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Do Agricultural Contracts Affect Grain Prices? Evidence from Mexico

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  • Santiago Guerrero

Abstract

In the late 80's and early 90's Mexico eliminated minimum price policies of main agricultural commodities and substituted those policies by government operated contract markets. Contracts can help smooth price variations and facilitate risk-sharing but their impact on price levels is uncertain. We simultaneously estimate the impacts of quantity supplied sold via contracts and the cash market on cash prices for grains participating in contracts: wheat, corn, soybeans and sorghum. By doing so we estimate an inverse grain demand function using supply shifters and other exogenous variables as exclusion restrictions. Our findings show that quantity supplied sold via contracts is a more important determinant of prices than quantity supplied in the cash market. A 10 % increase of volume sold via contracts is estimated to reduce cash market prices by 2.5 %. Additionally, we find no evidence that more contracts affect prices by reducing quantity supplied in the cash market.

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File URL: http://www.banxico.org.mx/publicaciones-y-discursos/publicaciones/documentos-de-investigacion/banxico/%7B398A79B4-2624-8717-7648-C30C4B6BA125%7D.pdf
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Bibliographic Info

Paper provided by Banco de México in its series Working Papers with number 2012-15.

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Date of creation: Dec 2012
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Handle: RePEc:bdm:wpaper:2012-15

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Web page: http://www.banxico.org.mx
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Keywords: Contracts; Inverse Demand; Three Stage Least Squares; Grains; Supply Shifters.;

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  1. Hayenga, Marvin L., 2000. "Meat Packer Vertical Integration and Contract Linkages in the Beef and Pork Industries: An Economic Perspective," Staff General Research Papers 10564, Iowa State University, Department of Economics.
  2. Elam, Emmett W., 1992. "Cash Forward Contracting Versus Hedging Of Fed Cattle, And The Impact Of Cash Contracting On Cash Prices," Journal of Agricultural and Resource Economics, Western Agricultural Economics Association, vol. 17(01), July.
  3. James M. MacDonald, 2006. "Agricultural Contracting, Competition, and Antitrust," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 88(5), pages 1244-1250.
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