NCCC-134
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Observations on Cash Settlement
Paul E. Peterson
Year: 1995
 
No Abstract Available

 
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Chicago Board of Trade Crop Yield Insurance Contracts
David D. Lehman
Year: 1995
 
No Abstract Available

 
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Discussion of Paul Peterson's and David Lehman's Comments
Sarahelen Thompson
Year: 1995
 
No Abstract Available

 
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Technical Analysis and Market Efficiency in the Live Hog Futures Market
John W. Hales and Marvin L. Hayenga
Year: 1995
 

Abstract

Three technical analysis tools-relative strength index (RSI), dual moving average and directional movement indicator-are applied to 1987-92 live hog futures market behavior to determine whether profitable trading rules could be devised which would continue to be proftable out-ofsample. A wide range of critical signaling points for each method is evaluated in conjunction with nine stop loss levels. The relative strength index is the only technique found to perform proftably and consistently. Out-of-sample performance of the best 1987-88 RSI trading rules is proftable, and the general performance of RSI trading rules is positively correlated over two year blocks during 1987-92. Dual moving average and directional movement indicator trading rules did not perform well in live hog futures.

 
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The Quality of Speculation in the Soybean Complex
Roger A. Dahlgran
Year: 1995
 

Abstract

This paper examines the quality of speculation in the soybean, soyoil and soymeal futures markets. High quality speculation is defned as speculative activity that quickly brings markets to equilibrium when economic events dictate that a new equilibrium is required. A model of spot and futures market interaction is developed and estimated using cross sections of time-series data from 1992, 1993 and 1994. The dynamics of market equilibration are simulated by using the estimated parameters and also by using alternative assumptions about speculative and hedging behavior. It is found that hedgers contribute little to market equilibration. Speculative activity consisting of arbitrage between the spot and futures markets based on carrying costs was found to be low in quality and potentially destabilizing. True speculative activity consisting of arbitraging the futures markets against expected futures prices was found to be the highest quality of speculation.

 
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Commodity Storage and Interseasonal Price Dynamics
Xiongwen Rui and Mario J. Miranda
Year: 1995
 

Abstract

This paper continues Deaton and Laroque's search for a variant of the nonlinear rational expectations commodity storage model that can explain the observed behavior of primary commodity prices. Using numerical functional equation methods and Monte Carlo simulation techniques, we demonstrate that the failure of Deaton and Laroque's model to explain high autocorrelation in primary commodity prices is attributable to the assumption of a constant returns to storage technology. Our findings suggest that a classical cost of storage function with "convenience yield" can give a satisfactory explanation for the high autocorrelation.

 
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The Effects of Government Storage Programs on Supply and Demand for Wheat Stocks
Brian D. Adam, Daniel S. Tilley, and Everett Olbert
Year: 1995
 

Abstract

Research has suggested that profitability of wheat storage hedges has declined in the 1980s, and that part of this decline is attributable to the increased proportion of stocks under government control during the mid-1980s. This study measures the effect of market and government factors on supply/demand for storage of hard red winter wheat using simultaneous equations procedures. Results indicate that government storage is negatively related to price of storage, shifting both supply and demand functions.

 
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Optimal Financial Leverage and the Determinants of Firm's Hedging Policies under Price, Basis and Production Risk
Joaquin Arias and B. Wade Brorsen
Year: 1995
 

Abstract

A new theoretical model of hedging is derived. Risk neutrality is assumed. The incentive to hedge is provided by progressive tax rates and bankruptcy laws. Optimal hedge ratios and the relationship with leverage, yield risk, basis risk, and fnancial risk is determined using alternative assumptions. An empirical example is provided to show changes in assumptions affect optimal hedge ratios for a wheat and stocker steer producer. Results show that hedging increases with increasing leverage and and increases at an even higher rate when the probability of bankruptcy is positive. The trade off between the cost and the tax-reducing benefts of hedging affects signifcantly the decision to hedge. The farmer wants to hedge to reduce tax payments, expected bankruptcy losses, interest rates and decrease the probability of bankruptcy. Even when the cost of hedging is a small portion of total cost, farmers may have no incentives to hedge when this cost is higher than the reduction in tax payments and the frm is in good fnancial position (i.e. low leverage ratios). For high levered frms, hedging reduces expected bankruptcy losses, and this effect may be considerably greater than the cost of hedging, making hedging very attractive. It is also shown that as basis risk increases, the optimal decision may well be not hedge at all.

