NCCC-134
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Market Efficiency and Marketing to Enhance Income of Crop Producers
Carl R. Zulauf and Scott H. Irwin
Year: 1997
 

Abstract

Recent changes in farm policy have renewed interest in using marketing strategies based on futures and options markets to enhance the income of crop producers. This article reviews the literature surrounding the dominant academic theory of the behavior of futures and options markets, the efficient market hypothesis. The following conclusion is reached: While individuals can beat the market, few can consistently do so. Those few who consistently earn trading returns have superior access to information or superior analytical ability. This conclusion is consistent with Grossman and Stiglitz's model of market performance when information is costly. One implication is that if any "expert" offers advice on taking a futures or options position, first ask for a statement of their past trading record. To follow on, we recommend that reporting of actual performance be required by the Commodity Futures Trading Commission. A second implication is the importance of cost of production relative to marketing in determining the long term survival of crop producers. With very few exceptions, the crop producers who survive will be those with the lowest cost of production since efforts to improve revenue through better marketing will have limited success. Thus, a good marketing program starts with a good program for managing and controlling cost of production. However, all is not lost for the individual crop producer when it comes to enhancing income from prudent marketing. Simple strategies exist which can enhance average return. These strategies use the market as a source of information, rather than as a trading medium. An example is to base storage decisions on whether the current basis exceeds the cost of storage, and to time storage decisions based on when a producer harvests the crop relative to the national harvest of the crop. Stated somewhat differently, an effective marketing program begins with first learning and practicing effective cash marketing.

 
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Can Pre-harvest Marketing Strategies Increase Net Returns for Corn and Soybean Growers?
Robert N. Wisner, E. Neal Blue, and E. Dean Baldwin
Year: 1997
 

Abstract

Grain producers price grain prior to harvest to reduce financial risk and to enhance net returns. Since accomplishing the second objective is debatable, alternative corn and soybean pre-harvest options/hedge marketing strategies were designed to test the hypothesis that pre-harvest pricing could generate statistically higher average net returns than harvest sales, without increasing income variability. Weekly seasonal futures price patterns from 1975 to 1994 were used to time marketings. The strategies were applied to Iowa and Ohio model farms. For the 1985-96 period, the hypothesis was accepted.

 
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A Theoretical Analysis of the "Grid Pricing" Structure of the Beef Carcass Market
Michelle Beshear and James Trapp
Year: 1997
 

Abstract

Carcass prices for varying yield and quality grades of fed cattle were estimated using five years of USDA reported prices for wholesale meat cuts. The estimated carcass prices were analyzed to determine seasonal patterns. Additionally, two samples of individual animal data were obtained to compare grid pricing to live weight pricing. The results show that beef carcass prices do exhibit a seasonal pattern. The seasonal patterns for both choice and select carcass prices follow the seasonal pattern of live fed steer prices. The level of pricing difference between animal values yielded on a live weight pricing system versus a grid pricing system is determined by three key factors identified in the study. Those factors are: quality of the animals in the pen in terms of both yield and quality grade, the time of year, and the contemporary cash market.

 
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Effects of Competition and Space on Country Elevator Grading Practices and Prices
Wes Elliott, Brian D. Adam, Phil Kenkel, and Kim Anderson
Year: 1997
 

Abstract

Kenkel and Anderson (1977) found that grade information recorded on scale tickets by Oklahoma elevators tended to overestimate test-weight and underestimate dockage and other undesirable grade factors for hard red winter wheat in the 1995 and 1996 harvest

 
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Basis Patterns for Feeder Cattle Teleauctions in Georgia
Steven C. Turner, Timothy A. Park, and John McKissick
Year: 1997
 

Abstract

The factors that influence feeder cattle basis were investigated using data from two Georgia teleauctions for the period from 1979 to 1994. A major goal was to use the models to forecast out-of-sample basis for individual lots of feeder cattle. These forecasts were compared to a forecast generated by using simple averages and a forecast using a market adjusted, 600-700 lb. steer average basis. Using root mean square error (RMSE) as the evaluation criterion, the results were inconclusive. For one of the teleauction organizations, the model forecast was superior, while for the other organization, the market adjusted forecast had the lowest RMSE.

 
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Estimating Expected Per Acre Indemnities of Yield and Revenue Insurance Products
Chad Hart, Samarendu Mohanty, and Darnell B. Smith
Year: 1997
 

Abstract

This study estimates average per acre indemnity payments for Iowa corn for traditional multiple-peril crop insurance and two revenue insurance products, Crop Revenue Coverage and Income Protection. Yield and price difference distributions are formed and employed in 1,000 simulation runs. From these simulations, corn yields for all 99 Iowa counties and futures prices are collected. These are used to calculate per acre indemnities under the three insurance products. Income Protection has the smallest per acre indemnities across the state, followed by multiple-peril and Crop Revenue Coverage. Per acre indemnities are the lowest in northwest Iowa and highest in southeast Iowa.

