Journal of Sustainable Development Vol. 9. Nos.

1/2, September, 2012

MARKET EFFICIENCY OF FROZEN FISH MARKETS: APPLICATION OF CO-INTEGRATION

TESTS

AYORINDE, B.J.O. 1 AND OLUKUNLE, O2

1. Department of Agricultural Production and Management Science, Tai Solarin University of
Education, P.M.B. 2118, Ijagun, Ijebu-Ode, Ogun State. Email: olumii4uu@gmail.com
2. Department of Wildlife and Fisheries Management, University of Ibadan, Ibadan

ABSTRACT

The inability of the domestic fish production sector of Nigeria to meet domestic demand for fish has
led to a dependence on fish imports. The value of fish and fish products imported into Nigeria
annually is worth about N12 billion. An efficient fish market will establish prices that are related
over-space by transportation costs and over-time by storage costs. This study is aimed at determining
the efficiency of the marketing system for frozen fish in Ogun State, Nigeria applying Cointegration
Tests. One hundred and four wholesalers and 200 retailers of frozen fish were selected using a three-
stage random sampling procedure in four marketing zones (Abeokuta, Ijebu-Ode, Ikenne and Ilaro)
according to Ogun State Agricultural Development Programme zoning. Questionnaires were
administered on marketers to elicit information, to determine whether the markets were integrated or
not and to establish the existence of long-run equilibrium relationship between the price variables.
The monthly price series (2007-2009) obtained from the rural and urban markets within the zones was
used for the price behaviour analysis and market integration. Data obtained were analyzed using co-
integration tests. The unit root test for stationarity of the time series showed that 50.0% of the price
series were stationary of order I(0) and the rest, of order I(1) (P<0.05). The long-run test indicates
seven co-integrating equations at 5% level of significance. The rate of adjustment to the long-run
equilibrium as indicated by the Error Correction Model is 79.0%, showing high rate of adjustment.
Eleven market links exhibited uni-directional Granger-causality. The monthly profit of the wholesale
market is higher than that of the retail market. The inter- and intra-rural and urban markets
integration is far from being optimum. The urban markets drive prices. It is possible to improve the
degree and effectiveness of competition in the frozen fish markets.

Keywords: Marketing efficiency, Market Integration, Frozen fish, Co-integration.

INTRODUCTION foreign exchange component of fish imports

The problem of efficient marketing of the
available fish product becomes apparent when
the contributions of the different sources of
fish are considered. In 1986, 72 percent of total
demand for fish came from the artisanal
sector. Industrial and aquaculture provided 7
and 4 percent respectively. These sectors have
all experienced a decline such that during the
1986 – 1999 periods, they averaged 50, 5, and 3
percent respectively). The importation of fish
from an all-time low 18 percent in 1986 has
steadily increased to an all-time high of about
59 percent in 1993 (Rahji, Popoola and Adebisi,
1999). Over the period 1986 – 1999, imports
averaged 42 percent (FDF, 2000) (Table 1). The
makes it necessary for an efficient marketing
system for the products if the benefits of the
imports are to spread over Nigeria. This
realization necessitated the need to study
frozen fish and other fish products markets
using Ogun State as a focus. The production of
fish (which can be used interchangeably as
supply in this instance) and marketing are a
continuum in the development process. The
lack of development in one retards progress in
the other. Hence, an efficient marketing is a
pre-requisite for increased and sustained
production. An efficient marketing system
stimulates production as producers/ suppliers
are likely to supply more if they are able to sell
at reasonable prices.

