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6. Research Project “Econophysics Model Development for Prediction of Variation in Agricultural Product Price-Indexes Related to Thailand’s Economic”

 

Figure 6.1 Pineapple oversupply problem and farmers’ protest against price slump in cassava
From http://www.prdnorth.in.th/ct/news/viewnews.php?ID=140616095929
and http://www.manager.co.th/Home/ViewNews.aspx?NewsID=9570000100247&Html=1&TabID=2&

 

 

        Thai farmers have been well-knowing of experiencing price slump of agricultural products for a long time, which proposes great negative impact on their quality of life. However, solutions to this problem are still far from being clearly identified and sustainable. Support by the government, often short-term, usually in the form of price insurance, subsidy scheme, or state purchasing, provides only temporary way out to the problem. Main reasons for the price slump are the excess demand in the market (Fig.6.1), or individual farmers being scattered in different areas which are far from the main market, result in lacking of real overall market information. As a consequent of having deficient information of the true market value for agricultural products, the opportunity for farmers to sell agricultural products at the right price is truly low. Moreover, many agricultural products have deteriorated period. Therefore, the products have to be sold out immediately after harvesting, which are usually forced to undersell trending controlled by buyers or middlemen.
        At the present, what farmers plant depend on the current price of the agricultural products. Specifically, when the price is good, that product is often grown more numerous. However, the current price cannot be used as for future reference as agricultural cultivation takes time before harvest. Moreover, if the same kinds of products are massively out into the market at the same time, it would result in further lowering the price. This consequently causes the agricultural sector of Thailand to be in an extremely worrisome state. Farmers from the agricultural sector may face bankruptcy, and instead turn into industrial and service segments. This further contributes to regression of farming and agriculture though they are the main manufacturing sector of the country and a good buffer for economic crisis including with unemployment of the country.
        Useful market information should not only present the real current situation of the market but also should be able to predict market events / trends in the future. With this information, farmers can efficiently plan for their production and sell at reasonable reference prices, which is necessary to step into the era of modern agriculture under the model Thailand 4.0. Being lack or inaccessible of useful information on agricultural markets and activities can lead to social crisis. This then inspires the need for development of effective tools which can provide agricultural market information that is timely, accurate and useful, to upkeep and support agricultural activities that can enhance Thailand's economy. The “econophysics” is one of the appropriate tools, which combines economics, mathematics, physics disciplines. The econophysics can be used to analyze and predict phenomena for both micro- and macro-economics on the scale of both domestic and international capital-markets. Business organizations and sectors in many developed countries often use econophysics to analyze and predict economic situation in the future. In addition, unlike other sectors, most of agricultural products are unbranded and sold on the market that farmers cannot set their prices. Therefore, profitability of farmers is usually a result of natural support and the state policy. The government then needs to understand the behavior of agricultural prices in the short, medium, and long terms in order to issue appropriate policies to promote the market for the agricultural sector, both regionally and nationally. Consequently, both agricultural production and agricultural price forecast obtained from econophysics can there for benefit the government, industrial sectors, and the communities.
        The main feature in econophysics is that it considers all economic factors as particles interacting among each other. For example, factors affecting the agricultural price index can be considered as interacting particles in physics system. This then leads to events / situations of interest such as the occurrence of sudden economic crisis being identical to rapid phase transition among states in matters, or the money exchange between individuals can be compared with energy exchange among gas particles in the system which leads to energy distribution of gas particles or the wealth distribution of individuals (Fig.6.2).

 



Figure 6.2 Comparison between interaction among gas particles (variables in physics) and individuals (variables in economics)
which leads to the energy distribution of gas molecules (physics system) and the wealth distribution of individuals (economic system).
From http://www.eoht.info/page/Victor+Yakovenko

 

        In econophysics, one model commonly used to study the behavior of agricultural price index, and employed in this project, is the agent-based models [1]. This model reflects the interactions among members of the system (called agents), which can be derived from spin model in statistical mechanics. In the model, interactions can be treated as exchanging stock, merchandise, currency or ownership among trade partners. Particularly, on prominent agent-based model is the magnetic spin model. This is because the spin model can reflect the interaction among spins (representing the agents), which can be used to calculate the level of supply and demand of goods for determining the market price. Apparently, the direction of spins’ magnetic moment can be used to refer to the behavior of investors (the agents) in the market. For instance, one direction can be used to denote buying intention, whereas the opposite direction can be used to refer to selling intention. The magnitude of the magnetic moment may also indicate the demand strength in buying and selling, or doing nothing (holdings position) in the case of zero magnitude. As a result, the magnetic spin model can reflect variety of agents’ behavior when investigating buying and selling behavior in the market.
        In calculation, the demand and supply level of a product as well as its price can be extracted from the Hamiltonian H of a simple magnetic model, where each spin in the model carries uniaxial magnetic moment (with only two possible, but opposite, spin directions) in the form

[2]


         The notation <…> refers to that the integration between pairs of spins is in accordance with the range set. J ij >0 is a variable that reflects the interaction between spins or agents located on the sites i and j , while h is an external field (related to information useful for the agent to make his buying / selling decision). σ is value of the spin that refers to the desire to buy (if greater than zero), or the desire to sell (if it is less than zero). Definitely, at a constant temperature, physics finds that the Hamiltonian H has to be minimized at equilibrium. In the same way, speaking in economic language H, may represent "Inconsistency" (disagreement) existing in the society, which should be minimized for persisting reasons. Then, price of any assets or any products in the market can be calculated from

[3]

where Pr(t) is price at time t and n is the time index. S(t) is average intention to buy or sell which can be calculated from

where N is the number of agents in the system. This predicted price as function of time and other relevant factors such as speculative information, news that affects the production process (related to the field h ), or "heat" of trading (related to the temperatures T ), suggest how to predict economic trends and when the crisis is about to happen. This may be useful for proposing policy on controlling / boosting productivity, or planning to stabilize the prices of agricultural products. Further, it could be used as information for preventing economic crisis situation resulted from the collapse of the agricultural sector of the country.

 

 

References

[1] A. Chakraborti, I.M. Toke, M. Patriarca and F. Abergel, “Econophysics review: II. Agent-based models”, Quantitative Finance 11 (2011) 1013-1041.
[2] J. Voit, The Statistical Mechanics of Financial Markets, 3rd ed. Berlin: Springer, 2005.
[3] T. Kaizoji, S. Bornholdt, Y. Fujiwara, “Dynamics of Price and Trading Volume in a Spin Model of Stock Markets with Heterogeneous Agents”, Physica A 316 (2002) 441- 452.

 

Principal Investigator : Associate Professor Dr. Yongyut Laosiritaworn 1)

 

Collaborators : Assoc. Prof. Dr. Burin Gumjudpai 2), Asst. Prof. Dr. Autchara Punya Jaroenjittichai1)

 

Affiliated Institutes : 1) Department of Physics and Materials Science, Faculty of Science, Chiang Mai University, 2) Institute for Fundamental Study, Naresuan University

 

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