An econometric investigation into the role of risk and expectations with special reference to store livestock
The role of expectations theory and risk perception is examined in relation to the structure of store livestock markets in England and Wales. Economic and biological features of store production are identified in the beef, dairy, pigs and sheep sectors. The axiomatic base of risk theory is examined and the Expected Utility approach of defining risk is adopted. Allied to the analysis of risk is the role of expectations in store markets. Two major expectations hypotheses are employed which act as a second, and parallel, research investigation to risk in the store markets: Adaptive and Rational Expectations are chosen. The assumptions and modelling approaches that underlie the analysis are outlinedo This then provides a framework in which the influences of risk and expectations are examined. An ex post analysis of grazing risk is undertaken. Farmers typically underutilise grazing resources, possibly as a result of the greater risks involved in feeding ruminant stock in this way. It is shown that grassland production, on average, can be intensified without incurring additional risk in terms of more variable output. The temporal structure of store livestock demand is then investigated on ex ante grounds with subjective risk defined on the basis of the Adaptive Expectations rule. Significant risk responses were found in the store steer, heifer and pig sectors. The demand analysis is then generalised to a full simultaneous and recursive model employing the Rational Expectations hypothesis, The implications of the solution procedure are outlined and the results indicate that risk perception associated with store demand in the pigs market and both store supply and demand in the sheep market are important features of trading. The results of using two different expectations models are then compared. General conclusions are drawn and the overall influence of risk in the store markets is assessed.