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Table 1: Fish output by sources and their percentage contributions to total demand 1986 – 1999
(metric tonnes)
Year Total Artisanal Aquaculture Industrial Imports
Demand
1986 372,301 267,636(71.8) 14,881(4.0) 25,042(6.7) 65,242(17.5)
1987 498,150 248,989(50.0) 15,221(3.0) 24,900(5.0) 209,043(42.0)
1988 463,540 297,624(64.2) 15,764(3.4) 36,549(7.4) 113,603(24.5)
1989 676,739 303,500(44.3) 25,607(3.8) 33,645(5.0) 313,987(46.4)
1990 435,579 283,534(65.1) 7,297(1.7) 26,529(65.1) 118,219(27.1)
1991 596,630 291,286(48.8) 15,849(2.7) 36,226(6.1) 253,278(42.4)
1992 721,492 283,943(39.4) 19,770(2.7) 39,365(5.5) 378,414(52.4)
1993 619,221 201,176(32.5) 18,703(3.0) 35,644(5.8) 363,688(58.7)
1994 515,135 234,601(45.6) 18,104(3.5) 30,488(5.9) 231,942(45.0)
1995 637,501 320,955(50.3) 16,619(2.6) 33,479(5.3) 266,449(41.8)
1996 759,207 309,200(40.7) 19,490(2.6) 27,244(3.6) 403,273(53.1)
1997 795,630 360,220(45.3) 25,265(3.2) 27,703(3.5) 382,442(48.0)
1998 856,527 433,070(50.6) 20,458(2.4) 29,955(3.5) 373,044(43.6)
1999 946,261 426,786(45.1) 20,738(2.3) 31,140(3.3) 466,597(49.3)
Average % 49.6 2.9 5.2 42.3
Source: Federal Department of Fisheries, Abuja (2000)
Figure in parentheses are percentages of the total demand for each year by each source.

Similarly, an efficient marketing system competition and the extent of marketing

stimulates consumption as consumers are
likely to buy more if they are able to purchase
their requirements in the right form, place and
time and at a minimum cost for a maximum
satisfaction (Adekanye, 1988).
There is therefore the need to examine the
frozen fish markets for efficiency and / or
inefficiency. More so, the concept of marketing
efficiency is based on the premise that an
efficient product market will establish prices
that are related over-space by transportation
costs, over-time by storage cost and over-form
by processing costs. That is, the difference in
the price of any commodity between two
locations, over a period of time and
presentation is caused by transportation,
storage and processing costs respectively.
The problem identified therefore centers on
understanding the dynamics of the market,
price transmission and the quantification of
measures to shed light on the nature of
efficiency in the system. Moreso, some
researchers have claimed that the existence of
many intermediaries (wholesalers, middlemen
and retailers) in the marketing chain results in
marketing inefficiency (e.g. Adegeye and
Dittoh, 1986). Others like Anthonio (1973) and
Wilcock (1978) have argued that this ensures
efficiency in the use of available resources.
The empirical problem is therefore to examine
the markets for efficiency as the more efficient
the system, the more benefits that will accrue
to sellers, consumers and by extension the
economy.
Co-integration test is carried out after the unit
root test. They are based on looking for the
unit roots in the residuals rather than in the
raw data, hence DF and ADF unit root tests
are limiting and therefore, require special
critical value as tabulated by Engle and
Granger (1987), Engle and Yoo (1987).
According to Engle-Granger (1987), we specify
the co-integrating regression as:

Pt =  + Zt + Ut …………………………………………………………………… (1)