 
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Crop Insurance and Forward Pricing Linkages: Effects on Mean Income and Variance
Kevin C. Dhuyvetter and Terry L. Kastens
Year: 1997
 

Abstract

Revenue was simulated for dryland wheat farms in Kansas using historical yields, prices, and estimated within-year yield variance for different crop insurance policies and pre-harvest hedging strategies. Crop insurance alternatives considered were no insurance, catastrophic insurance (CAT), multi-peril crop insurance (MPCI), and a new revenue insurance product, crop revenue coverage (CRC). Simulated revenue values were used to examine relationships between price and yield risk management tools as they relate to expected income and income variability. Average revenue was similar across insurance alternatives, but MPCI and CRC resulted in the least income variability as measured by both standard deviation and minimum revenue. The effects of pre-harvest hedging on relative risk reduction were small when comparing CAT and no insurance to MPCI and CAT. However, in comparing CRC to MPCI the relationship between CRC purchasing and pre-harvest hedging is perverse. That is, the advantage CRC has over MPCI, in terms of risk reduction, decreases as pre-harvest hedging increases implying the more a farm pre-harvest hedges the less likely its risk management strategy will include CRC.

 
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Optimizing Farmers' Joint Use of Forward Pricing and Crop Insurance by Comparing Revenue Distributions Estimated with Numerical Integration
Richard Heifner and Keith Coble
Year: 1997
 

Abstract

Because the distributions of crop yields, prices, and revenues generally are skewed, and because the payoffs from crop insurance and put options follow censored distributions, there is no reason to expect that crop producers' incomes approach the normality needed to justify mean-variance analysis. Numerical integration is used in this paper to approximate crop revenue distributions in their entirety so that various measures of riskiness can be applied. Procedures for finding approximately optimal futures and options hedges with and without crop insurance are described. The results demonstrate that combinations of crop insurance and forward pricing are much more effective than either alone in reducing risks.

 
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Corn and Soybean Basis Behavior and Forecasting: Fundamental and Alternative Approaches
Bingrong Jiang and Marvin Hayenga
Year: 1997
 

Abstract

This basis study covers corn and soybean markets across the U.S. Corn and soybean bases have seasonal patterns, as does the relative importance of factors (storage costs, barge rates, production levels) determining the basis. Corn and soybean basis behavior in port locations is different than in major production areas. Though three-year-average basis forecasts are reasonably accurate in recent years, forecasts based on a three-year-average supplemented with additional fundamental variables or seasonal ARIMA model forecasts slightly improved basis forecasting accuracy in our sample tests.

 
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The 'New' Live Cattle Futures Contract: Basis Issues
Rob Murphy and Keith Boris
Year: 1997
 

Abstract

Practical issues for live cattle basis calculation are explored. Significant differences were found when cash volume weights and mean futures prices were used in basis calculations rather than equal weighting and settlement futures prices. Using settlement futures prices rather than mean futures prices is probably acceptable for studies considering basis over a long period. Changes to the live cattle contract in June 1995 have caused the basis to become more negative. Day-to-day variability in the basis has changed little under the new contract specifications, but month-to-month variability has been reduced significantly.

 
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Did Producer Hedging Opportunities in the Live Hog Contract Decline?
Fabio C. Zanini and Philip Garcia
Year: 1997
 

Abstract

The paper assesses the usefulness of selective hedging strategies when combined with forecast techniques in the live hog contract. The use of routine futures and options hedging is not attractive relative to a cash-only strategy. However, forecasting and hedging can contribute to price risk management improvement for risk-averse producers. Consistent with previous research, the results indicate that the live hog contract continues to offer producers attractive pricing opportunities. The findings suggest that the success of the new lean value carcass contract may depend on its ability to attract trading volume from outside the traditional production sector.

 
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Producers' Preferences for Market Outlook Information
James D. Sartwelle III, Daniel M. O'Brien, and Walter Barker
Year: 1997
 

Abstract

This study evaluates western Kansas grain and livestock producers' preferences for market outlook information and marketing education. Producers were surveyed as to the types and sources of market outlook information they preferred to incorporate into their individual market outlook and as to the frequencies with which they preferred to receive different types of information. Western Kansas farmers prefer to use several types of information from numerous sources to make farm marketing decisions. Results suggest private-sector and University Extension market analysts are relied upon by farmers to provide analysis of supply and demand fundamentals through mass media outlets and direct educational meetings.

