Abstract
The study estimates a conditional mean and conditional variance model for producer prices of fresh potatoes. The results suggest that potato price movements are volatile exhibiting a symmetric and non-stationary process. Prices respond symmetrically to exogenous shocks and the shocks are, thereafter, predicted to prevail in prices to the end of the marketing year. The persistency of the price shocks makes potato price movements unpredictable and, therefore, increases price risks of holding potato inventories. The estimates indicate elastic price response with respect to annual potato yield shocks. A ten percent yield increase is predicted to decrease prices by 20%. The information on inventory levels is included in prices and this information is not increased by surveying the inventory levels. Because of the elastic price response, the largest risk for a farmer is an exceptionally large total yield of potatoes. Information on the aggregate potato yield, which arrives during the growing season, will be quickly incorporated in prices. Therefore, pre-harvest hedging strategies are more efficient than after-harvest hedging strategies in managing potato price risks.
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