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 Journal of Sustainable Development Vol. 9. Nos. 1/2, September, 2012
The residuals of the equation Ut = (Pt -  -
Zt) is simply the linear difference of the 1(1)
series if the residual from the linear
combination of non-stationary series are
themselves stationary then we can accept that
the 1(1) series are co-integrated. In the case of
test for co-integration, the critical value for the
tests differs according to the number of
variables in the co-integration regression. But
in situation where they do not co-integrate,
regression of one 1(1) variable on another
becomes spurious. Such regression produce
high R2 and t-ratio that are biased towards
rejecting the null hypothesis of relationship
even when there is no relation between the
variables as shown by Granger and Newbold
(1974). Co-integration analysis has recently
concentrated on the method developed by
Johansen and Juselius (1990), which provides a
more detailed analysis of multiple co-
integrating relationships between series.
Johansen (1988) and Johansen and Juselius
(1990) present a co-integrating estimation
methodology that overcome most of the
problems of the two-step approach. The
Johansen procedure is based on Maximum
Likelihood estimates of all the co-integrating
vectors in a given set of variables.
CO-INTEGRATION AND MARKET
EFFICIENCY
Co-integration theory according to Hendry
(1986); Engel and Granger (1987) examines the
time series characteristics of data with a view
to overcoming the problem of bogus
regression often associated with non-
stationary time series data and simultaneously
generate long-run equilibrium relations. The
theory was developed by econometricians in
the late ‘70s after discovering that most macro-
economic data were non-stationary and that
the major economic aggregation began to
fluctuate much more widely that the cost of
inappropriate time series specification became
apparent. Additional studies also showed that
statistics such as the t and DW statistics
including measures such as R2 did not retain
their usual characteristics in the presence of
non-stationary data. Thus, they fail to
systematically predict outcomes while at the
88
same time predictor failure was not so
noticeable amongst pure time series model.
Running regression with non-stationary data
produced bogus results. Thus, the need for the
introduction of a more comprehensive
treatment of the time series characteristics into
economic modeling and the development of
the notion of co-integration (Hendry and
Granger, 1986). Co-integration normally will
reject spurious results and accept correction
between non-stationary series. Whereas Coe
and Mogladar (1993) are of the opinion that
co-integration is the same as time series
variables (one, two or more) regarded as
describing a long-run equilibrium relationship
if they move closely together in the long-run,
even though they may drift apart in the short-
run. This long-run relationship is referred to as
a co-integrating vector. As a result of a long -
run relationship between the variables, a co-
integrating vector will have a stationary error
term even if none of the variables taken alone
is stationary.
Tijani, et al (1999), define error correction
model as “ an attempt to integrate economic
theory useful in characterizing a long-term
equilibrium with an observed disequilibrium
by building model that explicitly incorporates
behaviour that would restore the
equilibrium” . A necessary condition for co-
integration analysis to be carried out (Tambi,
1999), is that the data series for each variable
involved be integrated to the same order with
evidence of the same linear combination of the
integrated series. Two or more variables are
said to be co-integrated if each is individually
non-stationary (i.e. has one or more units
roots) but there exists a linear combination of
the variable that is stationary. This implies the
existence of a long-run equilibrium between
the two variables. In any two co-integrated
variables, deviations from the short-run
equilibrium may occur in the short-term, but
their linear combination will return eventually
to a constant mean. According to Silvapulla
and Jarasuriya (1994), “ the concept of co-
integration is, in many ways a statistical
definition of equilibrium” .
 Journal of Sustainable Development Vol. 9. Nos. 1/2, September, 2012
After the test for stationarity, the study
proceeds to test for co-integration between
market price series that exhibit stationarity of
same order. The usual two-step residual based
procedure propounded by Engle and Granger
Pit = α + βPjt + Υt + εt ………………………………………………….. (2)
Equation (2) is known as the “ co-integrating regression” . The second step involves testing whether
the residuals, εt,, from the co-integrating regression are non-stationary using a number of possible tests
on the β of the equation below.
∆εt = βεt-1 + ΣYj∆εt-j + et ……………………………………………… (3)
However, this study utilizes a more powerful
test for co-integration propounded by
Johansen (1988), Johansen and Juselius, (1990,
1992). This maximum likelihood procedure
(as it is called) relies on the relationship
between the rank of a matrix and its
characteristic roots. The Johansen maximal
k-1
∆χt = μt + ΣΓìΔχt-1 ‫ח‬χt-k+ εt …………………………………..
i= 1
Where χt is an n x 1 vector containing the
series of interest (frozen fish spatial price
series). If both series are 1(0), they are said to
be trivially co-integrated. However, if one
series is 1(1) and the other is 1(0), they cannot
be co-integrated (Schimmel-Pfenning and
Thistle, 1994). Γ and ‫ = תּ‬matrices of
parameters. K = no of lags and should be
adequately large enough both to capture the
short-run dynamics of the underlying VAR
and to produce normally distributed white
noise residuals. εt = vector of white noise
errors. The Johansen methodology involves
testing whether the ‫ תּ‬matrix in equation (4)
has less than full rank using the maximal
Eigen value test or the trace test.
The rank of ‫ תּ‬denoted by r, determines the
numbers of linear combinations that are
stationary. When 0 < r < n, there are r co-
integrating vectors or r stationary linear
combinations χt that are stationary. If r = n, the
variables are stationary and if r = 0, then, none
of the linear combinations of Xt. ‫ = תּ‬αβ, where
both α and β are n x r matrices, with β
containing the co- integrating vectors and α
containing the adjustment parameters. This
(1987) was followed. The first step involves
the OLS regression of a 1(1) price series on
another 1(1)* price series plus a constant and a
time trend in an equation of the type below.
eigen value and trace tests detect the number
of co-integrating vectors that exist between
two or more time series that are
econometrically integrated. The two variable
system is modeled as a vector auto-regression
(henceforth, VAR) as follows.
(4)
study investigated for co-integration
separately between pairs of market prices that
are stationary of order 1 (1).
ECONOMETRIC METHODOLOGY AND
DATA
One hundred and four wholesalers and 200
retailers of frozen fish were selected using a
three-stage random sampling procedure in
four marketing zones (Abeokuta, Ijebu-Ode,
Ikenne and Ilaro) according to Ogun State
Agricultural Development Programme zoning.
Questionnaires were administered on fish
sellers to obtain information, to determine
whether the markets were integrated or not
and to establish the existence of long-run
equilibrium relationship between the price
variables. The monthly price series collected
over a period of three years (2007-2009),
obtained from the rural and urban markets
within the zones were used for the price
behaviour analysis and market integration.
Time series data was first differentiated into
stationary series after which the test for the
order of integration was carried out. A
stationary variable is said to be integrated of
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 Journal of Sustainable Development Vol. 9. Nos. 1/2, September, 2012

