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Factors affecting forward pricing behaviour: Implications of alternative regression model specifications

Factors affecting forward pricing behaviour: Implications of alternative regression model specifications. By H Jordaan and B Grové. Outline. Introduction Data and Procedures Results Conclusions. Introduction.

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Factors affecting forward pricing behaviour: Implications of alternative regression model specifications

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  1. Factors affecting forward pricing behaviour: Implications of alternative regression model specifications By H Jordaan and B Grové

  2. Outline • Introduction • Data and Procedures • Results • Conclusions

  3. Introduction • SA agricultural sector experienced long history of state intervention (1930s to mid 1990s) • Period of regulation ended with Marketing of Agricultural Products Act of 1996 ordering demise of control boards • Farmers became responsible for marketing of their own produce • Became exposed to price risk

  4. Introduction (Cont…) • Three markets emerged for grain in SA • Cash (spot) mkt • Forward contracting mkt • Derivatives mkt (Futures & options) • Although forward pricing can reduce price risk few farmers tend to use it (both in South Africa and internationally) Forward pricing

  5. Introduction (Cont…) • Some researchers expected growth in the use of forward pricing (i.e. due to learning curve effect) • From the literature growth is lacking • Ample research was done to determine why producers do not use forward pricing methods

  6. Introduction (Cont…) • Number of different modelling specifications were used over the years • Tobit models • Multinomial logit models • Binary models (Logit & Probit) • Two-step approach • Binary sub-model (Adoption decision) • Linear sub-model (Quantity decision) Single decision Separate decisions

  7. Introduction (Cont…) • PROBLEM – If variables are forced to influence decision in certain way • May overlook important factors restricting use of forward pricing methods • May also explain lack of growth in use of forward pricing methods

  8. Introduction (Cont…) • OBJECTIVE • Compare results from three model specifications • Determine implications of alternative model specifications in the South African context • Single decision vs Separate decisions

  9. Data and Procedures • Used primary data from study by Jordaan & Grové (2007) • Questionnaire survey conducted (October 2005) • 78 randomly drawn farmers were personally interviewed • 50 produced maize • 22 used forward pricing methods

  10. Data and Procedures (Cont…) • SINGLE DECISION framework – dependent variable specified as proportion of crop which is forward priced • Non-adopters forward priced 0% of their crop • 56% did not use forward pricing methods • Dependent variable is censored at threshold of 0 • Need model that can effectively model censored dependent variable

  11. Data and Procedures (Cont…) • Tobit model relates observed outcomes of yi > 0 to an index function (Heij et al., 2004): Where if if

  12. Data and Procedures (Cont…) • Second and third specifications relate to TWO-STEP approach • 1) Adoption decision – • binary choice whether or not respondent used forward pricing methods • binary logit regression

  13. Data and Procedures (Cont…) • 2)Quantity decision • choice on proportion of crop that is forward priced, CONDITIONAL TO RESPONDENT HAVING USED FORWARD PRICING METHODS • OLS regression

  14. Data and Procedures (Cont…)

  15. Data and Procedures (Cont…)

  16. Two-step approach Results NA NA NA

  17. Results

  18. Results

  19. Results

  20. Results

  21. Results

  22. Results

  23. Results - + + + -

  24. Conclusions • Modelling forward pricing behaviour as single decision assumes same variables influence two forward pricing decisions • This assumption is again proven wrong in this study • Importance of risk aversion is again highlighted • Only significant factor in all three specifications • Confirms findings by McNew and Musser (2000)

  25. Conclusions (Cont…) • TOBIT specification fails to expose • producers’ perception that forward pricing is risky marketing alternative • adopters of forward pricing methods tend to use portfolio of risk management tools

  26. Conclusions (Cont…) • Conclusions based on results where variables are forced to influence two decisions similarly may • overlook restrictive impact of certain factors on the use of forward pricing methods • explain the lack of growth in the use of forward pricing methods

  27. Conclusions (Cont…) • Thus, study provides more evidence that quantity decision should be modelled conditional of rather than jointly with adoption decision (Katchova & Miranda, 2004)

  28. Thank You!!

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