Hedonic Price Functions for Wheat in the World Market: Implications for Canadian Wheat Export Strategy

HedoNc Price Functions for Wheat in the World Market: Implications for Canadian Wheat Export

Strategy

Michele M. Veeman

Department of Rural Economy, The University of Alberta.

Received 23 March 1987, accepted 11 September 1987

This study derives econometric estimates of the marginal implicit values of major characteristics of wheat in world markets for two recent time periods using pooled time-series and cross-sectional data. The results indicate that a one percentage point increase in protein content was associated with an average 0.3% price premium from 1976-77 to 1979-80. This price response had increased to an average 0.5% premium from 1980-81 to 1983-84, when there was an average world market protein premium of about U.S. $6.00 for a one percentage point increase in protein per tonne of wheat. During the latter time period, there was a premium for white wheat of nearly U.S. $16 per tonne. Wheat exported from the United States and Canada appeared to be discounted in price relative to wheat from Aus- tralia. Given the general order of the inverse relationship between yield and protein content that applies in wheat breeding, it is apparent that total revenue from Canadian wheat exports could be considerably increased by more emphasis on the development of higher-yielding wheats that are adapted to the higher-moisture regions of the Prairies. More emphasis on development of white wheats that are suited to Prairie growing conditions is also merited.

La prtsente ttude vise a obtenir des estimations tconomttriques ti partir de valeurs mar- ginales implicites des caracthistiques principales du blt sur les marchts mondiaux pour deux phiodes de temps dcentes, a I’aide de stries chronologiques regroupkes et de donntes transversales. Les rtsultats obtenus montrent qu’une augmentation de un pour cent de la teneur en prottines correspond en moyenne B une bonification de 0,3 % de 19761977 B 1979-1980. Cette rtaction des pnx a atteint en moyenne 0,s % de 1980-1981 a 1983- 1984, alors qu’une augmentation de un pour cent de la teneur en prottines par tonne de blt donnait lieu a une bonification moyenne, sur les marchts mondiaux, d’environ 6 $ US. Pendant la dernikre phiode, le blt blanc faisait I’objet d’une bonification de prhs de 16 $ US par tonne. Le blt export6 des Etats-Unis et du Canada semble avoir t t t vendu B rabais, comparativement au blt venant d’ Australie. Compte tenu du rapport inverse gtntralement observe entre le rendement et la teneur en prottines dans un contexte de stlection vtgttale, il semble que le total des revenus tirts des exportations canadiennes de blt pourrait s’ac- croitre considtrablement si l’on mettait davantage l’accent sur la production de varittts B rendement plus tlevt, adapttes aux rtgions B haut taux d’humiditt des Prairies. II serait tgalement justifit de consacrer davantage d’tnergie A la production de blts blancs mieux adaptts aux conditions de croissance des Prairies.

Canadian Journal of Agricultural Economics 35 (1987) 535-552 535

536 CANADIAN JOURNAL OF AGRICULTURAL ECONOMICS

INTRODUCTION This paper attempts to estimate the marginal values of major characteristics of wheat in the world market as a means of shedding light on appropriate product development strategies for Canadian wheat. The methodological approach used involves estimation of hedonic price functions for wheat in the world market. Such functions assume that the price of a good is a function of the quantities of characteristics or attributes of the good. The approach is therefore highly appropriate for assessing the values of characteristics or qualities of heterogenous commodities such as wheat.

WHEAT QUALITY ISSUES Western Canadian production and export of wheat has long been dominated by hard red spring wheats because of their agronomic suitability to the drier zones of the Prairies and the market premiums that arose from their high protein levels and other characteristics desired by users, particularly in the United Kingdom (Irvine 1983). Indeed, development, first of Red Fife and then of Marquis, provided one cornerstone on which the western wheat economy was built (Fowke 1957, Wilson 1978). Marquis, which came into general use in 1909, has since then served as a standard of comparison in the development and licensing of Canadian western red spring (CWRS) varieties.

The early reputation of Canada as a supplier of high-quality wheats to world markets has been jealously guarded by the Canadian Grain Commission and by the Canadian Wheat Board, the regulatory bodies charged, respectively, with over- seeing the quality (as well as handling and transportation) of wheat and other Canadian grain exports and with the export marketing of major western grains, including wheat. The achievement of high quality standards for Canadian wheat exports involves two features that, although conceptually different, in practice have become intertwined. One facet of grain quality relates to the achievement of those levels of technical characteristics of particular wheats associated with desired end use performance. The other facet of quality concerns consistency in adherence to specified grading standards and associated uniformity of export shipments.

In terms of quality characteristics associated with end use performance, much emphasis has been placed on maintaining the relatively high levels of protein content, kernel hardness and gluten characteristics (gluten strength) that give, using traditional baking methods, the high-rising pan bread widely consumed in the United Kingdom and in North America. This emphasis underlies the statutory specification that, to be graded within the two top grades of red spring wheat (CWRS No. 1 or 2), wheat must have the milling and baking attributes of the variety Marquis; this requirement also applies to the licensing of new varieties of CWRS wheat.