the order zero i.e. 1(0) and a non-stationary
variables is said to be integrated of the order
one i.e. 1(1) if it has to be differenced once to
become stationary. Statistically, the Dickey-
Fuller (DF) and the Augmented Dickey-Fuller
(ADF) tests were carried out to determine
whether each of the variables is 1(0) or 1(1).
They are both referred to as the unit root test.
The DF test (Dickey and Fuller, 1979) was
carried out by applying regression analysis on
the variables and the method is a test on the
size of the coefficient  in the equation:

Pt =  + pt-1 + Ut …………………….. (5)

The t-value is compared with the fuller
distribution table. If the t-value is significantly
negative, the variable is regarded as 1(1) that is
a rejection of the unit roots null hypothesis. If
auto-correlation occurs in the error terms, this
will bias the DF test and in order to overcome
such problem, the ADF can be used. The ADF
is identical to the standard test but is
constructed within a regression model of the
form:

Pt =  + pt-1 +  pt-1 + Ut ……………… (6)

Where the lag length j was set so as to ensure that any autocorrelation in Pt is absorbed and the error
is distributed as white noise

EMPIRICAL FINDINGS found to be stationary at first difference in the

Table 2 presents the results of the unit root test
by the Augmented Dickey Fuller (ADF)
method. The table shows that all the price
series accept the null hypothesis of non-
stationarity at their levels at 10 per cent
significance level, except Rural Ijebu-Ode and
UrbanIkenne (1 per cent level) and
Rural/ Urban Ilaro (at 5 per cent level)
rejecting the null hypothesis. The variables
that were non-stationary at their levels were
case of rural and urban Abeokuta, urban Ijebu-
Ode and rural Ikenne. The findings here
corroborate earlier findings by Alexander and
Wyeth (1994), Schimmel-Pfenning and Thistle
(1994), Mahanty, Peterson and Smith (1996),
Chirwa (2000), that commodity price series are
mostly stationary of order 1 i.e. 1(1). A
variable is said to be stationary when the ADF
t-statistics is greater in absolute terms than the
critical values. A variable that is stationary is
integrated of order zero i.e. 1(0).

