Cointegration Analysis for the Prices of Imported Wheat and Flour: Associated with Government Inspection and Marketing Efficiency

Actually Taiwan is an area with net food import. Its food self-sufficiency ration has been lowered to 30% if weighted by weighted calories. Due to the changing preference, wheat gradually edges out rice to become one of the key components of food consumption. Unfortunately, the domestic wheat supply is so rare that it can only supports less than 1% of domestic consumption. Most of the wheat is purchased from the United States. Since the recent price hike of wheat is phenomenal, this research aims to examine the connection between the price of American wheat and its imported price in Taiwan. By considering the freight cost and possible depreciation rate, the research puts more emphasize on the pattern of the imported price of wheat and wholesale price of flour in which Engle and Granger cointegration method is applied. Based on the conclusion, the magnitude of price hike of wholesale flour is still less than that of the imported wheat, which indicates that the rising price of flour yet matches the growing price of imported wheat. As a result, flour price is expected to increase in the near future. In the meanwhile, the statistical evidence rejects the controversial argument that the manipulative milling firms have gouged up the price of flour. Also, this paper has provided that the flour price is mainly related with the imported wheat price. The law of one price can be applied to the wheat and flour market in which horizontal and vertical market integration has been reached. That is, wheat and flour market are efficient.