 
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The Dynamics of Flex
Chad Hart, Darnell Smith, and John R. Kruse
Year: 1995
 

Abstract

As debate begins on the 1995 Farm Bill. One of the leading proposals for future farm policy is the expansion of the flex provision. This move would further limit the number of acres eligible for deficiency payments and increase the farmer's ability to respond to market and weather conditions. But how has the current flex provision affected agriculture? This paper examines how flex has been applied in different regions of the country and for different crops. The major producing regions of program crops often retain most of the flex acreage in the base crop while other regions use the flex acreage to shift to other crops or to idle the land. An economeric specification is put forth to investigate the impacts of market, weather, and farm program factors on flex usage. Responses to these factors vary across regions and across crops. Thus, flex has had vastly different regional impacts. Implications for the proposed expansion of flex are then discussed.

 
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The Confidence Intervals of Preharvest State Corn Yield Forecasts
Daniel O'Brien and S. Elwynn Taylor
Year: 1995
 

Abstract

This paper examines the accuracy of preharvest corn yield forecasts from crop-weather models for major U.S Corn Belt states. Cross section time series models using dummy variables to represent state crop reporting districts are estimated via ordinary least squares for Iowa, Illinois and Indiana. The models use normalized rainfall and temperature data and measures of crop maturity for the1972-1991 period. Four successive corn crop- weather models are estimated for each state using information available on July 1, August 1, September 1 and October 1, respectively. Crop reporting district level yield forecasts and forecast errors are derived via unconditional forecast error calculatlions. These forecasts and forecast errors are then aggregated together on a monthly basis throughout the growing season to form state yield forecasts and confidence intervals. During the 1992-1994 period, forcast accuracy was poor when weather conditions were abnormal compared to the average conditions during the period of model estimation. This is illustrated by inaccurate forecasts for 1992 and 1993 for Iowa caused by abnormally wet and cool conditions. Future crop yield forecasting efforts should focus on the use of resource capture models, which hold promise of producing more accurate forecasts than crop-weather models.

 
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Crop Yield Futures and Revenue Distributions
Viswanath Tirupattur, Robert J. Hauser, and Nabil M. Chaberli
Year: 1995
 

Abstract

The use of impending crop yield futures contracts to hedge expected net revenue is examined. The expectation being modeled here reflects that of an Illinois corn and soybean producer in March of the revenue realized after harvest. The effects of using price and yield contracts are measured by comparing the resulting expected distribution to the expected distribution found under five general alternatives: (1) a revenue hedge using just price futures, (2) a revenue hedge using just yield futures, (3) a no-hedge scenario where revenue is determined by realized price and yield, (4) a no-hedge scenario where revenue is determined by the market and by participating in the current deficiency payment program, and (5) a no-hedge scenario where revenue is determined by the market and by participating in a proposed revenue-assurance program. Three major conclusions are drawn. First, hedging effectiveness using the new crop yield contract depends critically on yield basis risk which presumably can be reduced considerably by covering large geographical areas. Second, crop yield futures can be used in conjunction with price futures to derive risk management benefits significantly higher than using either of the two alone. Third, hedging with price and crop yield futures can potentially offer benefits that are large relative to the revenue assurance program analyzed. However, the robustness of the findings depends largely on whether yield basis risk varies significantly across regions.

 
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A Flexible Dynamic Inverse Demand System: An Application to U.S. Meat Demand
Matthew T. Hold and Barry K. Goodwin
Year: 1995
 
No Abstract Available

 
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The Effects of Japanese Exports on Wholesale Beef and Live Cattle Prices
Marvin D. Hoffland, Marvin L. Hayenga, and Dermot J. Hayes
Year: 1995
 

Abstract

Has the rapid growth in the exports of wholesale beef affected U.S. beef and cattle prices? The short-term impact of U. S. beef exports to Japan, the dominant export destination, is estimated via econometric analysis of the relationship between monthly wholesale beef prices and export volumes of wholesale cuts to Japan. Rib and loin prices were signifcantly affected by Japanese exports, and the multiplier effects on U.S. cattle prices were higher than anticipated.

