Wheat market integration between Hungary and Germany

One of the most important targets ofthe Common Agricultural Policy (CAP) is to facilitatethe spatial integration of agricultural markets within theindividual member states as well as within the Community.On a spatially integrated market, price informationshould freely flow between member states. According tothe European Commission, national Governments andtheir regulations should help to attain the goal of acommon, integrated, and efficient market. For a smallopen economy, such as Hungary, market efficiency, andmarket information flow has at least two important politicalconsequences. The first one is the transmission ofprices by some actors of the chain either vertically orspatially. This issue is quite relevant for Hungary, consideringthe structure of its agri-food market. The secondproblem relates to the national agricultural supportsystem completing the CAP in the New Member States(NMS). This paper focuses on the first topic, by testingfor price transmission between German and Hungarianproducer prices. Given the changing nature of marketconditions over the past five years, a flexible Markov-Switching model for price transmission is proposed andestimated for the analysis of price transmission betweenHungarian and German wheat.