The emphasis on maintenance of high protein levels overall for export wheat is also seen in the delay in developing higher-yielding but lower-protein wheats

HEDOMC PRICE FUNCTIONS FOR WHEAT 537

(there is a general tendency for an inverse relationship between protein level and yield of wheat) suitable for the end uses of French bread, steam breads, flat or unleavened breads and noodles, despite the evidence of significant actual and potential markets for lower-priced wheats with lower levels of protein, hardness and gluten characteristics. These markets, essentially represented by the world’s developing nations, grew at a rapid rate during the 1970s and accounted for two thirds of all wheat imports by 1982. They are expected to be the major source of future import growth for wheat (although the rate of growth in the imports of these markets may be tempered by slow income growth, lack of foreign exchange and their own grain production increases). In contrast, world markets for higher-priced, high-protein, hard-kerneled, strong wheats, which are primarily in higher-income developed nations, have grown relatively more slowly. Indeed, western Europe (once the major export market for Canadian wheat) has become a substantial net exporter of wheat, increasing its exports of soft wheat and reducing its imports of high-protein wheat. The reduction in imports of bread wheats has been facilitated by changes in baking technology that have enabled increasing substitution of locally grown lower-protein, softer wheats for imported high-protein wheats,’ a tendency that is likely to continue with increased emphasis on gluten supplementation of soft wheats.

Other major markets have emerged for high-protein blending and bread wheats. The USSR has been a major importer of such wheats from Canada in recent years, and Japan is a significant importer of CWRS No. 1 and No. 2 wheat. Maintenance of these markets is obviously of great importance to Canada’s wheat export strategy but, since the developing world is likely to be the major source of future growth in world wheat imports, more emphasis on development of higher- yielding wheats of medium protein, hardness and gluten strength has been advo- cated (see, for example, Canadian Grains Council 1982, 1985; Veeman and Vee- man 1984, 1985; Ulrich and Furtan 1984; Loyns and Carter 1984; and Carter et al 1986). HY320, the first wheat of this type licensed in Canada, was developed in the early 1970s, but its licensing did not occur until 1985, when the Canada Prairie Spring class was established to accommodate this and anticipated future high-yielding but earlier-maturing varieties with intermediate protein content and gluten characteristics.

The other facet of grain quality-reliability and consistency in the application of grading standards-has provided the rationale for the visual distinguishability requirements for licensing of new grain varieties. The system of grain grading that has developed in Canada includes varietal identification for major grains and the requirement of visual distinguishability between varieties licensed for different classes of a grain such as wheat has been applied as a means of maintaining the confidence of the grain industry and of buyers in the application of Canadian grain- grading procedures.2 While the institutional structure and system of developing


and licensing new varieties and of grading grain has led to a reputation for reliability in the adherence to high standards of grading for Canadian grain exports, there have been costs associated with the mechanisms used for this purpose. Thus the constraint placed on plant breeders by the requirement for visual distinguishability is believed to involve a reduction of about 5% in potential yield increases (Canada Grains Council 1985).

THE HEDONIC PRICE FUNCTION The hedonic price function, which assumes that the price of a heterogenous good is a function of the characteristics or attributes of that good, is predicated on the assumption that consumers obtain utility from consuming the characteristics of the good in question; that is, that these characteristics rather than the goods per se are arguments in an individual's utility function. These features of the approach were outlined by Gorman (1956,1980), who noted their applicability to the analysis of quality characteristics and differentials. They were developed further by Becker (1965), Lancaster(l966), Muth(1966) andothersintohouseholdproduction theory. Household production theory integrates the theory of consumer behavior with that of the firm. It postulates that the household obtains utility from nonmarket commodities (bundles of characteristics or attributes) that are produced in the household from inputs of market goods and household resources; one branch of this theory focuses on the demand for characteristics (Lancaster 1966).' A competitive equilibrium theory of hedorric price functions has been outlined by Rosen (1974), but most of the literature and the applications relate to the demand for characteristics and the derived demand for goods.

The characteristics demand approach has been adapted to apply to production inputs by Ladd and Martin (1976). This approach, which is followed in this study, was also applied by Wilson (1984) in a study of malting barley prices in the United States. The approach assumes profit-maximizing , competitive multiproduct grain milling or processing firms whose independent production processes require inputs of characteristics (such as protein and other technical attributes of wheat) for appropriate end use performance. Thus, these production functions are functions of input characteristics. For such a firm the production function can be depicted as

qy =f (z,,, . . .zv) (1) where:

qy =the quantity of outputy Cy= 1, ...Y); and z, = the quantity of input characteristic j, (j= 1, . . A).

