“Expectations” in economics refers to the forecasts or views that decision makers hold about future prices, sales, incomes, taxes, or other key variables. The importance of expectations is due to their often substantial impact on the current choices of firms and households, and hence on the overall level of economic activity. There are three different models of expectations formation: naive or static expectations, adaptive expectations and rational expectations. Naive or static and adaptive expectations mean that the individual uses past values of relevant variables or simple extrapolations of the past values as measures of the expected variables. Rational expectations assume that people behave in their own best interests when they make decisions. This means that people do not repeat their mistakes.
Many researchers have focused on the expectations formation in agricultural markets (Fisher and Temin, 1970; Hayami and Ruttan, 1971; Cooley and Prescott, 1973; DeCanio, 1973; Chavas and Johnson, 1981; Bhati, 1987; Bakucs and Markus, 2010; Rezitis and Stavropoulos, 2009a, 2009b, 2010, 2011, 2012; Sckokai and Moro, 2009; Piot-Lepetit, 2011). The evaluation of influence of expectations on raw milk market can be found in LaFrance and de Gorter (1985), Chavas and Klemme (1986), Thraen and Hammond (1987), Chavas et al. (1990), Weersink and Tauer (1990), Adelaja (1991), Roemen (1993), Komaki and Penzer (2005), Bozic et al. (2012), Revoredo-Giha et al. (2013), however, there is no such research in Lithuania. The aim of this paper is to evaluate influence of milk producers and processors expectations on raw milk market. The following goals are raised: 1) to highlight the theoretical aspects of influence of expectations on agricultural sector, 2) to create model for raw milk market, 3) to assess influence of expectations on the purchase and purchase price of raw milk.
The data used in this study are monthly time series for the period of January 2011 to June 2014. The data are obtained from the State enterprise Agricultural Information and Rural Business Centre (AIRBC).
In order to evaluate influence of milk producers and processors expectations on raw milk market, vector error correction (VEC) model was created. VECM is a restricted VAR designed for use with non-stationary series that are known to be integrated. VECM is the most successful, flexible, and easy to use for the analysis of multivariate time series. This model is especially useful for describing the dynamic behavior of economic and financial time series and for forecasting.
The VEC specification restricts the long-run behavior of the endogenous variables to converge to their cointegrating relationships while allowing a wide range of short-run dynamics. The cointegration term is known as the error correction term since the deviation from long-run equilibrium is corrected gradually through a series of partial short-run adjustments.
The increasing amount of literature on time series analysis emphasizes that many macroeconomic variables might be non-stationary. Non-stationary data causes the standard test statistics to be seriously biased and resulting spurious regression. The first step of the model creation was to determine the order of integration of the series. Dickey-Fuller tests were used to test whether variables were stationary or needed to be differenced. After analyzing the stationarity of the variables, next step was to find out the lag length p. The three most common information criteria (Akaike, Schwarz, and Hannan-Quinn) were used to determine the lag length for the VAR. Since time series tend to be non-stationary, determining whether they are cointegrated is important. Cointegration of the two variables is the condition required for a regression not to be spurious. For a test of cointegration, the Johansen’s reduced rank methodology was employed. The test for the number of characteristic roots was conducted using the trace and maximum eigenvalue statistics. The last step was to examine the adequacy of the model. It was performed by using tests on normality, heteroskedasticity, and autocorrelation.
Conclusions:
- The literature suggests that expectations of milk producers and processors affect their behavior. Moreover, it can be seen that they behave rationally and respond to changes in the market.
- The methods of econometric analysis were employed. It was concluded that the first order vector correction model adequately explains the given data.
- The model showed that expectations of milk processors affect the development of raw milk market. Moreover, it can be seen that expectations of milk processors are rational. The changes in the average price of purchase of raw milk in the EU countries substantially influence the purchase price in Lithuania.
- The model is not universal. In order to investigate the formation of expectations in other agricultural markets, new models should be created according their peculiarities.
Keywords: raw milk market, expectations, vector error correction (VEC) model.
Kriščiukaitienė, I.; Namiotko, N. 2014. Pieno gamintojų ir perdirbėjų lūkesčių poveikio žaliavinio pieno rinkai vertinimas, Iš Ekonomika ir vadyba: aktualijos ir perspektyvos 3(35):44-49. ISSN 1648-9098 (Print) ISSN 2424-337X (Online) [Index Copernicus].
