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Hedonic prices of Milk

IBMS University of Agriculture Faisalabad

MS.(Agribusiness)

Submitted By: Khadija Yasin, Nosheen Naz, Maria Ishaq Submitted To: Dr.Abdul Ghafoor

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Hedonic prices of Milk

Hedonic prices of Milk

(A case study in Faisalabad District)

Abstract: This paper revolves around different important factors affecting prices of raw
milk in Faisalabad District using primary source of data. A representative sample of 30 milk consumers was selected using cluster sampling technique. The impact of major factors on prices of whole milk is estimated using linear regression analysis. Taste, colour, thickness, freshness, free from contamination, aroma taken as implicit attributes of milk, and relative to these theirs contribution in prices is estimated.R2 of the model is 0.927 with adjusted R2 0.865.F value is 14.872.On the basis of results it might be concluded that potential attributes of milk in consumer perception for which he/she is willing to pay. This can motivate the profit motive milk producers.
Key Words: Raw milk, cluster Sampling, linear Regression Analysis, adjusted R2

1: INTRODUCTION
Economy of Pakistan is basically an agriculture based economy. Agriculture is the back bone of Pakistan as it constitutes largest sector in our economy. Although this is the age of industrialization, agriculture still covers 22% of GDP (Pakistan economic survey 2010-2011). Livestock having 55.1% Stake in agriculture as a priority sector and 11.5% to GDP during 2010-2011.Historically Livestock sector dominated by small holders to meet their needs of milk, food, and cash income on daily basis. In rural areas, Livestock is considered as a more secure source of income for the small farmers and land less poor. It has become source of employment generation in rural areas. The sector is more dependent on uncertain vagaries of Mother Nature. The poverty incidence in Pakistan is determinant by income variability and thus livestock is best hope for poverty elevation as it can uplift the socioeconomic condition of our rural masses. The major product of livestock is milk and meat, the production of milk is given below. Table 1.1: Production of milk produce Milk(gross production) *Milk(human consumption)1 units 000,tons 000,tonns 20102011 46,440 37,475

Source: Ministry of livestock and dairy development 2011

The major milk breeds of Pakistan include Buffalos and cattles. Two well-known Buffalo breeds are Nili ravi and khundi. Nili ravi milk yield is on an average 1800-2500/liter in one lactation perod with 6.5% butter fat. The home land of these include Lahore,Shikhpura,

Hedonic prices of Milk

Faisalabad, Okara, Sahiwal, Multan and parts of Bahawalpur & bahawalnager. Kundhi buffalos yield 1700-2000/ liter /lactation period with 6% butter fat. These are found in Sindh, particularly on both sides of Indus River from Kashmire in the south on the coast of Arabian Sea. Cattle breeds for milk are Red Sindhi and Sahiwal cattle. Red Sindhi yields 1500-2000/liter. Found in Sindh and Balochistan. Sahiwal cattle live in district Sahiwal, Okara, Multan & Faisalabad in Punjab yields 1500-2000/liter with 4.5% fats. According to FAO the per capita milk consumption in world in 2010 is 104.3. the ideal and healthy level of milk & milk consumption would be 260-270 kg/ capital/ year. Approach By developing countries, major contribution is from Asia, 38.4% share in world consumption. In this era of Industrialization the buyer is more conscious about the quality products with increasing demand level. So the emphasis in this case study is on the implicit characteristics of milk, Contribution of each implicit character towards price.

perceived to be 28% more valuable than the fat component per point. Decomposing the $9.45 per hundredweight price of raw milk given average milk component levels existing during the time the survey data was collected, $3.76 was attributable to the protein component, $3.29 represented fat value, and $2.40 was assigned as calcium value. In American journal of agricultural economics Baccola, S & Linzuka,Y, in their study, A variant of a hedonic cost model is proposed in which the output aggregator is expressed as a function of total output and of the percentage concentrations of its components. Dairy farmers have responded rationally to artificially low protein prices. Due to the cow's appetite limit, farmers operate in stage I of feedto-milk production functions; yet protein's marginal cost rises sharply with protein output. Only modest substitutability is evident among feed inputs or milk component outputs. Gillmeister, W.J. used a hedonic price function, which relates the price of a commodity to the characteristics of the commodity, was econometrically estimated to derive milk component values from farm-level data. The data set contained observations on farm-level milk prices and component production from different markets in the United States. A technique called seemingly unrelated regression (SUR) was used to estimate the hedonic price function. In this application of SUR, the number of

2: RESEARCH REVIEW
In journal of dairy sciences the research paper by Lenz, J.E, was based on the new approach based on hedonic assessment of product characteristics for demand analysis. Dairy products analyzed included beverage milk products and three types of cheeses. The estimated nonlinear regression function explaining dairy product retail prices indicated that the protein, fat, and calcium components of raw milk were perceived by consumers as having significant value in the marketplace. Regarding relative value, on average, the protein component was

Hedonic prices of Milk

observations across equations is different. The results show that in the markets analyzed, the average values of butterfat, solids-not-fat, and water were $1.27/lb., $0.22/lb, and $0.09/lb. These results suggest that milk producers are overproducing water and butterfat and under-producing solids-not-fat.

