U.S. and Canadian Livestock Prices: Market Integration and Trade Dependence

Cointegration of Canadian and U.S. livestock prices points to the existence of market integration in the period 1996:1 to 2004:12 even though the trade flows of livestock and beef products were non-existent for many months in 2003 and 2004 (suggesting market segmentation) due to livestock/beef import bans by both countries due to BSE. It was also determined that Canada's trade dependence in livestock and beef is cointegrated with Canadian and U.S. livestock prices. However, as the trade dependence variable is shocked, the effects on Canadian and U.S. prices are opposite although one would expect that in an integrated market the price responses to an exogenous shock would be similar or statistically identical. This result reinforces the case against the use of cointegration in determining presence (or absence) of market integration. Empirical results in this article raise some very difficult questions. Gains from trade are well documented. Yet, once a country is very trade dependent, the prices in it are much more vulnerable to exogenous shocks that reduce the trade flows. Canadian livestock prices plummeted and stayed low following the BSE incident and U.S. (and Japanese) import bans on Canadian livestock and beef. Given the long cycles and high sunk cost in the livestock and beef industry, immediate adjustment (reduction in production) for Canadian producers was difficult and always unlikely. Moreover, the possibility of import bans being lifted in the near future may have further shaped their expectations and prolonged the decisions on herd reduction. In the meanwhile, U.S. prices increased following Canada's trade dependence shock due to BSE and remained above the original long-run equilibrium price.