The firm's profit function is:

HEDONIC PlUCE FUNCTIONS FOR WHEAT 539

where: xi, = the quantity of market input i (i = 1, . . .m) used in the production

p y = the given price of output y; and pIi = the given price of input xi.

of output y;

Consider a single output, y, and note that zlr, the total quantity of each characteristic used in production of y, is a function of the input quantities applied to the production process, xiy, and the quantity of characteristicj contained in unit quantities of input. Thus, the first-order conditions for profit maximization with respect to the use of market input i can be stated as:

Solving for p x , gives:

P n = p y x (aflaz,) (az,lax,) (4) I - 1

where: az,/dx,, = the marginal yield of characteristic j from the ith input in

af/dz, = the marginal physical productivity of one unit of character-

The term p y (dfldz,) is the marginal value product of a unit of the jth characteristic used in producing y. That is, it is the marginal implicit value of a unit of characteristicj or the hedonic price of a unit of that characteristic. Simplifying Eq. 4 by setting p y (afldz,) = p, and setting dz,,/dx,, = Z,] gives the hedonic price function:

Prt = PA, ( 5 )

Given data on input prices pxl and given the marginal yields of the various characteristics from these marketed inputs Z,,, regression analysis can be used to obtain estimates of PI , the marginal implicit values of unit quantities of characteristics and to test hypotheses relating to P, and the model; this procedure is followed in the study.4 The approach implicitly assumes that purchasers follow a two-stage budgeting procedure, first deciding to purchase wheat, then allocating expendi- tures on the basis of the characteristics of different wheats. As with other hedonic price studies of characteristics demand, it is also assumed that the demand function for characteristics is relatively stable during the subperiod(s) studied and that variations in prices and associated quantities of characteristics within these subperiods are generated by variations in the supply of characteristics rather than by shifts in the demand for characteristics.

production of y; and

isticj in the production of y.

I - I

540 CANADIAN JOURNAL OF A G R I C U L W ECONOMICS

THE MODEL, DATA, ESTIMATION PROCEDURES AND RESULTS Objectively measured characteristics of wheat include protein content and color. A number of other objectively measured characteristics of wheat relating to protein content and kernel hardness are tested by sellers and buyers in the world wheat market, but comparable data on these characteristics for wheat from different countries of origin are not readily available. Furthermore, there is a general tendency for protein content of most wheats to be related to kernel hardness and gluten characteristics. Thus most high-protein wheats are generally hard-kerneled with strong gluten (that is, they have a high proportion of glutamine proteins that impart extensible or rubber-like properties to the dough of leavened breads); as noted previously, these characteristics are required for high-loaf pan bread made with traditional baking techniques. Soft wheats have lower protein levels and their soft kernels tend to give flours with finer particles; these attributes and their protein characteristics are required for the end uses of cake, biscuit and pastry flours. Protein content was therefore selected as the major characteristic to be considered in this study and is designated as characteristic 2,. The color of wheat is also a characteristic of importance to some wheat processors and consumers. White wkeat can generally be ground to yield considerably higher flour extraction rates than is the case for red wheats, the flour from which becomes discolored by colored seed- coat and wheat germ particles at high extraction rates. This discoloration does not occur at lower extraction rates, although the nutrient content of flour is reduced as extraction rates are lowered; moreover, low extraction rates generally require a developed feed industry to absorb the milling by-products. Color was therefore identified as a second characteristic, Z,, in the models tested in this study. It enters the model as an intercept shifter, that is, as a dummy variable which takes the value 0 for red wheat and value 1 for white wheat.

Pooled time-series and cross-sectional data on wheat prices and the specified variables were used in this study. Consequently time, Z3, was also included as an explanatory variable. The other characteristic considered in this study is the country of origin of the various wheats. This variable is included as a means of testing whether the world market for wheat exhibits apparent premiums (or discounts) as a result of the presence (or absence) of quality characteristics associated with country of origin, such as the maintenance (or otherwise) of high standards of grading and uniformity of wheat shipments. Data for wheat from three countries of origin, the United States, Australia and Canada, were used in this study. Differentiating wheat by origin involves specifying variables Z, = 1 and Zs = 1 for wheat from two of three origins in question. Otherwise, these variables are equated to zero and the estimated coefficient for the third country of origin can be calculated from the other two. Variable Z, applies to wheat from the United States, and 2, denotes Canadian wheat. It was hypothesized that the maintenance of effective systems of grading and inspection of export wheat in Canada and Australia would lead to a

HEDONIC PRICE FLJNCITONS FOR WHEAT 54 1

positive coefficient on Z, and to an imputed positive coefficient for wheat from Australia; the existence of some problems in U.S. export grading standards for wheat led to the expectation that the coefficient on 2, would be negative (see, for example, Milling and Baking News).

Annual average FOB export price data in U.S. dollars per tonne for nine wheats of identifiable protein content, color and origin that are considered to be representative of wheats traded in world markets were collected for the time period from 1976-77 to 1983-84. This time period was chosen as being representative of world wheat markets in recent years. During this time period, the available export price data were considered to be accurate measures of actual transaction prices; this may not be the case for such price data for the mid 1980s and so, although more recent price data were available, they were not included in the analysis. Because of the possibility that the demand for the characteristics of wheat in world markets may have changed over the period from 197677 to 1983-84, two subperiods were considered in the study, 1976-77 to 1979-80 and 1980-81 to 1983-84. During the first of these shorter time periods, the world market for wheat and other agricultural goods was relatively strong; during the second subperiod, 1980-81 to 1983-84, the impact of global recession was being seen in world markets.

