fiber and grade G to converge to their long-run

equilibrium. This is in contrast with what was observed in Camarines Sur. It takes approximately 11.5 months for the price of all-in abaca fibers in Camarines Sur and grade G at the GBE level to converge to long-run equilibrium. Table 9. Matrix of speed of price adjustment of deflated buying prices of abaca fibers between

provinces and grades (in months), Bicol region, Philippines, 1998-2010.

Gradea

Provincea

Camarines Norte Camarines Sur Catanduanes Sorsogon

Excellent S2 4.3 4.2 3.9 5.6 S3 8.7 5.8 13.1 6.0

Good I 10.7 4.6 13.5 7.6 G 5.0 11.5 2.4 3.6 H 7.7 3.9 4.3 4.2

Fair JK 5.6 9.6 8.7 5.8 M1 6.0 11.0 10.7 4.6

Residual Y1 7.6 9.3 5.0 11.5 Y2 3.6 7.6 7.7 3.9

a Highlighted values refer to pairs of prices that adjust to their common trend in less than six months.

The speed of adjustment to the prices is affected by how quickly the variations in marketing margins can function as incentives or disincentives to the producers, middlemen and retailers. Fast adjustment can mean smooth flow of product movement from one market to another. On the other hand, slow adjustment may indicate limited trading which is due to a variety of reasons including absence of marketing infrastructures that can facilitate trade (Garcia and Salayo 2009). Price Leadership Along the stretch of the abaca fiber supply chain, the relationship of the marketing players in terms of their dependencies in price formation was analyzed using Granger causality test. This is widely in determining the existence of price leader in a competition. By definition the price in market A Granger-causes the price in market B, when the changes in price A precede the changes in price B. As can be observed in Table 10, there is bilateral relationship that exists between all pairs of “all-in” prices of abaca fibers in the four provinces considered in the analysis. The test of restrictions conducted on the pairs of price series can be found in Appendix Table 7. The bilateral relationship implies that there is no group of traders in each province that solely leads the changes in the prices of abaca fibers in other provinces. The traders in each province depend on other traders in other provinces in forming their buying prices for “all-in” abaca fibers. Table 10. Matrix of granger causality direction between pairs of prices of “all-in” abaca fibers in each province and grades at the GBE level, Bicol region, Philippines, 1998-2010.

Provinces Provinces

Camarines Norte Camarines Sur Catanduanes Sorsogon

Camarines Norte Camarines Sur Catanduanes Sorsogon

Bilateral relationship exists between buying prices at the provincial level. There is no price leader.

The existence of price leaders among horizontally co-integrated markets for graded abaca fibers was also tested. Table 11 shows that there is bilateral relationship between pairs of prices of abaca fibers by grade except for grades G and Y2. Bilateral relationship is exhibited by both price series causing Granger causality between each other. This implies that at the GBE level, price determination of a specific grade is based on the prices of other grades of abaca fibers. According to the previous studies on abaca fiber industry in the Bicol region, it is considered a sellers’ market because the buyers of abaca fibers have strong power in determining the prices up to the farmers’ level. This study also looked into this observation by determining what markets lead in the price formation in the abaca fiber industry in the Bicol region. Given the vertically integrated markets of abaca fibers (GBEs and traders in each province), Granger causality test was conducted to determine the

direction of relationship. Table 12 summarizes the direction of price leadership among pairs of co-integrated prices of all-in abaca fibers in each province and grades at the GBE level. Geographical location, number of abaca fiber traders and grades of abaca fibers produced in each province can explain the price leaders among pairs of prices. The prices of all grades at the GBE level Granger-causes the changes in the price of all-in abaca fibers in Camarines Norte. Thus GBE is a price leader in the abaca fiber market in Camarines Norte. GBE is also the price leader in Catanduanes especially for fair grades (i.e. JK and M1) and residual grades (i.e. Y1 and Y2) of abaca fibers. The GBEs exhibit monopsony power over the prices of all-in abaca fibers in the provinces. Their monopsony power is high when there is no GBE in the province like in the case of Camarines Norte. Traders in Camarines Norte have to bring their procured abaca fibers to Camarines Sur or Albay.

