Production Costs, Price Expectations and Reference Dependence in Commodity Marketing

This study examines how heterogeneity in cost structures and belief formation shapes reference-dependent grain marketing behavior among farmers. Using panel data from the Illinois Farm Business Farm Management (FBFM) program, we extend the reference dependence framework to a cross-sectional context, relaxing the common assumption of homogeneous reference prices across producers. Employing a finite mixture model with fixed effects, we identify two distinct behavioral groups: one highly responsive to price changes, and another more passive. We further test whether production costs function as farmer-specific reference prices—a widely discussed but rarely empirically tested concept. Results show asymmetric marketing responses around the reference point: farmers sell more when prices exceed their cost-based reference and less when prices fall below. These findings support the presence of reference-dependent preferences and highlight the importance of incorporating individual financial conditions into behavioral models and the design of marketing advisory services.