The nine different wheats for which data were collected included the most representative of the protein-segregated wheats for which FOB export price data are reported by the International Wheat Council in World Wheat Statistics, including U.S. FOB Gulf No. 2 Dark Northern Spring (14% protein) and No. 2 Hard Winter (13% protein); and Australian Prime Hard (14% protein). The available export prices for Canadian wheat are based on official in-store price quotations converted to FOB. The two protein-segregated Canadian wheats for which the International Wheat Council publishes price data are Thunder Bay CWRS No. 1, 13.5% protein and 12.5% protein. Rather than using these inland-based price series, westcoastpricesforCWRSNo. 1,13.5%proteinand 12.58proteinwheats were included. The price series for CWRS No. 1,13.5% protein wheat was from the Canadian Wheat Board Annual Report; the annual differences between the IWC-reported Thunder Bay CWRS No. 1,13.5% protein and 12.5% protein price series were assumed to apply at the west coast in order to obtain the west coast price series for CWRS No. 1, 12.5% protein wheat. In addition to the protein- segregated wheats noted above, data on four unsegregated wheats were also included. Three of these were U.S. wheats, and the other was Australian Standard White wheat. Their protein levels were taken to be the midpoint of the range of their normal protein content (Canadian International Grains Institute 1982). These wheats and their respective protein contents are: U. S. FOB Gulf No. 2 Hard Winter Ordinary (12.5% protein); U.S. FOB Atlantic No. 2 Soft Red Winter (10% protein); U.S. FOB Pacific No. 2 Western White (9% protein); and Australian Stand- ard White (10% protein). The sample thus included price and protein observations


for three white wheats and six red wheats. The protein percentages cited above relate to wheats of consistently different moisture content and therefore are not fully comparable. Specifically, the protein content of Canadian wheats is specified as at 13.5% moisture content, while a moisture content of 11% applies to the Australian wheats. In contrast, no specified moisture content applies to the United States wheats, for which protein content is on an “as is” moisture basis. The moisture content of each of the five U.S. wheats was taken to be the midpoint of the normal moisture content reported for these wheats by the Canadian Interna- tional Grains Institute, and the specified protein content of each wheat was adjusted to the comparable dry-weight bashs

Each model specified was estimated using both nominal prices and prices deflated by the Organization for Economic Coordination and Development’s all- items consumer price index, 1980 = 100. For the time period from 197677 to 1983-84, there were 72 pooled observations for each variable; for each of the two subperiods considered, there were 36 observations.

The model is: P,f = P o + P J l t + P Z Z , + P J 3 f + P A + P& + elf (7)

Pi, = the price in U.S. dollars per tonne of the ith type of wheat (as

Z,, = the dry weight basis percentage protein content of each of the nine

Z, = color, with a value of 0 applied to red wheats and 1 to white wheat;

Z, = country of origin; Z, = 1 for U.S. wheat and 0 otherwise; Z,, = country of origin; Z5, = 1 for Canadian wheat and 0 otherwise; and e, = the error term.

The model was fitted in both linear form and in partial semilogarithmic form; in the latter case the two continuous variables, P,, and Z,,, were each expressed in logarithmic form.6 Two alternative estimation procedures were applied for each of these model versions. The first involved applying ordinary least squares (OLS) procedures to the series of pooled time-series and cross-sectional observations, assuming that explanatory variables and the error terms satisfy the assumptions of the standard linear regression model. However, this assumption may be incorrect, since heteroscedasticity sometimes affects cross-sectional observations and auto- regression is not uncommon with time-series observations. The computer program developed by White (1978) was therefore used to apply the double transformation procedure of Kmenta (1986,618-22) to estimate cross-sectionally heteroscedastic and time-wise autoregressive versions of the model.

The results from the OLS estimation procedure for the time period from 1976- 77 to 1983-84 are given in Table 1. Results for the two subperiods within this time

where:

outlined in detail above) at time t;

wheat types, so expressed that 1 = 100%;

Z3, = the year of observation, t = 1,. . .8; (8)

Tabl

e 1.

Est

imat

es of

the

hedo

nic

pric

e fu

nctio

n fo

r whe

at in

wor

ld m

arke

ts, 1

9767

7 to

1983

-84

Estim

ated

coef

ficie

nts a

nd a

ssoc

iate

d &st

atis

tics*

U.S

. C

anad

ian

Equa

tion

Dep

ende

nt

Inte

rcep

t Pr

otei

nb

Col

or

Yea

r or

igin

or

igin

A

djus

tedc

nu

mbe

r va

riabl

e Po

PI

P*

P3

P4

PS

R=

1 2

Nom

inal

pr

ices

D

efla

ted

pric

esd

(Lin

ear m

odel

) -4

91.4

0 46

7.20

12

.27

7.47

-2

2.14

-2

5.43

0.

55

(-5.

93)

(3.1

8)

(1.2

8)

(7.5

4)

(-3.

74)

(-2.

35)

621.

84

483.

13

12.7

7 -6

.25

-23.

67

-26.