Table 11. Matrix of co-integration between pairs of prices of abaca fibers at the GBE level by grades, Bicol region, Philippines, 1998-2010.

GRADES Excellent Good Fair Residual

S2 S3 I G H JK M1 Y1 Y2

Excellent S2

S3

Good

I

G

H

Fair JK

M1

Residual Y1

Y2

Price of the grade in the second column precedes the price of the grade in the second row. Grade in the second column is the price leader.

Bilateral relationship exists between price of the grade in the second column precedes the price of the grade in the second row. There is no price leader.

Bilateral relationship exists between the GBEs and traders in Sorsogon, Catanduanes (for excellent and good grades only) and Camarines Sur (all grades except JK and Y1). This shows that traders in each province have bargaining power, to some extent, over excellent and good grades. They can haggle for a better price if the grades that they have are excellent or good. But in the case of Catanduanes, the prices of good to residual fiber grades (i.e. H, JK, M1, Y1 and Y2) are dictated by the GBEs to the traders as shown by the Granger causality test. 6. SUMMARY AND CONCLUSIONS The markets for both all-in and graded abaca fibers exhibit both horizontal and vertical integration in the Bicol region. Horizontal integration exists among markets for all-in abaca fibers in the provinces of Camarines Norte, Camarines Sur, Catanduanes and Sorsogon. Horizontal integration can also be observed between markets for graded abaca fibers especially good grades (G and H), fair grades (JK and M1) and residual grades (Y1 and Y2) because the trends of their prices move in a synchronized manner from 1998-2010. Lastly, vertical integration between the provincial markets of graded abaca fibers and markets for graded abaca fibers exists. Their prices exhibit common trend from 1998-2010 which implies that long-term relationship exists among them. This also means that changes in the price of a specific grade of abaca fiber can be explained by changes in the prices of other grades and in other provinces. Horizontally and vertically integrated markets of abaca fibers exhibit synchronized movement in prices through time. However, this common long-run equilibrium of prices can be distorted by market shocks in the short-run. The speed at which these prices return to their long-run equilibrium condition can be explained by their geographical location relative to the processing areas in the region and number of traders in a province. The markets for all-in abaca fibers in the provinces of Camarines Sur and Sorsogon exhibit the fastest price adjustment in less than a month in the event of short-run market shocks. This can be attributed to their proximity to the province of Albay where majority of the processors in the region are located to whom the local traders sell their abaca fibers. On the other hand, price of all-in abaca fibers in the island of Catanduanes and Sorsogon shows the slowest adjustment to their long run equilibrium. It took approximately 8.7 months for the prices in the two provinces to converge to their long-run equilibrium.

Table 12. Matrix of Granger causality direction between pairs of prices of “all-in” abaca fibers in each province and grades at the GBE level, Bicol region, Philippines, 1998-2010.

Grade (GBE Level)

Province

Camarines Norte Camarines Sur Catanduanes Sorsogon

Excellent S2 S3

Good I G H

Fair JK M1

Residual Y1 Y2

Price of the grade at the GBE level precedes the price of “all-in” abaca fibers at the provincial level. Specific grade of abaca fiber at the GBE level is the price leader. Bilateral relationship specific grade of abaca fiber at the GBE level and “all-in” abaca fibers at the provincial level. There is no price leader.

