Behavioural determinants of the adoption of forward contracts by Western Australian wool producers

Abstract

Australian wool traders and researchers have little knowledge of the incomplete adoption of the price risk management strategies that are available to stabilise wool producers’ incomes. Auction is by far the most popular method of selling wool in Australia with an adoption rate of about 85%. However this system exposes users (wool producers and buyers alike) to highly volatile prices and non-specific knowledge of supply and demand. Furthermore, it places differentiated wool types in the same commodity market as mass produced, homogeneous wool types. In order to address these issues, a mixed-method research design was used to develop and test a behavioural model of wool producers’ intentions to adopt the use of forward contracts; a selling method alternative to auction. In the simplest terms, a forward contract is a binding agreement between a buyer and a seller that stipulates price, quality, quantity and delivery date of a product. The behavioural model developed for this research was based on the Theory of Reasoned Action, Theory of Planned Behaviour and Diffusion of Innovations as well as some farm-level constructs that were raised in focus groups with Western Australian wool producers. The focus groups were pivotal in adding a unique, farm-level decision-making dimension to the behavioural model by the inclusion of various factors external and internal to the farm business. Based on the behavioural model, 28 hypotheses were developed and tested. Data was collected via a telephone survey of 305 Western Australian wool producers and analysis was conducted using the Partial Least Squares (PLS) approach to Structural Equation Modelling (SEM).A key finding of this analysis, contrary to the initial indications of focus group discussions, is that the current selling and marketing structure of the Australian wool industry, including the dominance of the auction system, is an important but not a limiting factor associated with the adoption of forward contracts for the sale of raw wool. Similarly, some other factors internal to the farm business, such as past experiences with selling wool, level of dependence on wool to earn a living and commitment to producing wool, were also found not to limit the adoption of forward contracts. The main factor limiting the adoption of forward contracts was identified as the wool producers’ perceptions of risk and uncertainty. Farmers’ perceptions of risk and uncertainty and their perceptions and attitudes in general are known to be important influences on farmers’ adoption decisions. While the majority of the hypotheses tested within the model were explained by the data, further data were collected to solve the issues associated with why farmers perceive forward contracting as being subject to risk and uncertainty. Additional research was conducted in the form of four case studies with Western Australian wool producers who had varying commitments to using forward contacts. Results showed that profit-raising, the whole farm system as a basis for decision making, the mass media and social pressures are important behavioural factors that are limiting the adoption of forward contracts by Western Australian wool producers. Overall, the results of the study indicate that the current structure of the Australian wool industry and various factors internal to the farm business account for farmers’ attitudes towards the use of forward contracts to sell their wool.More importantly, from an agribusiness point of view, it is the perceived risk associated with price that principally accounts for the incomplete adoption of forward contracts in the wool industry. The conclusions of this study resulted in the development of new research questions that focus on the study’s theoretical framework, the impact of supply chain dynamics on the adoption of forward contracts and the empirical testing of additional behavioural determinants such as trust, habit and social cohesion. Based on the results of this study, several contributions have been made to the literature and agribusiness. The study showed that variables from the Diffusion of Innovations model played a significant part in this research. However, the more substantial finding was that the Theory of Reasoned Action is likely to be a superior theoretical framework for modelling wool producers’ adoption behaviours related to forward contracts than the Theory of Planned Behaviour. This claim is based on the finding that perceived behavioural controls are not a significant factor in the intention of wool producers to adopt the use of forward contracts. In terms of the contributions to agribusiness, information and extension initiatives that explain and demonstrate the benefits of forward contracts may be necessary if farmers’ perceptions of the riskiness and uncertainty surrounding these contracts are to be altered.