48

0.49

(7

.29)

(3

.19)

(1

.29)

(-

6.13

) (-

3.78

) (-

2.38

)

3 U 0

0

F

stat

istic

3

18.5

8 z ~ i;l

14.8

4 3 2

(Partial se

mi-l

ogar

itbm

ic m

odel

) 3

3 N

omin

al

- 1

2.01

0.

40

0.10

4.

09

-0.1

3 -0

.16

0.58

20

.92'

4 D

efla

ted

20.0

1 0.

40

0.10

- 3

.19

-0.1

3 -0

.16

0.51

15

.89

pric

es

(- 5

.54)

(3

.31)

(1

.54)

(8

.32)

(-

3.57

) (-

2.43

) CA ;

pric

esd

(9.3

4)

(3.3

6)

(1.5

6)

(-6.

57)

(-3.

62)

(-2.

46)

'r-st

atis

tics are in

bra

cket

s bd

ry m

atte

r bas

is

cadj

uste

d for

deg

rees

of f

reed

om

ddef

late

d by

OEC

D &

-item

s co

nsum

er p

rice

inde

x, 1

980=

100

4 sta

tistic

s sig

nific

ant a

t 99%

leve

l of s

igni

fican

ce

% VI

P

W


period are given in Tables 2 and 3. The results from Kmenta’s cross-sectionally heteroscedastic and time-wise autoregressive procedure did not give any better fit than did the OLS results. Application of log-likelihood ratio tests did not support the use of Kmenta’s procedure for the model over any of the periods considered in the study (see Appendix Table 1) and these results are not reported in this paper. Two further model versions were tested. One involved addition of the term 2,: in order to determine whether the marginal implicit value of protein appeared to be a constant value or whether it tended to vary as the quantity of this characteristic varied. In view of the insignificant estimated coefficient on Z,: and the poorer fit of this model version, these results are omitted from this paper. Another postulated characteristic was also added to the model. This was the usual moisture content of each wheat considered in the study; because of the lack of significance of the estimated coefficients for this factor, it was rejected as a characteristic and these results are also omitted from the paper. The question of whether the marginal implicit values of the characteristics of wheat in world markets had been constant over the time period considered was tested by truncating the data into two periods, 1976-77 to 1979-80 and 1980-81 to 1983-84, and testing the model over these two time periods. The resulting estimates were then compared with those for the complete time period, applying the Chow test for structural change. The null hypothesis that structural change was not evident in the two successive time periods was rejected (see Appendix Table 2). The estimates for the model in the two subperiods are given in Tables 2 and 3. Since there is evidence of structural change during the longer time period, more emphasis should be placed on the results in Tables 2 and 3 than on those in Table 1.

DISCUSSION OF RESULTS The model consistently yielded highly significant estimates of the coefficients for the protein and year variables. The coefficients for protein are positive; they do appear to have increased somewhat over time and are higher for the period from 1980-8 1 to 1983-84 (Table 3) than for the period from 1976-77 to 1979-80 (Table 2). The estimated elasticities of price response to changes in protein content are also slightly higher for the more recent period but are considerably less than 1 (Table 4). A possible explanation for the increased levels of the marginal implicit prices for increments of protein in the time period from the early to mid 1980s relative to those during the mid to late 1970s is that effective demand for wheat imports by lower-income countries may have been more adversely affected by global recession and the associated “debt overhang” than was the demand for wheat imports by higher-income countries in the recent time period. The estimated coefficients for the year variable indicate that while, overall, nominal prices tended to increase and real prices tended to fall over the period from 1976-77 to 1983- 84, both nominal and real prices increased over the mid to late 1970s (Table 2) and fell over the early 1980s (Table 3).

Tabl

e 2.

Es

timat

es of

the

hedo

nic

pric

e fu

nctio

n fo

r whe

at in

wor

ld m

arke

ts, 1

976-

77

to 1

979-

80

Estimated

coef

ficie

nts a

nd r-

stat

istic

s us

. C

anad

ian

Equa

tion

Dep

ende

nt

Inte

rcep

t Pr

otei

nb

Col

or

Yea

r or

igin

or

igin

A

djus

ted<

F

num

ber

varia

bie

Po

PI

PI

83

8.

B5

R=

st

atis

tic

5 N

omin

al

6 D

efla

ted

pric

es

pric

esd

7 N

omin

al

8 Deflated

pric

esd

pric

esd

- 1

100.

20

(- 1

1.75

) - 54

0.83

(-

3.8

8)

- 38

.99

(-11

.52)

- 1

0.01

(-

3.0

1)

333.

56

(3.0

7)

437.

08

(3.4

4)

0.32

(3

.38)

0.

32

(3.4

4)

(Lin

ear m

odel

) 8.

89

19.2

2 -1

7.19

(1

.25)

(1

2.79

) (-

3.82

) 12

.11

8.63

-2

1.91

(1

.47)

(4

.91)

(-

4.17

)

0.08

10

.24

-0.1

2 (1

.63)

(1

3.22

) (-

3.92

) 0.

08

3.65

-0

.12

(1 .w

(4

.80)

(-

3.9

9)

(Par

tial s

emi-l

ogar

ithm

ic m

odel

)

- 1

9.24

0.

