Why Don't Country Elevators Pay More for High Quality Wheat? The Effects of Risk Information

Previous research has found that country elevators that re the first in their area to grade wheat and pay quality-adjusted prices would receive above-normal profits at the expense of their competitors. These early-adopting elevators would pass on to producers 70% of the quality-based price differentials received from next-in-line buyers. If competing elevators also adopt these practices, profits for all elevators would return to near normal, and elevators would pass on to producers nearly all price differentials received from next-in-line buyers. However, that research could not explain why more elevators were not becoming "early adopters" by paying quality-adjusted prices.An additional explanation for country elevators failing to pass on to producers quality-adjusted prices is risk aversion. If producers are risk averse, an elevator that imposes discounts for lower quality wheat, even while paying a higher price for high quality wheat, risks losing business if producers believe that a competing elevator may be more likely to pay them a higher price net of discounts. Producers likely are uncertain about the quality of their grain before they deliver it to an elevator, and thus are uncertain about the net price they will receive. Risk-averse producers would prefer a certain price to a quality-adjusted price that is equally likely to be higher (because of a premium) or lower (because of a discount).A simulation model is used to measure the effects of risk-averse producers and limited quality information on profits that can be earned by an elevator that pays quality adjusted prices. Results suggest that while risk aversion is important, the amount of information producers have about the quality of their wheat is even more important.