Spatial Price Transmission and Efficiency in the Urea Market

Urea fertilizer is widely used in the United States, however, urea is not publicly traded and formula pricing is common. This article studies spatial transmission and efficiency of urea prices in the Arkansas River-New Orleans urea markets and the New Orleans-Middle East urea markets. A vector error correction model (VECM) and Baulch's (1997) parity bound model (PBM) are estimated. A threshold VECM is considered, but no threshold effects are found so threshold effects are not included in the final VECM. The estimated VECM shows that violations of spatial price equilibrium are corrected faster between Arkansas River-New Orleans prices than New Orleans-Middle East prices. The long term adjustments to deviations from spatial equilibrium in the New Orleans-Middle East price relationship are made through adjustments in the New Orleans price. The PBM shows that New Orleans-Middle East price spreads are greater than transportation costs about 23% of the time. [EconLit citations: C32, Q13, R32].