85

39

.w

( - 2.

40)

-25.

10

0.64

13

.43'

(- 2

.68)

-0.1

4 0.

86

42.8

5'

-0.1

4 0.

63

t2.8

@

( - 2.

67)

(- 2

.71)

-1-st

atist

ics ar

e in

brac

kets

W

y-m

atte

r bas

is

.adj

uste

d fo

r deg

rees

of f

reed

om

ddef

lated

by

OEC

D a

ll-ite

ms c

onsu

mer

pric

e ind

ex, 1

980 =

100

+-

stat

istic

s si

gnifi

cant

at 99

% le

vel o

f sig

nific

ance

E 5

Tabl

e 3.

Estimates o

f the

hed

onic

pric

e fu

nctio

n fo

r whe

at in

wor

ld n

iark

ets,

1980

-81 t

o 19

83-8

4

> 0

Estim

ated

coe

ffic

ient

s and

ass

ocia

ted r

-sta

tistic

s' U.S

. C

anad

ian

Equa

tion

Dep

ende

nt

Inte

rcep

t Pr

otei

nb

Col

or

Yea

r or

igin

or

igin

A

djus

&

F nu

mbe

r va

riabl

e $0

P

I $2

$3

B.J

$5

R=

st

atis

tic

i 5

(Lin

ear m

odel

)

i? 10

D

efla

ted

1771

.20

529.

19

13.3

6 -2

0.25

-2

5.43

-2

7.86

0.

89

56.0

%

% priC

€!Sd

(14.

55)

(5.

(1.9

3)

(-13

.85)

(-

5.81

) (-

3.57

) n

(P

artia

l sem

i-log

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HEDONlC PRICE FUNCTIONS FOR WHEAT 547

Table 4. Increase in price of wheat associated with a one percentage point increase in protein mntenr

1976-77 to 1983-84 197677 to 1979-80 1980-81 to 1983-84

Elasticity Elasticity Elasticity Equation estimate Equation estimate Equation estimate

(%) (%I (56) 1 0.40 5 0.32 9 0.47 2 0.39 6 0.33 10 0.46 3 0.40 7 0.32 11 0.48 4 0.40 8 0.32 12 0.48

calculated at the mean of the price and dry-matter protein content variables

The estimated coefficients for the color variable are positive, as expected, and are fairly stable. Although none of the estimates of this coefficient in Table 1 or 2 are significantly different from zero, the levels of significance of the estimates of the coefficient for color are higher for the more recent shorter time period reported in Table 3. The country of origin variables are negative for both the U. S . and Canada, implying that wheat from the U. S . and Canada was discounted relative to wheat from Australia, the third country of origin considered in this study. This was expected for the U.S., but for Canada it is contrary to expectations. Since the export price data series for Canadian wheat are based on official export price quotations rather than export transaction prices (which are not released by the CWB), they are unlikely to be downward-biased measures of Canadian export prices; this limitation in the nature of the price data is therefore unlikely to have contributed to the negative coefficient for wheat from Canada.

IMPLICATIONS OF THE RESULTS The estimated coefficients imply that there was a protein premium in the world market for wheat in the mid to late 1970s of U.S. $3.34 (nominal) per tonne for a one percentage point increase in protein content. During the early 1980s, the protein premium was somewhat higher at about U.S. $6.00 (nominal) per tonne (or $5.29 per tonne in 1980 prices) for a one percentage point increase in protein content (expressed in terms of bushels, the nominal value premium for 1980-81 to 1983-84 was 16.33 cents per bushel and the real value premium was 14.40 cents per bushel for a one percentage point increase in protein content). In other words, a one percentage point increase in protein content resulted in an average 0.32% premium for wheat sold in the world market in the late 1970s; this had increased to an average 0.47% premium by the early to mid 1980s.

The apparent premium in world markets for white wheat in excess of U.S. $15 (nominal) per tonne in the more recent period provides support for plant breeding efforts to develop white high-yielding wheats that are suited to western Canada’s climatic conditions. A probable interpretation of the negative coefficient on the variable indicating Canada as country of origin is that long distance from major


markets may contribute to this apparent price discount. Since the price data used in the study are FOB export prices, the hypothesis that factors associated with country ~4 origin, such as the Canadian grading system and its related features including visual identifiability, have been successful in obtaining higher levels of prices for Canadian wheat in the world market relative to other major exporters is not rigorously tested. However, it does appear that any possible price-level benefits of the Canadian grading system have not been sufficient to overcome other negative factors associated with country of origin, such as long distance from markets. The issue warrants further research, either by using data on CIF import prices (unfor- tunately, these are scanty and therefore were not used in this initial study) or by imputing transport costs. It is possible that the Canadian grading system and related features such as visual distinguishability may have had an effect in obtaining an increased Canadian share of the world market for wheat and this issue also warrants research.