 
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The Apparent Failure of Retail Beef Prices to Respond to Supply Shocks: An Empirical Investigation
Rodney Jones and Wayne D. Purcell
Year: 1995
 

Abstract

Several times in recent years concerns have been expressed regarding slow and/or inadequate price adjustments in the retail beef market. In particular, industry participants have speculated that retail prices may not respond promptly or completely to supply shocks at the producer level. This study provides a detailed investigation of the wholesale - retail price spread in the beef market using weekly data over a 14 year period. The objective is to determine whether there is a deviation of this margin from the costs of providing retailing services, and if an excess margin is found to determine whether the magnitude of the deviation is related to beef, or total meat, supplies. The results of this investigation indicate that margins have become more variable in recent years. However, it is not clear that margins have deviated from the costs of providing A comparison of an early period with a more recent period indicates that the beef retailing sector may have become even more competitive in recent years. No evidence is found to suggest that excessive wholesale - retail margins are associated with increased beef or total meat supplies. Future research will look at the other potential source of inadequate price adjustment in the beef marketing chain, the farm-wholesale margin.

 
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Quality Uncertainty and Grain Merchandising Risk: Vomitoxin in Spring Wheat
D. Demcey Johnson, William W. Wilson, and Matthew Diersen
Year: 1995
 
No Abstract Available

 
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A Comparison of Carcass Value Pricing Systems of Southeast Hog Plants
David Kenyon, John McKissick, and Kelly Zering
Year: 1995
 

Abstract

Carcass value pricing systems of six Southeast U.S. plants were analyzed. All plants measured hot carcass traits with Fat-O-Meater. Base live prices were derived by formula from various combinations of Midwest prices. One plant starts with a base carcass price. Standard yield varies substantially across plants. Base carcass price is base live price divided by standard yield except for the plant starting with carcass price. All plants but one applies minimums and discounts to base carcass price. One plant makes adjustments to live price. The desired carcass weight is 172 to 194 pounds. Discounts are larger for lighter weights than for equivalent increases in heavier weights. Backfat premiums are given by all plants starting at 25 mm or less. Loin depth premiums and discounts are relatively small compared to weight sortbkfjIJ195, from $50.68 to $52.93 cwt. After adjusting for premiums and discounts, the adjusted carcass price 49.97 to $52.73 cwt. for a typical carcass. The price spreads among plants were greater for light compared to heavy carcasses. The price differences between some plants is costs. The price difference between a typical and ideal carcass is approximately $14. The carcass value pricing system is sending producers a strong signal to , uniform, leaner, and wel-muscled hogs. Given the wide diversity of methods used in determining live price, carcass price, yield, and premiums and discounts associated with backfat, and loin depth, it is diffcult for producers to compare prices received from the six systems.

 
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Daily Hedonic Price Analysis in Cotton: An Alternative Approach for Providing Market Information
Darren Hudson and Don Etheridge, Jeff Brown
Year: 1995
 

Abstract

Information on prices of commodities that are. differentiated by quality is important for understanding how the markets where these goods are traded operate. Hedonic price analysis provides a means to address this issue. Through econometric estimation, the overall price of a good can he disaggregated into its components. That is, the value or "price" of a quality attribute can he estimated through econometric analysis. This allows one to disaggregate the observed (aggregated) price of the product into its component parts based on the different levels of quality of the commodity. The hedonic approach has been well-established for some time, but it has not previously been applied to the daily analysis and reporting of prices.

 
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Garch Option Pricing with Implied Volatility
N'Zue F. Fofana and B. Wade Brorsen
Year: 1995
 

Abstract

Generalized autoregressive conditional heteroskedasticity (GARCH) provides a better ft to futures price data than the common assumption of identical independent normal distribution. GARCH option pricing models (OPM) with historical volatility have proven superior to the log-normality assumption of the Black option pricing model with historical volatility. Implied volatilities derived from GARCH OPM might therefore be expected to provide better guidance in investment decisions than those derived from the Black option pricing model. This paper estimates implied volatilities from GARCH OPM. The estimated implied volatilities are used to forecast option premia. Results are compared against forecasts of option premia using implied volatilities from Black's option pricing model. The GARCH implied volatilities are more stable than the Black implied volatilities. The GARCH option pricing model with implied volatility outperformed the Black option pricing model with implied volatility in terms of forecasting actual option premia.

