Searching for market integration: Evidence from Ukrainian and European Union rapeseed markets

Trade liberalization and globalization processes are resulting in an increased spatial integration of agricultural commodity markets. According to the Heckscher-Ohlin model, land-abundant countries like Ukraine should export land-intensive goods. Therefore, the international integration of commodity markets should lead to the integration of factor markets, land markets among them. Biofuel expansion in the European Union constitutes a chance for a stronger integration of the Ukrainian agricultural market with the European Union market. However, trade policy and biofuel policy modifications create both chances for and threats to strengthening such market integration. In this framework, the present paper aims at assessing-for the first time-to what degree the Ukrainian and European Union rapeseed markets are horizontally integrated. Considering that rapeseed imported to the EU is processed to fulfil the mandatory blending of biofuels with diesel, the Ukrainian rapeseed prices are expected to follow the EU prices. To answer our research question, we employ linear vector error correction models (VECMs) and threshold autoregressive models (TAR) based on weekly prices for rapeseed from 2008-2018. The results confirm direct and indirect integration of both markets via physical trade flows of rapeseeds, rape cake, and rape oil, providing evidence that the prices of rapeseed in Ukraine and European Union are cointegrated and that adjustments to the long-run equilibrium relationship are asymmetric and seasonal.