Are milk quota prices a rational investment? Modeling quotas as financial assets

Our objective in this paper is to examine the growth of the price of farm milk quotas in Canada, to shed light on their patterns of growth within the last 15 years. Our quota price model is based on the Gordon growth model, supplemented by some important characteristics of the milk quota market. Our explanatory variables include the quota rental price, interest rate, and expectations of both price and quantity growth, all for the province of Alberta over the 2009–2023 time period. Our economic model of quota prices performs well by giving results with the predicted signs for all variables in our model and high levels of statistical significance except for expectations of quantity allocations when entered separately. The model has two variants, one with the expectation of growth in quota rents and the other with the expectation of growth in the quota asset price. Econometric issues related to time series problems are dealt with. The model allows calculation of policy risk, which shows an interesting pattern over this time period.