 
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The Effect of Planting on the Volatility of Grain Futures Prices
David A. Hennessy and Thomas I. Wahl
Year: 1995
 

Abstract

Existing literature on commodity futures price volatility emphasizes time to expiration and the resolution of uncertainty. This paper stresses the supply and demand infexibilities arising from decision making. A decision made on the supply (demand) side makes future supply (demand) responses less elastic. Therefore, a shock arising after a decision is made is more effective in changing the futures price than a shock before the decision is made. The results support the maturity hypothesis but do not conflct with the state variable hypothesis of futures price volatility.

 
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Pre-harvest Hedging Behavior and Market Timing Performance of Private Market Advisory Services
Joae Martines-Filho and Scott H. Irwin
Year: 1995
 

Abstract

Market advisory services are one the major providers of marketing information to agricultural producers. However, limited objective evidence exists regarding the hedging behavior and value of marketing information provided by these firms. .In this study, the pre-harvest hedging behavior and market timing ability of six market advisory services are examined. Daily data on recommended corn and soybean futures and options bedging positions are available for the 1991-1994 pre-harvest seasons. The analysis of hedging behavior resulted in a number of interesting findings. For example, the services use a wide array of bedging positions, mostly short, sometimes long, and both futures and options are employed. Also, there is substantial time series variation in the hedge recommendations.

 
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Robust Risk Management Strategies for U.S. Hard Red Winter Wheat Producers
Brian D. Adam and Kim Anderson
Year: 1995
 

Abstract

Harvest-time marketing strategies are analyzed for hard red winter wheat producers. A total of 6,561 strategies are considered, including purchases and sales of put and call options and futures contracts, as well as cash market and storage activitest. The focus of the analysis is to identify strategies that are "robust" to uncertain price expeectations and imprecise specification of a producer's toerance for risk. It is assumed that a wheat producer uses the harvest-time futures price as a predcitor of November 30 furures price, but that there is no market-based predictor of basis. The analysis attempts to find strategies that are relatively insensitive to the amount basis changes from harvest to Novemver 30.

 
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The Performances of Probability-Based Grain Marketing Strategies
Daniel O'Brien and Robert Wisner
Year: 1995
 

Abstract

The performances of probability-based corn marketing strategies are compared for alternative corn price forecast probability information sources for the 1992-1994 time period. Price forecast probability information from Extension grain price forecasts, grain options premiums, and price forecasting models are used. The probability-based decision rules are designed to "trigger" preharvest sales when certain probability and price level goals are met. The grain marketing strategies are based on the probability of prices increasing or decreasing, of proftability goals being attained, or of other combinations of crop condition and proftability criteria being met. During the 1992-1994 period, an average futures price $2.58-$2.60 per bushel was received by the highest performing strategies, compared to an average harvest time futures price of $2.24. The performance of these strategies during this period was dependent on whether or not preharvest sales were triggered during the key yield determination period of mid-June through July.

 
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The Development of Index Futures Contracts for Fresh Fruits and Vegetables
Mark R. Manfredo, James D. Libbin, and Lowell B. Catlett
Year: 1995
 

Abstract

The fruit and vegetable industry does not have a risk management instrument or a wellstructured price discovery system, such as commodity futures contracts, to aid in the marketing and management of its price risk. Since the 1980s, financial futures contracts based on indexes of stocks, commodities, and currencies have been used to hedge these groups of assets. The purpose of this study was to apply the concept of index futures contracts to the produce industry by developing an index or indexes based on prices of fruits and vegetables and to test their hedging capabilities. Twenty representative fruits and vegetables were chosen to compile indexes for fruits, for vegetables, and for fruits and vegetables together using a trade-weighted arithmetic average of 1989-92 wholesale prices of selected commodities traded on the Dallas Wholesale Fruit and Vegetable Market. The indexes were then tested by simulating a short and long hedge of a portfolio of commodities and by cross-hedging selected individual New Mexico and California produce commodities with the indexes.

