Three essays on rough rice marketing

Abstract

This study presents three essays on rough rice marketing. The first examines the impact of quality on rough rice prices, using 1987-1991 Texas rough rice marketing sales office data. A Heckman two-stage model is used to test for selectivity bias in the data, and to obtain implicit prices for key qualitative factors. Results from this study reinforce previous findings that rice quality is a key determinant of price. Furthermore, this study indicates that market participants often value quality attributes differently than does the USDA World Market Price (WMP), which provides the base pricing mechanism. The presence of selectivity bias and the changing structure of the rice industry highlight these findings. The second essay investigates the economic and statistical relationships between the Texas rough rice price, the Chicago Rice and Cotton Exchange (CRCE) rough rice futures price, the WMP, and the Thai milled price during the 1987-91 marketing years. Specifically, the study addresses the pricing and informational efficiency of the respective markets in a cointegration context. The study is characterized by two key findings. First, the WMP does not enter the long-run equilibrium, and is weakly exogenous to the model. Secondly, the error correction representation indicates that the long-run equilibrium is depicted by two cointegrating vectors. The first cointegrating vector describes the strong arbitrage condition existing between the cash and futures markets. The second cointegrating vector describes the inverse relationship and linkage between the U.S. and Thai rice markets. The final essay analyzes the profitability of selected producer marketing strategies. Twelve selected cash, storage, and hedging strategies are examined for the 1987-91 marketing years. The results indicate that cash sales at harvest, the benchmark strategy, is sub-optimal. Furthermore, derivation of the mean-variance efficient portfolio frontier indicates that risk is significantly reduced by combining marketing strategies.