 
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Research Topics Suggested by Extension Marketing Economists
B. Wade Brorsen and Kim Anderson
Year: 1997
 

Abstract

Extension marketing economists were surveyed and asked what they considered to be the most important unanswered research question in agricultural marketing. The most frequent response was marketing strategies that increase income, reduce risk, or both. The second most frequent response was vertical coordination/contracting in order to assure product quality. Past and current NCR-134 Conference papers have addressed these topics. Thus, the NCR-134 group appears to be addressing relevant topics. The question then is, if NCR-134 is addressing the right topics, then why is there a perceived gap between research and extension.

 
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Perceptions of Marketing Strategies: Producers vs. Extension Economists
Joseph Parcell, Ted Schroeder, Terry Kastens, and Kevin Dhuyvetter
Year: 1997
 

Abstract

Extension marketing economists commit substantial resources to outlook and market analysis. Producers demand this information and use it to make marketing decisions. This study analyzes responses to a marketing question survey of producers and Extension marketing economists to discern similarities and differences in their perceptions regarding market timing, futures market efficiency, and risk management. Producer and Extension perceptions are consistent with regard to several marketing issues, although they are not always consistent with published research results. Also, Extension marketing economists misperceive producers' goals of risk reduction in marketing strategies. Results suggest the need for increased collaboration between research and Extension economists.

 
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Cheddar Cheese and Fluid Milk Cointegration among Cash and Futures Prices: The Evidence for a Long-term Equilibrium Relationship
Cameron S. Thraen and Krassimir Petrov
Year: 1997
 

Abstract

In the early 1990's, after four decades of relying on government mandated minimum price supports and public stockholding to achieve price risk management, the United States dairy industry is undertaking a shift to a market clearing equilibrium system. A significant component of this new structure is the development of an operational futures market for selected milk and dairy products. In June of 1993 the Coffee, Sugar, & Cocoa Exchange introduced contracts on nonfat dry milk and cheddar cheese. In December of 1995 the CSCE introduced a contract on fluid milk and this was followed in January 1996 by a similar fluid milk contract trading on the Chicago Mercantile Exchange. This paper examines the extent to which a long-run equilibrium relationship has been established between the cheese and fluid milk futures markets and their cash market counterparts. The existence of a long-run equilibrium is a necessary condition for effective hedging opportunities. Using the time series concept of cointegrated series we concluded that the data support an equilibrium relationship in the cheese markets but provide no support for an equilibrium relationship in the fluid milk market.

 
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Noise Trader Sentiment and Futures Price Behavior: An Empirical Investigation
Dwight R. Sanders, Scott H. Irwin, and Raymond M. Leuthold
Year: 1997
 

Abstract

The noise trader sentiment model of DeLong, Shleifer, Summers, and Waldman (1990a) is applied to futures markets. The theoretical results predict that overly optimistic (pessimistic) noise traders result in market prices that are greater (less) than fundamental value. Thus, returns can be predicted using the level of noise trader sentiment. The null rational expectations hypothesis is tested against the noise trader alternative using a commercial market sentiment index as a proxy for noise trader sentiment. Fama-MacBeth cross-sectional regressions test if noise traders create a systematic bias in futures prices. The time-series predictability of futures returns using known sentiment levels is tested in a Cumby-Modest market timing framework and a more general causality specification. The empirical results suggest that noise traders do not create a systematic bias in futures prices, and market returns are not predictable using the level of noise trader sentiment.

 
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Optimal Marketing Decisions for Cattle under Price Risk
Xuecai Wang, Jeffrey H. Dorfman, John McKissick, and Steven C. Turner
Year: 1997
 

Abstract

Optimal marketing decisions for cattle in Georgia are of critical importance to the profitability and continued economic survival of producers because of the low profit margins common to cattle production in the Southeast. Many Georgia producers sell calves in November rather than retaining ownership, feeding until May, and selling as stocker cattle. This allows producers to avoid price risk, but may cause them to miss profit opportunities. We examine five different marketing strategies and assess their expected profitability and riskiness. These expectations are employed to compute the expected utility of profit and allow a producer to choose an optimal marketing strategy for a specific level of risk aversion. Empirical results for a representative Georgia cattle operation of 130 calves show that optimal decisions in the last three years have been either selling in November or feeding until May while using a futures hedge. For example, in 1996 the technique recommends feeding until May while selling two futures contracts as a hedge to reduce risk. Following this advice would have earned a producer an extra $1594 (or $12 per head). Given that Georgia producers commonly earn about $30 per head if they sell in November, these extra profits are economically significant.