It is of interest to compare the very modest premiums for protein in world markets to the yield-protein tradeoff that applies in breeding wheat. The precise nature of this tradeoff has not been well quantified biologically; however, Tipples (1984) states that this inverse relationship involves a reduction of about 10% in yield for every one percentage point increase in protein content. The Canada Grains Council’s Grain Grading Committee (1982, 157) considers that the tradeoff is for a reduction of 10% to 15% in wheat yields as protein content increases by one percentage point, but that higher yield increases are probable in higher moisture areas. These estimates are in striking contrast to the increases in world wheat prices in the early 1980s of less than 1% as the protein content of wheat increased by one percentage point. It is apparent that increased emphasis on the development of higher-yielding wheats would indeed have the potential for considerable increases in the total revenue from the sale of Canadian wheat in world markets. The income impact for producers from improved high-yielding varieties adapted to local conditions can be expected to be greatest in the higher moisture areas (the black soil zones) of the West; these are areas that are not particularly well suited to the production of the highest grades of CWRS wheat.

SUMMARY AND CONCLUSIONS This study presents estimates of the marginal implicit values of major characteristics of wheat in world markets for two time periods, 1976-77 to 1979-80 and 1980-81 to 1983-84, using pooled time-series and cross-sectional data on FOB export prices, moisture-adjusted protein content, color, country of origin and time for nine wheats from three different wheat-exporting nations. The results indicate that a one percentage point increase in protein content was associated with an average 0.32% price premium in the earlier period. This had increased to an average 0.47% premium for the period from 198&81 to 1983-84, when the nominal value premium was about U.S. $6.00 per tonne (or $5.29 per tonne in real terms

HEDONIC PRICE FUNCTIONS FOR WHEAT 549

relative to 1980) for a one percentage point increase in protein content. A possible reason for the increased levels of the marginal implicit prices for increments of protein content in the time period from 1980-81 to 1983-84 is that, compared with the mid to late 1970s, effective demand for wheat imports by lower-income countries (which tend to import lower-priced, lower-protein wheats) may have been more adversely affected by the impact of global recession than was the demand for wheat imports by higher-income countries. Despite the increase in the protein premium in the early 1980s over that of the mid to late 1970s, comparing this premium to the general order of the yield-protein tradeoff faced by wheat breeders, it is apparent that the total revenue from Canadian wheat exports could be considerably increased through greater emphasis on developing higher-yielding wheats that are adapted to the higher-moisture regions of the prairies. There was an apparent premium for white wheat in world markets of nearly U.S. $16 (nominal) per tonne in the early 1980s, which suggests that more emphasis on plant breeding efforts to develop white high-yielding wheats that are suited to western Canada’s climatic conditions is merited. The coefficients on the country-of-origin variables were negative for the U.S. and Canada, giving an imputed positive coefficient for Australia. While the result for Canada was contrary to that expected, it is likely accounted for by the relatively long distance from major markets that applies for Canadian wheats. It appears that any price-level benefits from the Canadian grading system have been insufficient to overcome other negative factors associated with country of origin, such as location relative to major markets. However, it is possible that the Canadian grading system and related factors such as visual distinguishability may have had an effect in obtaining an increased Canadian share of the world wheat market.

NOTES 1Mechanical dough developments, arising from the introduction of continuous mixing processes (pioneered in the United States) and the Chorleywood bread process (developed in England), give improved baking results from weaker flours; together with chemically accel- erated dough developments, these innovations of the 1950s and 1960s have reduced bakers’ needs for wheats with the qualities traditionally required for high-rising pan bread. *For wheat, grading specifications apply to weight, variety, soundness, and foreign material content. For red spring and durum wheat, levels of vitreousness (an indication of kernel hardness that is generally related to protein content) are also specified. For fuller details on the specifications, see Canadian Grain Commission (1984). )Another major branch of household production theory focuses on time allocation decisions of households (Becker 1965). 4Ladd and Martin (1976) apply an alternative methodological procedure, estimating marginal values as the shadow prices from the dual of a linear programming formulation of their model.

550 CANADIAN JOURNAL OF A G R I C U L W ECONOMCS

The moisture content of US . hard red spring wheat was taken to be 12%; for hard red winter, this was 11.5%, while 12.5% and 10.58, respectively, applied t0U.S. red winter and white wheat (Canadian International Grains Institute 1982). 6As Muellbauer (1974) points out, the linear versions of such a hedonic price model can be justified in terms of Lancaster’s (1966) specification of the chanicteristics demand model whereas a partial semilog model can be justified in terms of Gorman’s (1956, 1980) formulation.

ACKNOWLEDGMENT Computing assistance by X. Y. Dong is acknowledged, as are comments by T. S. Veeman, K. G. Briggs, F. Z. Ahmadi-Esfahani, and an anonymous reviewer. Financial support for this study was provided by the Agricultural Research Council of Alberta.