 
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The Hedging Effectiveness of Rough Rice Futures
Kye Ryong Lee, Marvin L. Hayenga, and Sergio H. Lence
Year: 1995
 

Abstract

The potential effectiveness of the thinly traded rough rice futures market in price risk minimizing hedging is evaluated for milled rice in four states, and for rough rice in Arkansas. Both unconditional and conditional hedge ratios are estimated via regression analysis. While the potential for hedging milled rice is good in Texas, Louisiana and Arkansas, it is not in California. Rough rice can be effectively hedged in Arkansas.

 
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Meatpacker Conduct in Fed Cattle Pricing: Multiple-Market Oligopsony Power
Stephen R. Koontz and Philip Garcia
Year: 1995
 

Abstract

The exercise of market power in multiple geographic fed cattle markets is measured with an econometric model which links behavior of the margin between boxed beef and regional fed cattle prices to an economic model of oligopsony conduct in multiple markets. A game theoretic economic model suggests that for market power to be exercised in a single market a discontinuous pricing strategy must be followed. Total market power is enhanced if meatpackers coordinate pricing across geographic markets. Tests reject independence of pricing conduct across geographic markets which suggests multiple-market market power is nt. However, the magnitude of the market power is small and has decreased between the early and late 1980s.

 
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An Econometric Model for Forecasting the Manufacturing Grade Price of Milk in U.S. Markets
Ken Bailey and Steve Gallivan
Year: 1995
 

Abstract

The object of this paper is to develop a forecasting tool that will accurately predict the M-W price series. The model reflects the Secretary's final decision for the new M-W estimate which consists of the base month M-W lagged one month plus an update price formula. The statistical model in this report estimates the base month M-W as a function of dairy commodity prices. The latter are used as a proxy for the gross wholesale value of milk used in cheese and butter/nonfat dry milk plants in Minnesota and Wisconsin. The statistical results indicate the model is accurate.

 
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An Analysis of the Frequency of Marketing by Kansas Crop Producers
Barry K. Goodwin and Terry L. Kastens
Year: 1995
 

Abstract

This study evaluates the frequency of marketing for a sample of 572 Kansas crop producers. The frequency of marketing is an important dimension of marketing practices that has received little empirical attention. At its most fundamental level, the frequency of marketing is intimately related to on-farm and off-farm commodity storage. Estimators appropriate for integer count data are utilized to evaluate the relationship among farm and operator characteristics with observed frequencies of marketing. Large, non-irrigated crop partnerships which have little rented acreage appear to market the most frequently. Young operators that spend a considerable amount of time in self-education efforts also appear to market more frequently.

 
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Ex Ante Basis Risk in the Live Hog Futures Contract: Has Hedgers' Risk Increased?
Phil Garcia and Dwight R. Sanders
Year: 1995
 

Abstract

Basis behavior has a direct affect on hedging and pricing decisions. Here, ex ante basis risk for selected live hog cash markets is analyzed from 1985 through 1994. Econometric, time series, and naive (three year average) models are used to forecast a nearby live hog basis. Measures of basis risk are based on mean squared forecast errors and market timing ability. The fndings suggest that regardless of the forecasting method basis risk has not increased nor has basis predictability declined relative to historical levels. The recent decline in demand for futures contracts is likely attributable to other structural changes in the industry.

 
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An Analysis of Trader Activity During Limit-Move Events in Live Cattle Futures
Rob Murphy and Wayne Purcell
Year: 1995
 

Abstract

Price limits in futures markets can inhibit discovery of the market-clearing equilibrium price. This study examines the price discovery contribution of six broad groups of traders during limit-move events in live cattle futures. A quantitative measure of the daily net price pressure exerted by each trader group was developed and used to identify trader activity on and around limit moves. Results indicate that, overall, limit moves are more likely to improve price discovery than to hurt it. Positive limit moves strongly enhance price discovery while negative limit moves tend be more harmful. A group composed of commodity pool and commission house traders were best at anticipating limit moves while large speculators were more likely to have a hand in causing them. No trader group consistently outperformed the others in exerting pressure benefcial to the price discovery process during limit-move events.

 
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