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Abstract
Reduced-form price spread models have been recently utilized by Wohlgenant and
Mullen, and Thompson and Lyon to evaluate the economic factors affecting the marketing
margins for agricultural products. Drawing on Gardner, Heien, Buse and Brandow, Waugh,
Tomek and Robinson, and others they specify alternative retail-farm price spread models
and attempt to determine which best fit the data in the context of underlying theoretical
rationale.
This paper continues in the spirit of Wohlgenant and Mullen, and Thompson and Lyon
by evaluating alternative specifications of the retail-farm price spread for white maize in
South Africa. However, several important differences do remain. Wohlgenant and Mullen
analyzed the price spread for beef using annual data, while Thompson and Lyon modeled
the price spread for oranges using weekly data. The time period under consideration can be
expected to affect the choice of model because fixed markup rules that might be evident
using a short-run period of analysis (e.g., Thompson and Lyon) become untenable over the
long run with underlying supply and demand shifts. In this paper, monthly data, which may
be interpreted as an intermediate-run period, are used along with dichotomous supply-demand
shifters. In addition, Brorsen et. a!. have shown that price uncertainty affects the
price spread in the marketing channels of agricultural commodities. Thus, the analysis in
this paper extends the framework of Wohlgenant and Mullen, and Thompson and Lyon to
include measures of price risk. Finally, like Brorsen et. a!. this study pertains to the grain
market, while Wohlgenant and Mullen, and Thompson and Lyon studied the marketing
margin for non-storable commodities.