Expectations, supply response, and marketing boards: An example from Kenya
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Whether farmers form price expectations adaptively or in a forward-looking manner has implications for supply response analysis and
for the implementation of agricultural policy reform. This paper examines the formation of price expectations by Kenyan export-crop
farmers who market their produce through a monopsonistic parastatal. The analysis allows for relaxation of the small-country assumption
within a rational expectations framework. Production behavior is consistent with expectations of future prices based on indicators of
aggregate supply and of the marketing board's purchasing capacity. The finding that price forecasts may be formed using information other
than previous price levels implies that marketing reforms that raise prices may not raise the relevant price expectations. To elicit a positive
supply response, market reforms should be sensitive to farmers' interpretation of institutional signals as well as previous prices.