Rational price expectations and structural change in the US broiler industry

Dayo O.A Phillip

ISU General Staff Papers from Iowa State University, Department of Economics

Abstract: The study broadly investigates the econometric implications of the rational price expectations hypothesis with three alternative formulations of the U.S. broiler market model, each of which was already biologically restricted in terms of the structural equations describing broiler supply. Each of the three alternative structural models reflects a different assumption about the nature of vertical integration in the broiler industry;Each model was estimated in its restricted and unrestricted form. Resulting estimates of regression coefficients were, in most cases, consistent with economic theory predictions and statistically significant. The elasticities of response of the various broiler production activities with respect to broiler feed cost and expected broiler price variables decline in value as the broiler slaughter period approaches. In a dynamic sense, this is interpreted to mean that the closer firms are to the broiler marketing period, the less time is available for adjusting to changes in the variables affecting their decisions;Reduced forms of the broiler supply equations in the alternative structural models were also evaluated using non-nested test procedures. Finally, the broiler sector was evaluated for structural change using time-varying parameter regressions. On the basis of the results obtained from the tests of rationality restrictions, non-nested evaluations of the models and the trend behavior of the simulated time-varying weights, the following conclusions were drawn. First, there are no strong indications that firms in the U.S. broiler industry overwhelmingly fully integrate all the broiler production activities. What appears to happen is that firms vertically integrate varying numbers of the broiler production activities in the industry. Second, provided that the information requirements are met, rational expectations hypothesis offers a promising approach to the modeling of agricultural commodity systems even when the relevant planning (expectations) horizons are longer than the current period.

Date: 1986-01-01
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