Among the markets for graded abaca fibers, the quick convergence (less than 6 months) in prices were observed among excellent and good grades of abaca fibers such as S2, I, JK and G. Convergence to long-run equilibrium takes approximately 3.6 months for grades I and G, 4.2 months for grades JK and G, and 4.3 months for grades S2 and G. Price adjustment between grades JK and Y2 as well as G and Y1 is also fast by approximately 3.9 months and 5.8 months, respectively. Y1 and Y2 exhibit the fastest convergence in prices in approximately 2.4 months. Among the vertically integrated markets, the speed of price adjustment can be attributed to the quality (thus market price) of abaca fibers and the grade of abaca fiber that each province majority produces in terms of volume. The prices of all-in abaca fibers in the four provincial markets quickly converge with the price of S2 when there are market shocks in the short-run. S2 is an excellent abaca fiber grade and it is the most expensive abaca fiber considered in the study. The market for all-in abaca fibers in Catanduanes, Sorsogon and Camarines Norte quickly adjusts towards long-run equilibrium with grade G in the event of market shocks approximately 2.4 months, 3.6 months, and 5.0 months, respectively. In contrast with what was observed in Catanduanes, it takes approximately 11.5 months for all-in price of abaca fibers in Camarines Sur and grade G at the GBE level to converge to their long-run equilibrium. This price behavior can be attributable to the fact that Catanduanes produces more grade G abaca fibers than other grades while Camarines Sur produces more excellent grades such as S2. The analysis on price leadership among markets for different grades of abaca fibers reveals that there is a bilateral relationship among the provincial markets of all-in abaca fibers. This suggests that there is no group of traders in a particular province that acts as price leader. Furthermore, this implies that the traders in each province may depend on traders in other provinces in forming the buying prices for all-in abaca fibers. Among markets for graded abaca fibers, all pairs of prices except for G and Y1 as well as G and Y2 exhibit bilateral relationship. This implies that GBEs consider the price of other abaca fibers grades in formulating the price of a specific grade. Price leadership is evident among vertically integrated markets of abaca fibers. The prices of all grades at the GBE level Granger causes the changes in the price of all-in abaca fibers in Camarines Norte. GBE is also the price leader in Catanduanes especially for fair (i.e. JK and M1) and residual (i.e. Y1 and Y2) grades of abaca fibers. On the other hand, bilateral relationship exists between the markets for graded abaca fiber and provincial markets for all-in fibers in Sorsogon, Catanduanes (for excellent and good grades only) and Camarines Sur (all grades except JK and Y1). This shows that traders in each province have (to some extent) bargaining power over excellent and good grades. 7. RECOMMENDATIONS Based on the foregoing findings and conclusions about bilateral relationship between provincial markets for all-in abaca fibers and abaca fibers with excellent and good grades, the following recommendations are forwarded to maximize the benefits of market players and farmers:

1. Development of cottage industries that utilize excellent and good grades of abaca fibers in the province of Catanduanes. The province of Catanduanes is the major producer of G grade abaca fiber in the region because it has direct market in Iligan City for pulp production. The presence of processors can improve the dynamics of prices and can encourage farmers to produce excellent and good grades of abaca fibers that command higher price. This alternative factor market for excellent and good grades of abaca fibers will reduce the degree of leadership of the grading and baling establishments on the prices of fair and residual grades of abaca fibers.

2. In support to the previous recommendation, replanting of disease-free abaca cultivars that can produce long fibers with high tensile strength is necessary to increase the production of

excellent and good grades of abaca fibers. FIDA has been the leading agency in this replanting effort in the provinces of Catanduanes and Sorsogon.

8. DIRECTION FOR FUTURE RESEARCH The price analysis will be extended to include analysis on the effect of financial crisis and

exchange rate fluctuations on the dynamics of abaca fiber prices. This can be used to understand the

volatility of prices to reduce the risks in the marketing of fibers especially at the farmer’s level.

9. LITERATURES CITED

Abamo, A.P., Mascarinas, A.M., Alan, E.D., Villarin, B.S. and Galve, J.R. Abaca Fiber industry in the Philippines. Exploring the opportunities towards competitiveness: Supply chain improvement in selected commodities in AFNR (Phase I). Los Baños, Laguna: PCARRD-DOST, 2011. 268 pp. (Book Series No. 183/2011) pp. 25-61.

Bureau of Agricultural Statistics (BAS). Selected Statistics on Agriculture 2011. 2011. Dang, Nguyen Viet and Lantican, F. Vertical Integration of Tea Markets in Vietnam. Journal of

ISSAAS. Vol. 17, No 1: 208-222. 2011.

