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The role of expected protein levels in determining the impact of protein premiums and discounts

Elizabeth H. Petersen and Robert Fraser

No 124517, 1999 Conference (43th), January 20-22, 1999, Christchurch, New Zealand from Australian Agricultural and Resource Economics Society

Abstract: This paper investigates the role of expected protein levels in determining the impact of protein premiums and discounts on firstly, a grower’s income stream, and secondly, a grower’s willingness-to-pay for a forward contract. The impact is examined for a range of expected protein levels (9%-13%). When considering a grower’s income stream, for expected protein levels less than approximately 10.2% expected income, E(I), and the variance of income, Var(I), decrease, and E(I) is the dominating effect causing an overall decrease in expected utility (EU). There exists a small protein window (approximately 10.2%-10.3%) where E(I) and Var(I) decrease and the Var(I) effect is dominant causing an overall increase in EU. For expected protein levels greater than 10.3%, E(I) increases and Var(I) decreases, both working to positively affect EU. Hence, growers with low expected protein levels are disadvantaged by the scheme. A sensitivity analysis is conducted on key parameter values to understand their impact on this relationship and it is found that although the window changed slightly in size and level, it did not significantly alter this relationship. Expected protein levels also have a significant role in determining the impact of protein premiums and discounts on a grower’s willingness-to-pay for a forward contract. This paper shows that in the presence of protein premiums and discounts growers with expected protein less than approximately 10% are willing to pay more for a forward contract, and growers with expected protein greater than approximately 10% are willing to pay less for a forward contract. A sensitivity analysis conducted on key parameter values did not significantly modify this relationship.

Keywords: Agricultural; Finance (search for similar items in EconPapers)
Pages: 20
Date: 1999-01
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Persistent link: https://EconPapers.repec.org/RePEc:ags:aare99:124517

DOI: 10.22004/ag.econ.124517

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