Table 2: Results of unit root test in frozen fish price series (2007-2009)
Variable (market price series) Price level 1(0) First Difference 1(1)
ADF Statistics ADF Statistics ]
Rural Abeokuta -2.426271 -8.380720***
Urban Abeokuta -1.608882 -6.590542***
Rural Ijebu-Ode -3.755729*** -7.319475
Urban Ijebu-Ode -1.929549 -5.091510***
Rural Ikenne -2.174231 -8.366919***
Urban Ikenne -4.194733*** -7.375720
Rural Ilaro -3.036691** -7.971932
Urban Ilaro -3.159961** -7.316017
Source: Extracted from the computer print-out on stationarity test
Note: *** Significant at 1% level ** Significant at 5% level * Significant at 10% level.
ADF critical values are -2.62 for 10% level, -2.95 for 5% level and -3.64 for 1% level.

Table 3 presents the result of the co-integration The test revealed a long-run relationship
test using Johansen Maximum Likelihood test. between the market pairs. The long-run test
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 Journal of Sustainable Development Vol. 9. Nos. 1/2, September, 2012

indicates seven co-integrating equations at 5%
level of significance. The rate of adjustment to
the long-run equilibrium as indicated by the
Error Correction Model is 79.0%, showing
high rate of adjustment. Co-integration test
was carried out to determine whether the
markets were integrated or not and to
establish the existence of long-run equilibrium
relationship between the price variables

Table 3: Results of Johansen maximum likelihood test for rural and urban frozen fish markets in Ogun
State.
Likelihood 5 Percent Hypothesized
Eigenvalue Ratio Critical Value No. of CE(s)
0.933423 271.9356 156.00 None **
0.824447 179.8162 124.24 At most 1 **
0.675212 120.6625 94.15 At most 2 **
0.592314 82.42668 68.52 At most 3 **
0.403151 51.91994 47.21 At most 4 *
0.396556 34.37284 29.68 At most 5 *
0.329014 17.19936 15.41 At most 6 *
0.101345 3.633115 3.76 At most 7
Source: Extracted Computer

CONCLUSION markets in Ogun state are assumed not to be

Engle-Granger test has been employed to test
the integration among the frozen fish markets
in Ogun state. The Augmented Dickey-Fuller
(ADF) test has been applied first to test the
stationarity of the price series. The unit root
test for stationarity of the time series showed
that 50.0% of the frozen fish markets
(UrbanIjebu-Ode, RuralIkenne,
RuralAbeokuta and UrbanAbeokuta) price
series are found to be non-stationary of order
1(0) when ADF test was carried out on the
levels thus necessitating further test. The test
revealed that the price series for frozen fish in
the markets are all stationary of order 1(1).
Then cointegration test has been applied
which is a standard ADF test on the residuals
on an OLS regression. Thus, frozen fish
integrated. This is mainly attributed to poor
infrastructural facilities at markets. The poor
market integration observed in this case
reveals that frozen fish markets in Ogun state
are uncompetitive. The long-run test indicates
seven co-integrating equations (P<0.05). The
rate of adjustment to the long-run equilibrium
as indicated by the Error Correction Model is
79.0%, showing high rate of adjustment. It is
recommended that infrastructures such as the
physical functions like transportation and
storage should be improved upon.
Transportation routes should be improved for
shorter distance and intercity transportation of
fish. Refrigerated stores should be provided
and maintained by government in all the
markets to help reduce risks and losses for
retailer.

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