Fiber Industry Development Authority (FIDA). Abaca History. <http://fida.da.gov.ph/ Templates/ abaca_history.htm > Accessed on February 4, 2012.

Fiber Industry Development Authority (FIDA). Grades and Uses of Abaca Fiber.

<http://fida.da.gov.ph/Templates/abaca_grades_and_uses.htm> Accessed on February 4, 2012.

Food and Agriculture Organization. Current Situation and Short-term Outlook for Jute, Kenaf

and Allied Fibers and for hard Fibers. 5th INTERSESSIONAL CONSULTATION ON FIBRES. Rome, Italy 26 March 2004. <http://www.fao.org/es/esc/common/ecg/345/en/ ESC_2.pdf> Accessed on February 4, 2012.

Fiber Industry Development Authority. Abaca Industry Highlights. 2008. <www.da.gov.ph>.

Accessed on February 4, 2012.

Garcia, Y. and Salayo, N. 2009. Price Dynamics and Co-integration in the Major Markets of Aquaculture Species in the Philippines. Unpublished research.

Piadozo M.E. Price Distortions in the Abaca Fiber Market. Metro Manila Commission

Professorial Chair Lecture delivered at the Department of Agricultural Economics, College of Economics and Management on June 30, 2005 http://www.uplb.edu.ph/academics/schools/ cem/dae/News_and_Publication/ Professorial_Chairs.htm#eden> Accessed on September 28, 2011.

Philippine Council for Agriculture, Forestry and Natural Resources Research and Development

(PCARRD). Industry Status of Abaca. <http://maidon.pcarrd. dost.gov.ph/joomla/ index.php?option=com_content&task=view&id=662&Itemid =502> Date Accessed: September 28, 2011.

Rufino, C. C. Inter-regional Integration of the Philippine Rice Market. De La Salle University-Angelo King Institute (DLSU-AKI) for Business, Economics, Research and Development Working Paper Series 2008-06. (Preliminary paper)

Tomek, W. G. and K. L. Robinson. Agricultural Product Prices. Second Edition. Ithaca and

London: Cornell University Press. 1981. 10. ACKNOWLEDGEMENTS The author would like to thank Fiber Industry Development Authority ROV for providing the historical prices of the different grades of abaca fibers. He also would like to thank Dr. Yolanda T. Garcia of UPLB Department of Economics for the valuable inputs during the advanced socio-economics training of PCARRD, PAEDA and CEM in which the methodology on price co-integration and dynamics was discussed. Appendix Table 1. Horizontal co-integration of deflated buying prices for “all-in” abaca fibers using

augmented Dickey-Fuller (ADF) Tau test between pairs of provincial markets, Bicol region, 1998-2010.

Between Provincial Markets ADF Tau Statistic

P-value Horizontally Cointegrated?

Camarines Norte-Camarines Sur -6.329** 0.0000 YES

Camarines Norte-Catanduanes -4.999** 0.0000 YES

Camarines Norte-Sorsogon -7.484** 0.0000 YES

Camarines Sur-Catanduanes -4.609** 0.0000 YES

Camarines Sur-Sorsogon -7.272** 0.0000 YES

Catanduanes-Sorsogon -4.187** 0.0007 YES

*statistically significant at α=5% **statistically significant at α=1% ns

not significant NA

Failure to apply the DF test due to stationarity in the deflated wholesale price in either market.

Appendix Table 2. Horizontal cointegration of deflated buying prices for abaca fibers using augmented Dickey-Fuller (ADF) Tau test between pairs of grades, Bicol region, 1998-2010.

Between Grades ADF Tau Statistic P-Value Horizontally Cointegrated?