REFERENCES Becker, Gary S. 1965. A theory of the allocation of time. The Economic Journal 75(3): 493-517. Canadian Grain Commission. 1984. Oscial Grain Grading Guide. Winnipeg: Office of the Chief Grain Inspector. Canada Grains Council. 1982. Grain Grading for Eflciency and Projit. A Report Sub- mitted by the Grain Grading Committee, Canada Grains Council, Winnipeg, September. Canada Grains Council. 1985. Wheat Grades for Canada: Maintaining Excellence. A Report Submitted by the Grain Grading Committee, Canada Grains Council, Winnipeg, January. Canadian International Grains Institute. 1982. Grains and Oilseeds: Handling, Market- ing, Processing. 3rd ed. Winnipeg: CIGI. Canadian Wheat Board. 1986. Annual Report 1985-86. Winnipeg: CWB. Carter, C. A., R. M. A. Low, and Z. F. Ahmadi-Esfahani. 1986. Varietal licensing standards and wheat exports. Canadian Journal of Agricultural Economics 34 (3): 361- 72. Fowke, V. C. 1957. The National Policy and the WheatEconomy. Toronto: University of Toronto Press. International Wheat Council. World Wheat Statistics. WC. Goman, W. M. 1956, 1980. A possible procedure for analysing quality differentials in the egg market. Reprinted in Review of Economic Studies 47: 843-56. Irvine, G. W. 1983. The History and Evolution of the Canadian Grain Handling System. Winnipeg: Canadian Grain Commission. Judge, George G., W. E. Griffiths, R. Carter W, Helmut Lutkepohl and Tsoung- Chao Lee. 1985. The TheoryandPractice ofEconometrics. 2nded. New York John Wiley. Kmenta, Jan. 1986. Elements of Econometrics. 2nd ed. New York: Macmillan. Ladd, George W. and Marvin B. Martin. 1976. Prices and demands for input characteristics. American Journal of Agricultural Economics 58(1): 21-38. Lancaster, Kelvin J. 1966. The new approach to consumer theory. Journal of Political Economy 74(2): 132-57. Loyns, R. M. A. and Colin A. Carter. 1984. Grains in Western Canadian Economic Development to 1990. Discussion Paper 272. Ottawa: Economic Council of Canada, September. MiUing CmdBaking News. 31 December 1985. Kansas City: Sosland Publishing Co., p. 1. Muellbauer, John. 1974. Household production theory, quality, and the “hedonic tech- nique.” The American Economic Review 64(6): 977-94.

HEDONIC PRICE FUNCTIONS FOR WHEAT 55 1

Muth, Richard F. 1966. Household production and consumer demand hnr lions. Emn- ometrica 34(3): 699-708. Rosen, Sherwen. 1974. Hedonic prices and implicit markets: Product diif :entidim in pure competition. Journal of Political Economy 82(1): 34-55. Tipples, Keith. 1984. Potential use of high-yielding semi-hard wheats of in[. diuin protein content. Proceedings of the Canadian Barley and Oilseeds Conference, p. )!3. Winlipeg, 7-8 March. Urich, Alvin and W. Hartley Furtan. 1984. An economic evaluation of prcrc w i n g HY320 wheat on the Prairies. Department of Agricultural Economics, University of :taskatchewan, October. Veeman, Terry and Michele Veeman. 1984. The Future of Grciin: Conah's PrcFpects for Grains, Oilseeds and Related Industries. Toronto: Canadian Institute for Economic Policy and James Lorimer. Veeman, T. S. and M. M. Veeman. 1985. Western Canadian agriculture: Prospects, problems, and policy. C a d i a n Public Policy 11 (Supplement): 301-09. White, K. J. 1978. A general computer program tor econoriletric mcthods: SHAZAM. Econometrica 1978: 23940. Wilson, C. F. 1978. A Century of Canadian Grain: Government Policy to 1951. Saskatoon: Western Producer Prairie Books. Wilson, William W. 1984. Hedonic prices in the malting barley market. Western Journal of Agricultural Economics 9(1): 29-40,


Appendix Table 1. Log-likelihood ratio test comparing two estimators

Log-likelihood rat iob

1976-77 to 197677 to 1980-81 to Equation type 1983-84 1979-80 1983-84

Nominal prices, linear version 9.360 13.318 25.682 Deflated prices, linear version 12.796 10.854 22.570 Nominal prices, partial semi-log version 10.704 14.518 24.396 Deflated prices, partial semi-log version 11.860 12.542 23.714

'The test compares OLS, viewed as the restricted model, and Kmenta's cross-sectionally heteroscedastic and time-wise autoregressive procedure, viewed as the unrestricted model (Judge et al 1985,

b I n each case, the likelihood ratio is less than the critical value of x2 at the 99% level of significance, indicating that the null hypothesis (that heteroscedasticity and autorepssion do not apply) is not rejected. Thus use of the OLS procedure appears appropriate.

Appendix Table 2. Test of structural change in the model between 1976-77 to 1979-80 and

. . 22-24).

198CL81 to 1983-84

F-statistic from Equation type applying Chow testa

Nominal prices, linear version 40.13 Deflated prices, linear version 26.79 Nominol prices, partial semi-log version 39.27 Deflated prices, partial semi-log version 33.28

'In each case, the calculated F exceeds the critical level of F at the 99% level of significance, indicating rejection of the null hypothesis that the regressions for the earlier period are the same as for the latter period.

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Hedonic Price Functions for Wheat in the World Market: Implications for Canadian Wheat Export Strategy