Market Integration in European Union’s Fruits and Vegetables Sector

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potential non-linearity in price transmission due to the  inactivity band  of 
transaction costs. A recent approach rely on modeling the  inactivity band  using 
the threshold autoregressive (TAR) models (Ejrnaes and Persson, 2000; Goodwin 
and Piggott, 2001; Abdulai, 2006; Serra et al., 2006; Fackler and Tastan, 2008). 
Another important issue in market integration is the symmetric (or 
asymmetric) nature of price transmission. Meyer and Cramon-Tabaudel (2004) 
surveyed the literature on asymmetric price transmission (APT) identifying some 
of the possible causes of asymmetry: market power and adjustment costs (Ward, 
1982), non-equivalence of demand and supply shocks (Cramon-Tabaudel, 1998), 
distorted price reporting process (Bailey and Brosen, 1989), asymmetric 
information (Abdulai, 2000). Although the survey is very explicative of many 
aspects of APT, we argue that a not negligible part of the explanation might lie in 
the arbitrage opportunities could be exploited through storage. In particular, when 
either trade and storage are introduced in spatial commodities models it has been 
shown that storage tends to be more stabilizing than trade (Wright, 2001).   
Unfortunately, although the literature associated with market integration of 
agricultural markets is extensive (some recent references are listed: Ardeni, 1989; 
Benson and Faminow, 1990; Goodwin, 1992; Bessler, Yang and Wongcharupan, 
2003; Vollrath, and Charles, 2006; Serra et al., 2006; Awokuse, 2007; Federico, 
2007; Meyer, 2007; Fackler and Tastan, H., 2008; Chen and Lee, 2008; Coleman, 
2009a and 2009b; Miljkovic, 2009), a vast majority of empirical studies dealt with 
few categories of products (in particular cereals and meat) and for many 
agricultural goods the topic remains under investigated. In particular, since many 
studies do not consider perishable products, it is difficult to attribute different 
findings to characteristics such product storability or transaction costs.  
The fresh fruits and vegetables (F&V) sector is influenced by some 
peculiarities of the products: seasonality, perishability and sensitiveness to climate 
conditions. European Union (EU) is either the largest import Country and one of 
the most important producer in the World. Therefore, the European Commission 
is really concerned about the sensitiveness of the F&V sector to price variability. 
In a recent Council Regulation (EC 1182/2007) « the production of fruit and 
vegetables (has been defined) unpredictable [ ] and surplus on the market, even  
if (they are) not too great, can significantly disturb the market ». As a result, fresh 
6 
 
F&V sector is often affected by market crisis, due to factors as product 
perishability and production and consumption sensitiveness to climate variations 
(EC, 2007a). Recently the F&V CMO reform has introduced new instruments to 
stabilize the markets (EC, 2007b) that tend to transfer the risk to other agents: the 
efficacy of these instruments depends on the spatial dimension of the crises. For 
this reason, the measure of market integration assumes relevant importance for 
crisis management and prevention: Integration could increase both the probability 
and the scale of an event (Sparling and Casswell, 2006), that is crises in highly 
integrated markets are spread and diluted, while they tend to be stronger and 
localized in isolated or low integrated markets. 
Despite the serious policy implications and relevance of assessing market 
integration in F&V sector, the topic remains under-investigated in few articles 
about U.S. F&V sector (Sexton, Kling and Carman, 1991; Jordan and VanSickle, 
1995; Padilla-Bernal, Thilmany and Loureiro, 2003) and, to the best of our 
knowledge, literature lacks of studies on EU F&V sector.  
The challenge of this dissertation is to assess the degree of market 
integration in some F&V sectors through econometric techniques. In particular we 
aim to estimate the speed of price transmission among closely located markets as 
well as the price transmission across different Regions. By selecting products that 
differ for storability, incidence of transportation costs and production technologies 
we are able to generalize our findings to the whole EU F&V sector. The 
dissertation is articulated as following.  
Chapter 1 (European Union fruits and vegetables sector) is dedicated to 
the description of the EU F&V sector: production, consumption and trade flows. 
Attention is paid to synthesize the importance of assessing the degree of market 
integration as a key aspect to be considered when planning policies to limit the 
effect of market crises. The last part of the chapter provide a more detailed 
description of the production and trade flows of the products selected for the 
present analysis: tomatoes, cauliflower and apple. 
The second chapter (Market integration and LOP in agricultural markets: 
a review) is a survey of the literature on Law of One Price and Market Integration. 
The first part reviews the definitions and the theory related to the economic 
concepts of market integration and LOP; the second part examines advantages and 
7 
 
