AGRICULTURAL PRODUCER PRICE EXPECTATIONS

Producer price expectations underlie much of agricultural supply analy sis. While producer price expectations would ideally be discovered exp erimentally, this is too costly. Instead, producer price expectations are usually represented in agricultural supply analysis by easily obta ined hypothesized expectation formulations. In most cases, the hypothe sized expectation formulations are functions of past prices. However, other formulations are sometimes used, such as current cash and future prices, or initial payments in the case of grains marketed by the Can adian Wheat Board. This paper compares actual producer price expectati ons with a variety of hypothesized expectation formulations for wheat and canola in Saskatchewan. A test developed by Granger is used to det ermine the proxy models that are significantly dominant. The model tha t dominates as a proxy in the case of wheat price expectations is the two-year declining-weight moving average. The two models that dominate as a proxy in the case of canola price expectations are the first-ord er autoregressive and, as well, the two-year declining-weight moving a verage. There is no significant difference between the two models. Som ewhat surprising is the performance of formulations based on futures p rices. These formulations perform very poorly in representing producer s' price expectations, even though they are found to be among the most accurate predictors of actual commodity prices. An even more interest ing observation is the performance of the futures price model in the c anola market. Even though the November contract in January explains ve ry little of the variation in the actual commodity prices for that yea r, its error in predicting canola prices is not significantly greater than that of the best performing, the four-year declining-weight movin g average, based upon the root mean squared error criterion.