X6: Adulteration (powder, water, straws) The relationship between dependent variable (Prices) and independent variables (milk colour, milk taste, milk freshness, milk thickness, milk aroma and free from contamination) was estimated by employing linear regression analysis.As a first step, we check the collinarity problem which arises when the grip of one independent variable on the other one become strong. This can be detected by VIF (Variance inflation factor) defined as a measure of the amount of multicollinearity in a set of multiple regression variables. The variance inflation factor allows a quick measure of how much a variable is contributing to the standard error in the regression. When significant multicollinearity issues exist, the variance inflation factor will be very large for the variables involved. The value of VIF below 10 consider safe as a rule of thumb (Kutner, Nachtsheim, Neter, Applied Linear Regression Models, 4th edition, McGraw-Hill Irwin, 2004).The colliniarity test of our proposed model is:
Table 3.1: Collinearity test
Variable Taste Color Thickness Freshness Adulteration Aroma VIF 3.768 1.313 8.858 4.744 3.734 5.982
*Tolerance

3: METHODOLOGY AND FINDINGS

This study primarily based on primary data collected from 14 milk consumers in Faisalabad district. Simple random sampling technique was used in this case study. Five scale Likert scale is used. The objective of this study is to determine the contribution of each implicit character in the price of whole milk. Hedonic price regression model technique was used to estimate that contribution. We have adopted the model suggested by Hudson et al. (1995) and Bowman(1989).We assume that the price of whole milk is the function of its taste, freshness, color, thickness, free of physical contamination like powder, water or sometimes straws. The theoretical model is taken as: P=f (implicit attributes) P=+1X1+2X2+3X3+4X4+5X5+6X6 : Constant : Coefficient X1: Taste of whole milk X2: Color of whole milk X3: Freshness of whole milk X4: Aroma of whole milk X5: Thickness of whole milk

0.265 .762 .113 .211 .268 .167

The model is then estimated by using Regression analysis in SPSS. The coefficient of determination, R2, is the proportion of

Hedonic prices of Milk

variability in a data set that is accounted for by a statistical model. The overall fitness of the model indicated by value of R2 which ranges from (+1)(-1). The value of adjusted R2 was 0.865 suggest that all independent variables explained 86% variation in the dependent variable, taking all other factors constant. F-ratio directs that all independent variables are significant for causing variation in the dependent variable. The F-value was 14.87 which was highly significant and explained overall appropriateness of model. The is considered as the threshold value and if p value is >, means the model is acceptable (Arsham H., Kuiper 1988). We are working with a confidence level of 95% our alpha is 0.05. The results are:
Table 3.2: Model Summary R2 Adjusted R2 F Value 0.927 .865 14.872

In this analysis all variables are considered as important variable as they use to determine the quality of milk. Milk taste coefficients values with +ve sign indicate that with if taste of milk improves 1 time, can enhance the prices by 2.900 times keeping all other factors constant. The p value of milk taste implies it as insignificant. Milk color gives positive value with insignificant p value. If 1 time increment in color, the prices might be boost up by 2.683 times keeping all other factors constant. Milk thickness with positive sign also considered as important variable. If it improves 1 time the prices may increase by .834 times keeping all other factors constant. Freshness also may consider as important variable showed positive sign and significant. Freshness taken as most important factor in milk by consumer, every one unit increase in milk freshness might enhance prices by 3.37 times.

The model estimates are:

Table 3.3: Coefficients Coefficient Constant Taste Color Thickness Freshness Adulteration Aroma 20.692 2.900 2.683 .834 5.610 1.400 -2.440 t Value 2.434 1.958 2.177 .715 3.376 .976 -1.643 P value .000 .099** .066** .491* .012* .362* .144**

Adulteration free coefficient value is .976 with positive sign indicates that.976 increase may observed by lowering the level of adulteration. Last one is aroma and insignificant results reveal that people dont like any type of aroma in milk as well as not willing to pay for it. Negative sign indicate the inverse relation between any aroma if aroma in milk arises 1 time the price fall by 2.44 time.

*Level of significance is 95%,.

Hedonic prices of Milk

4: CONCLUSION
This study estimated impact of important quality attributes (Milk taste, Milk color, Thickness, Freshness, Adulteration and Aroma) on prices of Raw milk in Faisalabad Punjab, Pakistan. The findings of this study confirmed that prices of milk were highly depended on taste, color, thickness, and freshness etc. So in order to improve milk quality desired by consumer may enhance the revenues to milk producers.

5: REFERENCES
1:http://www.arec.umd.edu/libcomp/Areclib/Publi cations/Working-Papers-PDF-files/98-07.pdf 2:http://www.aae.wisc.edu/fsrg/publications/wp2 001-1.pdf 3:Buccola, S Iizuka, Y. May 1997. v. 79 (2)American journal of agricultural economics 4: Lenz, J.E June 1991. v. 74 (6) Journal of dairy science 5: Gillmeister, W.J. May 1996. v. 18 (2) Review of agricultural economics. 6: Economic survey of Pakistan 2010-2011 7: Kutner, Nachtsheim, Neter, Applied Linear Regression Models, 4th edition, McGraw-Hill Irwin, 2004