ABSTRACT
The purpose of this chapter is to examine how the set of competitive prices for a particular commodity at a particular point in time are connected over space. Prices will be spatially integrated if commodity deficit and commodity surplus regions trade amongst themselves and profit seeking arbitrage results in the LOP. Arbitrage implies that profit-seeking traders will ship the commodity from a low-price exporting region to a high-price importing region if the price difference exceeds the marginal transportation and handling costs. These arbitrage shipments, which serve to raise the price in the exporting region and to lower the price in the importing region, will continue until the price difference is reduced to the marginal transportation cost. 1 The assumption of competitive prices may appear to be unreasonable because agricultural commodity trade is often dominated by large multinational firms and state trading agencies. Nevertheless, easy entry by small traders and heavily traded futures markets is believed to be sufficient to ensure reasonably competitive pricing for the major agricultural commodities.