S2-S3 -1.695ns

0.4338 NO

S2-I -2.824ns

0.0549 NO

S2-G -6.347** 0.0000 YES

S2-H -1.718ns

0.4221 NO

S2-JK -2.898* 0.0456 YES

S2-M1 -1.736ns

0.4127 NO

S2-Y1 -4.516** 0.0002 YES

S2-Y2 -2.442ns

0.1302 NO

S3-I -1.347ns

0.6072 NO

S3-G -2.469ns

0.1233 NO

S3-H -4.025** 0.0013 YES

S3-JK -3.174* 0.0215 YES

S3-M1 -3.817** 0.0027 YES

S3-Y1 -5.120** 0.0000 YES

S3-Y2 -3.334* 0.0134 YES

I-G -7.451** 0.0000 YES

I-H -1.311ns

0.6239 NO

I-JK -2.748ns

0.0661 NO

I-M1 -1.308ns

0.6254 NO

I-Y1 -2.506ns

0.1140 NO

I-Y2 -2.400ns

0.1418 NO

G-H -2.715ns

0.0715 NO

G-JK -4.408** 0.0003 YES

G-M1 -2.668ns

0.0798 NO

G-Y1 -3.911** 0.0020 YES

G-Y2 -4.170** 0.0007 YES

H-JK -2.933* 0.0416 YES

H-M1 -4.882** 0.0000 YES

H-Y1 -5.080** 0.0000 YES

H-Y2 -3.305* 0.0146 YES

JK-M1 -3.123* 0.0249 YES

JK-Y1 -5.251** 0.0000 YES

JK-Y2 -6.024** 0.0000 YES

M1-Y1 -4.531** 0.0002 YES

M1-Y2 -3.041* 0.0312 YES

Y1-Y2 -6.186** 0.0000 YES

*statistically significant at α=5% **statistically significant at α=1% ns

not significant

Appendix Table 3. Vertical cointegration of deflated prices of “all-in” fibers by province and graded

abaca fibers in the region using augmented Dickey-Fuller (ADF) Tau test, Bicol region, 1998-2010.

Between Province and Grade ADF Tau Statistic P-Value Vertically Cointegrated?

Camarines Norte-S2 -5.188** 0.0000 YES

Camarines Norte-S3 -6.975** 0.0000 YES

Camarines Norte-I -5.129** 0.0000 YES

Camarines Norte-G -5.069** 0.0000 YES

Camarines Norte-H -6.063** 0.0000 YES

Camarines Norte-JK -5.952** 0.0000 YES

Camarines Norte-M1 -5.911** 0.0000 YES

Camarines Norte-Y1 -5.618** 0.0000 YES

Camarines Norte-Y2 -5.179** 0.0000 YES

Camarines Sur-S2 -7.285** 0.0000 YES

Camarines Sur-S3 -4.451** 0.0002 YES

Camarines Sur-I -6.739** 0.0000 YES

Camarines Sur-G -7.054** 0.0000 YES

Camarines Sur-H -3.755** 0.0034 YES

Camarines Sur-JK -5.476** 0.0000 YES

Camarines Sur-M1 -3.709** 0.0040 YES

Camarines Sur-Y1 -4.664** 0.0001 YES

Camarines Sur-Y2 -4.690** 0.0001 YES

Catanduanes-S2 -3.461** 0.0090 YES

Catanduanes-S3 -3.250* 0.0173 YES

Catanduanes-I -3.063* 0.0294 YES

Catanduanes-G -3.189* 0.0207 YES

Catanduanes-H -2.972* 0.0376 YES

Catanduanes-JK -3.089* 0.0274 YES

Catanduanes-M1 -2.966* 0.0382 YES

Catanduanes-Y1 -3.237* 0.0179 YES

Catanduanes-Y2 -2.824ns

0.0549 No

Sorsogon-S2 -5.253** 0.0000 YES

Sorsogon-S3 -6.032** 0.0000 YES

Sorsogon-I -4.892** 0.0000 YES

Sorsogon-G -4.986** 0.0000 YES

Sorsogon-H -5.220** 0.0000 YES

Sorsogon-JK -6.450** 0.0000 YES

Sorsogon-M1 -5.188** 0.0000 YES

Sorsogon-Y1 -5.365** 0.0000 YES

Sorsogon-Y2 -5.195** 0.0000 YES

*statistically significant at α=5% **statistically significant at α=1% ns

not significant

Appendix Table 4. Estimates of the speed of price adjustment from error-correction model of deflated

buying prices of “all-in” abaca fiber between co-integrated provinces, 1998-2010.

