7.7 The Macroeconomic-Agricultural Sector Model Results
7.7.2 Maize and Apple Long Run and Short Run Results
Given the existence of two cointegrating equations, error correction models were estimated based on eigenvectors in relation to eigenvalues of equations (6.11) and (6.12). We first present maize long run cointegration results based on Table 7.11. All the long run and their corresponding short run results are given as normalized with respect to the dependent variable (farmland values) (see appendix A section 1.3 for some explanation on normalized coefficients). It must be noted that a negative sign is interpreted as positive and a positive sign as negative when results are given as normalized results. This occurs because interest rate and net farm income are transferred to the other side of the equation and the equation is then divided by the coefficient of the chosen variable (in this case farmland values).
81 Table 7.11 Maize and Apple Cointegration Tests Results
Apples Hypothesized
No. CE(s)
Trace Statistic
Trace Critical
Maximum Eigenvalue
Maximum Eigenvalue
Eigenvalue 5% 5%
5%
(statistic)
5%
critical
None * 0.859642 176.8178 95.75366 56.94328 40.07757 At most 1 * 0.845889 119.8745 69.81889 54.23234 33.87687 At most 2 * 0.735620 65.64214 47.85613 38.58069 27.58434 At most 3 0.457470 27.06145 29.79707 17.73384 21.13162 At most 4 0.263450 9.327609 15.49471 8.867563 14.26460
Maize Hypothesized
No. CE(s)
Trace Statistic
Trace Critical
Maximum Eigenvalue
Maximum Eigenvalue
Eigenvalue 5% 5%
5%
(statistic)
5%
critical
None * 0.898209 115.8657 69.81889 66.26006 33.87687 At most 1 * 0.600751 49.60567 47.85613 26.62695 27.58434 At most 2 0.377245 22.97871 29.79707 13.73447 21.13162 At most 3 0.249306 9.244241 15.49471 8.315950 14.26460 At most 4 0.031503 0.928291 3.841466 0.928291 3.841466
(*) indicates significance at 5% level Maize
The normalized long run coefficient of maize price is positive and statistically significant at 1, 5 and 10 percent levels of significance with a t-statistic of 11.59. A 10 percent increase in maize price could induce a 14.1 percent proportionate increase in maize farmland prices in the long run.
Money supply has an inflationary impact because its increase may results in increase in prices. The normalized coefficient of money supply is positive and is statistically significant at one percent and five percent significant levels with a t-statistic of 9.61. A 10 percent increase in money supply could induce a 0.61 percent increase in maize farmland prices in the long run. Costs and interest rate normalized coefficients are negative as they were expected. These coefficients are statistically significant at one and five percent significance levels with t-statistics of 5.02 and 17.54 for costs and interest rate respectively. A 10 percent increase in costs could induce a decline of 5.27 percent in maize farmland prices in the long run. A one percent increase in interest rate could induce a long run 0.136 percent decrease in maize farmland prices. The speed of adjustment coefficient for farmland values is negative (-0.74) and close to one. This indicates that farmland values moderately adjust from long run equilibrium deviations.
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Table 7.12 Maize and Apple Long Run and Short Run Cointegration Results Apples
Variable β t-stat β(s.e) α α(s.e)
Values 1 0.00 0.00 -0.08 0.02
Price -0.07 -0.76 0.09 0.52 0.7
Costs -1.4 -5.94*** 0.23 0.168 0.04
Interest rate 0.069 6.56 0.01 2.17 2.16
M3 -.008 -0.92 0.009 -0.68 5.76
Exchange rate 0.94 5.00*** 0.18 -0.27 0.24
Maize
Variable β t-stat β(s.e) α α(s.e)
Values 1 0.00 0.00 -0.74 0.275
Price -1.41 -11.6*** 0.12 -0.22 0.42
Costs 0.527 5.02*** 0.10 0.162 0.33
Interest 0.136 17.5*** 0.007 -6.35 1.4
M3 -0.06 -9.61*** 0.006 -10.7 5.76
(***) indicate statistically significant at 1% level Apples
Long run cointegration results are presented in Table 7.12. Input costs for apple production appear to be the major driver of apple farmland values. The coefficient sign for input costs is not as it was expected. The sign is positive instead of negative and is statistically significant at 1 percent, 5 percent and 10 percent levels with a t-statistic of 5.95. This could happen because input costs are a dominant factor in the early stages of fruit plantations. Orchard values appreciate simultaneously with the increase in the costs of maintaining an orchard. A 10 percent increase in input costs could induce a 14.1 percent increase in farmland values in the long run. Exchange rate has an expected negative sign; appreciation of the South African Rand against the US Dollar makes South African goods expensive in foreign markets and profit margins also decline. Depreciation of the South African Rand makes South African goods cheaper in foreign markets and revenue prospects are revitalised. Exchange rate coefficient is statistically significant at all levels of significance with a t- statistic of 5.00. A 10 percent increase in exchange rate could result in a decrease of 9.4 percent in apple farmland values in the long run. Interest rate coefficient also has an expected negative sign and is statistically significant at 1 percent, 5 percent and 10 percent significance levels. A percentage increase in interest rate could induce a decline of 0.069 percent in apple farmland values in the long run. The coefficient sign of average apple prices is positive but not statistically significant at 5 percent and 10 percent levels. This could be the result of pooling together of export
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prices, domestic prices and processing prices. Processing prices are the lowest of the three prices and has an adverse impact on averaging the apple prices. A 10 percent increase in average price could induce a 0.7 percent increase in apple farmland values in the long run. Money supply coefficient is positive as it was expected; a 10 percent increase in money supply could result in a 0.08 percent increase in apple farmland prices in the long run. The speed of adjustment coefficient for apple farmland values is -0.08; this indicates that apple farmland values do not quickly adjust to long run equilibrium path after deviating from the path. Money supply and exchange rate speed of adjustment coefficients are -0.68 and -0.27 respectively. These variables moderately adjust to long run equilibrium after deviation from the equilibrium path. Interest rate is the most explosive variable with a speed of adjustment coefficient of 2.17 percent.
7.7.3 Forecasting Error Variance Decomposition (Maize and Apple)