Price expectations and price dynamics: the case of the rice sector in developing Asia
Uncertainty is a crucial issue for producers who must make input decisions without knowing prices and without perfect knowledge of realized output. In this context, price expectations strongly determine the production choices and market prices that result from market-clearing conditions. This study analyzed the role that price expectations play in price dynamics, developing a theoretical model of trade in varieties following Armington (1969) and augmented with yield and price uncertainty to highlight several main determinants of domestic producer prices, including exchange rates, proximity to world markets, input prices, natural disasters, and producers' expectations. An econometric estimation of the rice sector, using a panel of 13 developing Asian countries during 1965-2003, confirmed that expectations count, with a 1% increase in the expected price resulting in a 1.18% decrease in the market price. A simulation exercise based on these empirical results demonstrated that forecasting errors are large. Specifically, Asian rice farmers have a 50% chance of making prediction errors of 10% or more on the final market price. This high error rate suggests the need for developing ways of sharing information, such as radio programs dedicated to agricultural producers or the introduction of futures markets, to stabilize agricultural incomes.
|Date of creation:||02 Oct 2011|
|Date of revision:|
|Note:||View the original document on HAL open archive server: http://hal.archives-ouvertes.fr/hal-00630711|
|Contact details of provider:|| Web page: http://hal.archives-ouvertes.fr/ |
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Boussard, Jean-Marc, 1996. "When risk generates chaos," Journal of Economic Behavior & Organization, Elsevier, vol. 29(3), pages 433-446, May.
- repec:spo:wpecon:info:hdl:2441/c8dmi8nm4pdjkuc9g8mb6c01j is not listed on IDEAS
- Angus Deaton & Guy Laroque, 2002.
"A model of commodity prices after Sir Arthur Lewis,"
201, Princeton University, Woodrow Wilson School of Public and International Affairs, Research Program in Development Studies..
- Deaton, Angus & Laroque, Guy, 2003. "A model of commodity prices after Sir Arthur Lewis," Journal of Development Economics, Elsevier, vol. 71(2), pages 289-310, August.
- Angus Deaton & Guy Laroque, 2002. "A Model of Commodity Prices after Sir Arthur Lewis," Working Papers 2002-19, Centre de Recherche en Economie et Statistique.
- Hommes, Cars H., 1994. "Dynamics of the cobweb model with adaptive expectations and nonlinear supply and demand," Journal of Economic Behavior & Organization, Elsevier, vol. 24(3), pages 315-335, August.
- Sophie Mitra & Jean-Marc Boussard, 2008. "Storage and the Volatility of Agricultural Prices: A Model of Endogenous Fluctuations," Fordham Economics Discussion Paper Series dp2008-11, Fordham University, Department of Economics.
- Deaton, Angus & Laroque, Guy, 1992.
"On the Behaviour of Commodity Prices,"
Review of Economic Studies,
Wiley Blackwell, vol. 59(1), pages 1-23, January.
- Deaton, A. & Laroque, G., 1989. "On The Behavior Of Commodity Prices," Papers 145, Princeton, Woodrow Wilson School - Development Studies.
- Deaton, A. & Laroque, G., 1989. "On The Behavior Of Commodity Prices," Papers 145, Princeton, Woodrow Wilson School - Public and International Affairs.
- Angus Deaton & Guy Laroque, 1990. "On The Behavior of Commodity Prices," NBER Working Papers 3439, National Bureau of Economic Research, Inc.
- Deaton, Angus & Laroque, Guy, 1996. "Competitive Storage and Commodity Price Dynamics," Journal of Political Economy, University of Chicago Press, vol. 104(5), pages 896-923, October.
- Keith Head & Thierry Mayer, 2011. "Gravity, market potential and development," Sciences Po publications info:hdl:2441/c8dmi8nm4pd, Sciences Po.
- Christophe Gouel, 2012. "Agricultural Price Instability: A Survey Of Competing Explanations And Remedies," Journal of Economic Surveys, Wiley Blackwell, vol. 26(1), pages 129-156, 02.
- Lovell, Michael C, 1986. "Tests of the Rational Expectations Hypothesis," American Economic Review, American Economic Association, vol. 76(1), pages 110-24, March.
- Jakob Svensson & David Yanagizawa, 2009. "Getting Prices Right: The Impact of the Market Information Service in Uganda," Journal of the European Economic Association, MIT Press, vol. 7(2-3), pages 435-445, 04-05.
- Keith Head & Thierry Mayer, 2011. "Gravity, market potential and economic development," Journal of Economic Geography, Oxford University Press, vol. 11(2), pages 281-294, March.
- Garey Ramey & Valerie A. Ramey, 1994.
"Cross-Country Evidence on the Link Between Volatility and Growth,"
NBER Working Papers
4959, National Bureau of Economic Research, Inc.
- Ramey, Garey & Ramey, Valerie A, 1995. "Cross-Country Evidence on the Link between Volatility and Growth," American Economic Review, American Economic Association, vol. 85(5), pages 1138-51, December.
- Galtier, F., 2009. "How to Manage Food Price Instability in Developing Countries ?," Working Papers MOISA 200905, UMR MOISA : Marchés, Organisations, Institutions et Stratégies d'Acteurs : CIHEAM-IAMM, CIRAD, INRA, Montpellier SupAgro, IRD - Montpellier, France.
- Bardhan, Pranab K, 1973. "Size, Productivity, and Returns to Scale: An Analysis of Farm-Level Data in Indian Agriculture," Journal of Political Economy, University of Chicago Press, vol. 81(6), pages 1370-86, Nov.-Dec..
- Liefert, William M. & Persuad, Suresh, 2009. "The Transmission of Exchange Rate Changes to Agricultural Prices," Economic Research Report 55942, United States Department of Agriculture, Economic Research Service.
When requesting a correction, please mention this item's handle: RePEc:hal:cesptp:hal-00630711. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (CCSD)
If references are entirely missing, you can add them using this form.