Between Provinces δ Coefficient t-statistic P-value a

Adjustment Period (Months)

Camarines Norte-Camarines Sur -0.31296** -5.61 0.0000 3.2

Camarines Norte-Catanduanes -0.23373** -4.65 0.0000 4.3

Camarines Norte-Sorsogon -0.44277** -7.34 0.0000 2.3

Camarines Sur-Catanduanes -0.21517** -4.16 0.0000 4.6

Camarines Sur-Sorsogon -0.06125ns

-1.2 0.2300 0

Catanduanes-Sorsogon -0.11500** -2.73 0.0070 8.7

*statistically significant at α=5% **statistically significant at α=1% ns

not significant at α =5% NA

Adjustment period within one month

Appendix Table 5. Estimates of the sped of price adjustment from error-correction model of deflated

buying prices of abaca fiber between co-integrated grades, 1998-2010.

Between Grades δ Coefficient t-statistic P-value a

Adjustment Period (Months)

S2-G -0.2317** -5.29 0.0000 4.3

S2-JK -0.1146** -4.45 0.0000 8.7

S2-Y1 0.0933* 2.04 0.0430 10.7

S3-H -0.2011** -4.84 0.0000 5.0

S3-JK -0.1307** -4.56 0.0000 7.7

S3-M1 -0.1790** -4.64 0.0000 5.6

S3-Y1 -0.1672** -4.63 0.0000 6.0

S2-Y2 -0.1315** -4.14 0.0000 7.6

I-G -0.2815** -6.02 0.0000 3.6

G-JK -0.2390** -5.17 0.0000 4.2

G-Y1 -0.1730** -4.12 0.0000 5.8

G-Y2 -0.2192** -4.85 0.0000 4.6

H-JK -0.0870** -3.32 0.0010 11.5

H-M1 -0.2540** -4.69 0.0000 3.9

H-Y1 -0.1038** -2.68 0.0000 9.6

H-Y2 -0.0905** -2.75 0.0070 11.0

JK-M1 -0.1080** -2.97 0.0030 9.3

JK-Y1 -0.1314* -2.40 0.0180 7.6

JK-Y2 -0.2554** -4.10 0.0000 3.9

M1-Y1 -0.0764* -2.08 0.0390 13.1

M1-Y2 -0.0741* -2.30 0.0230 13.5

Y1-Y2 -0.4093** -6.09 0.0000 2.4

*statistically significant at α=5% **statistically significant at α=1% NA

Adjustment period within one month

Appendix Table 6. Estimates of the speed of price adjustment from error-correction model of deflated

buying prices between co-integrated provinces and grades, Bicol region, Philippines, 1998-2010.

Between Province and Grades

δ Coefficient t-statistic P-value a

Adjustment Period (Months)