limitations of various empirical approaches proposed to assess the integration of 
markets; the last part describes the main issues on which the debate is focused and 
our  suggestions for further line of research. 
The third chapter (Empirical design: methodology and data) illustrates the 
methodology adopted in this dissertation. This empirical study, carried out on a 
large set of markets located in 6 different EU Countries, consists of two main 
steps: the identification of the markets that mainly influence the prices of other 
markets in the same Region and the analysis of integration either inside and 
among Regions. Regarding the former, we employed Granger-Causality tests and 
estimated Ravallion-type regressions; the latter has been achieved by using 
several specifications. Consistently with a majority of recent literature on price 
transmission, we adopted threshold autoregressive models and contributed to the 
debate by testing whether price transmissions are asymmetric.  
Chapter 4 (Analysis and results) reports the empirical findings. They 
support the intuition that the speed of price transmission depend on the distance of 
markets and on storability of F&V. Interestingly we found that  product 
perishability accelerates the transmission of shocks in prices. In most of the cases 
we estimated different speed of adjustments for positive and negative price 
movements, and, generally, the former are slower transmitted. A second 
consideration relies on the relationship between storability and market integration: 
fixing the distance, the models estimate the largest transaction costs for 
cauliflower, high perishable, and the lowest for apple, which are storable for 
several months.  
According to its purpose, the study offers some pioneeristic estimates of 
market integration in the EU F&V sector which is based on techniques more 
sophisticated than simple analysis of prices  correlations.  
 
 
 
 
 
 
 
8 
 
1 
 
European Union fruits and vegetables economy 
 
 
The fresh fruits and vegetables (F&V) sector is characterized by the 
peculiarities of the products: seasonality, perishability and sensitiveness to 
climate conditions. 
Generally, the supply side presents an high degree of seasonality and 
products are not disposable during the entire year. Consumption and 
production in the F&V sector are affected by weather conditions, while the 
degree of perishability tend to constrain the F&V tradability in very short 
period making the supply inelastic. 
In other words, F&V sector is characterized by features that contribute 
to render the market exposed to high price variability that in some cases may 
become market crises. 
In European Union (EU) the temperate mood offers an ideal 
environment for the production of temperate and sub-tropical fruits (citrus, 
grapes, pears, apples, oranges, etc.), whose imports from non-EU members is 
consistent only out of the growing season (counter-season supply). On the 
opposite, tropical fruits production (bananas, pineapples, avocados, mangos, 
etc.) is very scarce and EU market is mainly supplied through imported goods. 
Differently, the internal production of vegetables is very large, leading 
EU to a considerable degree of self-sufficiency (i.e. 99% for lettuce, 97% for 
cucumbers, 90%  for tomatoes). The low storability of vegetables represents a 
 natural  barrier to the imports from non-EU member s, especially for high 
perishable products (i.e. lettuce, cauliflower, etc.). Another obstacle to imports 
from non-EU members is due to the expansion of the internal supply season by 
growing vegetables in controlled conditions (i.e. greenhouses). 
 
 
1.1 Production and consumption 
 
EU is one of the biggest global producer of F&V. Despite the recent 
declining trend, its production accounts for more than the 8 percent of world 
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production (more precisely, it supplies respectively 12% and 7% fruits and 
vegetables of the world) .  
The main Countries, Italy, Spain and France (accounting for more than 
30% of the total EU), show different trends: Italian share has been almost 
constant since 2000, while French and Spanish shares are respectively 
decreasing and increasing. Other important producers are Greece, Germany, 
Poland, Hungary and Portugal (Graph 1.1).  
 
Graph 1.1 - EU fruits and vegetables shares. 
Source: Our elaboration from FAOSTAT data 
 
Grapes are the largest fruit, but most of the production is used for 
making wine.  Italy (30%), France (25%) and Spain (22%) are the main 
producers, followed by Germany, Portugal and Greece.  
Tomatoes is the second largest product (almost 30% of the total EU 
vegetables production). The largest supplier, Italy (38%), is interested by a 
production around 6.6 million tonnes. Spain is the second largest producer, 
accounting for more than 20% of the total production.  
Table 1.1 -  Main EU fruits and vegetables producers (tones) 
 Annual average production  
 2000-2002 2005-2007 Share  2005-2007 
Italy 32.523.165 32.653.865 25,30% 
Spain 28.179.741 28.515.941 22% 
France 19.683.406 16.366.773 12,70% 
Greece 8.325.955 7.472.924 1,9% 
Poland 7.391.193 7.383.998 1,9% 
Romania 6.076.207 5.978.831 1,5% 
Germany 8.334.859 5.746.849 1,5% 
Netherlands 4.260.354 4.735.145 1,2% 
United Kingdom 3.098.938 3.177.273 0,8% 
Belgium 2.216.621 2.396.861 0,6% 
Source: our calculations from EUROSTAT data.  
 
Apples is the third product (40% of total fruit supply), with a 
production around 12 million tones largely due to Italy (18%), France (17%), 
2000 2001 2002 2003 2004 2005 2006
Fruits 14.6% 14.0% 13.1% 12.8% 13.2% 12.2% 12.7%
Vegetables 9.6% 8.9% 8.4% 8.4% 8.6% 8.0% 7.4%
5.0%
10.0%
15.0%
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