Camarines Norte-S2 -0.2317** -5.29 0.0000 4.3

Camarines Norte-S3 -0.1146** -4.45 0.0000 8.7

Camarines Norte-I 0.0933* 2.04 0.0430 10.7

Camarines Norte-G -0.2011** -4.84 0.0000 5.0

Camarines Norte-H -0.1307** -4.56 0.0000 7.7

Camarines Norte-JK -0.1790** -4.64 0.0000 5.6

Camarines Norte-M1 -0.1672** -4.63 0.0000 6.0

Camarines Norte-Y1 -0.1315** -4.14 0.0000 7.6

Camarines Norte-Y2 -0.2815** -6.02 0.0000 3.6

Camarines Sur-S2 -0.2390** -5.17 0.0000 4.2

Camarines Sur-S3 -0.1730** -4.12 0.0000 5.8

Camarines Sur-I -0.2192** -4.85 0.0000 4.6

Camarines Sur-G -0.0870** -3.32 0.0010 11.5

Camarines Sur-H -0.2540** -4.69 0.0000 3.9

Camarines Sur-JK -0.1038** -2.68 0.0000 9.6

Camarines Sur-M1 -0.0905** -2.75 0.0070 11.0

Camarines Sur-Y1 -0.1080** -2.97 0.0030 9.3

Camarines Sur-Y2 -0.1314* -2.40 0.0180 7.6

Catanduanes-S2 -0.2554** -4.10 0.0000 3.9

Catanduanes-S3 -0.0764* -2.08 0.0390 13.1

Catanduanes-I -0.0741* -2.30 0.0230 13.5

Catanduanes-G -0.4093** -6.09 0.0000 2.4

Catanduanes-H -0.2317** -5.29 0.0000 4.3

Catanduanes-JK -0.1146** -4.45 0.0000 8.7

Catanduanes-M1 0.0933* 2.04 0.0430 10.7

Catanduanes-Y1 -0.2011** -4.84 0.0000 5.0

Catanduanes-Y2 -0.1307** -4.56 0.0000 7.7

Sorsogon-S2 -0.1790** -4.64 0.0000 5.6

Sorsogon-S3 -0.1672** -4.63 0.0000 6.0

Sorsogon-I -0.1315** -4.14 0.0000 7.6

Sorsogon-G -0.2815** -6.02 0.0000 3.6

Sorsogon-H -0.2390** -5.17 0.0000 4.2

Sorsogon-JK -0.1730** -4.12 0.0000 5.8

Sorsogon-M1 -0.2192** -4.85 0.0000 4.6

Sorsogon-Y1 -0.0870** -3.32 0.0010 11.5

Sorsogon-Y2 -0.2540** -4.69 0.0000 3.9

*statistically significant at α=5% **statistically significant at α=1% NA

refers to non-cointegrated buying prices between pairs of provinces

Appendix Table 7. Results of Granger causality test between pairs of deflated prices of all-in abaca

fibers by province, Bicol region, Philippines, 1998-2010.

Between Provinces

Test for Granger Causality Models

Over-all Granger Causation

Model 1 Province A=f(lagged Province A, lagged

Province B)

Model 2 Province B=f(lagged Province B, lagged

Province A)

Camarines Norte (CN) -Camarines Sur (CS) 8.26** 4.27*

CN CS

Camarines Norte (CN) –Catanduanes (CT) 8.38** 3.24*

CN CT

Camarines Norte (CN) –Sorsogon (SG) 10.37** 4.62*

CN SG

Camarines Sur (CS) –Catanduanes (CT) 20.26** 14.18**

CS CT

Camarines Sur (CS) –Sorsogon (SG) 9.95** 9.57**

CS SG

Catanduanes (CT) –Sorsogon (SG) 4.60* 9.25**

CT SG

a The numerical value refers to the F-statistic from the test of the restriction in the Granger causality model. *statistically significant at α=5% **statistically significant at α=1% ns

not significant Bilateral relationship exists between buying prices at the provincial level. There is no price leader.

Appendix Table 8. Results of Granger causality test between pairs of deflated prices abaca fibers at the

GBE level by grade, Bicol region, Philippines, 1998-2010.

Between and Grades

Test for Granger Causality Models Over-all Granger

Causation

Model 1 Grade A =f(lagged Grade A, lagged

Grade B)

Model 2 Grade B =f(lagged Grade B,

lagged Grade A)

S2-G 21.32** 71.77** S2 G

S2-JK 31.67** 29.43** S2 JK

S2-Y1 17.75** 11.13** S2 Y1

S3-H 97.94** 54.42** S3 H

S3-JK 33.18** 28.09** S3 JK

S3-M1 61.27** 34.56** S3 M1

S3-Y1 14.74** 23.96** S3 Y1

S3-Y2 13.43** 5.95** S3 Y2

I-G 25.94** 111.83** I G

G-JK 23.02** 5.24* G JK

G-Y1 10.06** 5.50* G Y1

G-Y2 26.54** 1.92ns

G Y2

H-JK 38.26** 11.95** H JK

H-M1 196.20** 199.98** H M1

H-Y1 4.60* 15.28** H Y1

H-Y2 9.82** 13.26** H Y2

JK-M1 9.96** 30.68** JK M1

JK-Y1 7.14** 24.17** JK Y1

JK-Y2 17.68** 20.37** JK Y2

M1-Y1 4.20* 14.69** M1 Y1

M1-Y2 7.18* 13.32** M1 Y2

Y1-Y2 98.36** 45.99* Y1 Y2

a The numerical value refers to the F-statistic from the test of the restriction in the Granger causality model.

*statistically significant at α=5% **statistically significant at α=1% ns

not significant at α =5% Price of the grade at the GBE level precedes the price of “all-in” abaca fibers at the provincial level.

Specific grade of abaca fiber at the GBE level is the price leader. Bilateral relationship specific grade of abaca fiber at the GBE level and “all-in” abaca fibers at the

provincial level. There is no price leader.

Appendix Table 9. Results of Granger causality test between pairs of deflated prices of “all-in” abaca fibers by province and deflated prices of abaca fibers at the GBE level by grade, Bicol region, Philippines, 1998-2010.

Between Province and Grades

Test for Granger Causality Models Over-all Granger

Causation

Model 1 Province “all-in”=f(lagged

Province “all-in”, lagged GBE

Graded)

Model 2 GBE Graded=f(lagged GBE Graded, lagged

Province “all-in”)

Camarines Norte-S2 8.57** 1.11ns

CN S2

Camarines Norte-S3 14.94** 1.46ns

CN S3

Camarines Norte-I 16.34** 1.10ns

CN I

Camarines Norte-G 11.84** 1.24ns

CN G

Camarines Norte-H 17.03** 2.76ns

CN H

Camarines Norte-JK 26.73** 0.00ns

CN JK

Camarines Norte-M1 18.82** 0.88ns

CN M1

Camarines Norte-Y1 27.54** 1.57ns

CN Y1

Camarines Norte-Y2 29.13** 2.15ns

CN Y2

Camarines Sur-S2 66.37** 17.26** CS S2

Camarines Sur-S3 13.18** 17.19** CS S3

Camarines Sur-I 40.04** 13.15** CS I

Camarines Sur-G 36.28** 21.26** CS G

Camarines Sur-H 9.07** 3.47* CS H

Camarines Sur-JK 16.98** 5.66** CS JK

Camarines Sur-M1 8.01** 1.98ns

CS M1

Camarines Sur-Y1 7.79** 3.11* CS Y1

Camarines Sur-Y2 22.09** 1.89ns

CS Y2

Catanduanes-S2 11.05** 12.04** CT S2

Catanduanes-S3 8.02** 30.88** CT S3

Catanduanes-I 7.43** 9.04** CT I

Catanduanes-G 8.13** 10.72 CT G

Catanduanes-H 6.31* 2.06ns

CT H

Catanduanes-JK 10.31** 1.37ns

CT JK

Catanduanes-M1 5.83* 2.14ns

CT M1

Catanduanes-Y1 9.88** 3.58ns

CT Y1

Catanduanes-Y2 8.10** 0.80ns

CT Y2

Sorsogon-S2 14.28** 5.36** SG S2

Sorsogon-S3 25.93** 7.27** SG S3

Sorsogon-I 12.58** 4.20* SG I

Sorsogon-G 10.32** 5.70** SG G

Sorsogon-H 18.32** 4.59* SG H

Sorsogon-JK 17.78** 10.40** SG JK

Sorsogon-M1 17.75** 4.62* SG M1

Sorsogon-Y1 9.69** 5.91** SG Y1

Sorsogon-Y2 22.86** 5.35** SG Y2

a The numerical value refers to the F-statistic from the test of the restriction in the Granger causality model.

*statistically significant at α=5% **statistically significant at α=1%

ns not significant at α =5% Price of the grade at the GBE level precedes the price of the “all-in” abaca fibers in the province.

Grade at the GBE level is the price leader. Bilateral relationship exists between the price of the grade at the GBE level and the price of “all-in

abaca fibers in the province. There is no price leader.