 
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Pricing an OTC Basket Option to Manage Cattle Price Risk in Canada: Comparing the Cost of COPP and of a CME-Based "2 Legs" Strategy
Francesco Braga
Year: 1997
 

Abstract

A put option covering the risk of a decrease in the Canadian dollar value of a U.S. live cattle futures price is offered over the counter to Canadian cattlemen. The empirical results confirm that the pricing of the over the counter derivative is consistent with prevailing market conditions, and this, thanks to the low correlation between currency and live cattle price fluctuations, reduces the cost of this instrument to approximately 80% of the total cost of a portfolio consisting of one CME Canadian dollar call and one CME live cattle put.

 
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An Analysis of the Effect of Corn Prices on Feeder Cattle Prices
John D. Anderson and James N. Trapp
Year: 1997
 

Abstract

This study develops the concept of a corn price multiplier which quantifies the effect of a change in corn price on feeder cattle price. Estimation of the multiplier is accomplished using a partial adjustment model of feeder calf prices which directly incorporates elements of break-even budget analysis. Because it includes technical parameters related to cattle feeding, this model provides information on how changes in these factors affect the relationship between corn and feeder calf prices. This information will provide insight into the degree to which cattle producers can offset the effect of high grain prices by altering feeding programs.

 
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Futures-Based Price Forecasts for Agricultural Producers and Businesses
Terry Kastens, Rodney Jones, and Ted Schroeder
Year: 1997
 

Abstract

This study examines the accuracy of five competing naive and futures-based localized cash price forecasts. The third week's price for each month from 1987-1996 is forecasted from vantage points one to 11 months preceding the observed price. Commodities examined included those relevant to Kansas producers: the major grains, slaughter steers and slaughter hogs, several classes of feeder cattle, cull cows, and sows. Information about relative forecasting accuracy across forecast methods was collapsed into regression models of forecast error. The traditional forecast method of deferred futures plus historical basis had the greatest accuracy -- even for commodities that are substantially different from those specified in related futures contracts. Adding complexity to forecasts, such as including regression models to capture nonlinear bases or biases in futures markets, did not improve accuracy.

 
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The Forecasting Value of New Crop Futures: A Decision-Making Framework
Dwight Sanders, Phil Garcia, and Raymond Leuthold
Year: 1997
 

Abstract

The statistical forecasting efficiency of new crop corn and soybean futures is the topic of frequent academic inquiry. However, few studies address the usefulness of these forecasts to economic agents' decision-making. Each year Central Illinois producers are faced with the decision to plant either corn or soybeans on marginal acreage. Agronomic concerns aside, these decisions hinge on the expected relative return of corn versus soybeans, and the expected return is largely a function of expected new crop prices. Do new crop futures prices reliably guide producers into the correct production decision? The results suggest that over the entire period of the analysis, futures markets provide only marginal decision-making information to the producer; however, more recent signals do appear to be useful.

 
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Producer Ability to Forecast Harvest Corn and Soybean Prices
David Kenyon
Year: 1997
 

Abstract

Corn and soybean producers' most likely low and high harvest price expectations were obtained in January and February each year from 1991-1996. Average expectations missed corn prices by $0.23-0.65 per bushel and missed soybean prices by $0.51-1.04 per bushel. Producer price expectations covered a wide range -- $1.00 for corn and $1.70 for soybeans. They consistently underestimated the probability of large price changes from January-February until harvest.

 
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A Reexamination of a Popular Econometric Model of Pork Supply and Forecasting Performance vs. ARIMA and Composite Approaches
John Nwoha, Mark Manfredo, Mark Ditsch, and Raymond Leuthold
Year: 1997
 

Abstract

A Quarterly Model of the Livestock Industry by Richard P. Stillman provides a classic example of a structural model of key stages of pork production. Since the publication of the Stillman model in 1985, hog production has moved toward greater industrialization. Hence, structural change in key hog supply variables creates a need to update and reexamine this model and compare its forecasting ability to alternative formulations such as ARIMA and composite forecasts. Structural change was found to be present for sow farrowings, but less obvious for other key supply variables. The forecasting performance of the updated econometric model was strong in the presence of alternative forecasts for both one and four-step ahead horizons.

 
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Development of Alternative Wheat and Corn Price Forecasting Models
Daniel O'Brien and Robert Wisner
Year: 1997
 

Abstract

Models of U.S. corn and wheat prices are estimated for the purpose of making forecasts of futures and average cash prices. The supply-demand based price models developed are based on economic theory with attention given to the econometric properties of both the models and the data series involved in their estimation. Forecast results for these models during 1994-1996 are comparable to that of associated corn and wheat futures contracts. These price forecast models may provide valuable information to forecasters regarding future price direction and the responsiveness of corn and wheat prices to potential changes in supply-demand factors.

 
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Forecasting Retail-Farm Margins for Fresh Tomatoes: Econometrics vs. Neural Networks
Timothy Richards, Pieter van Ispelen, and Albert Kagan
Year: 1997
 

Abstract

This study compares the forecasting ability of an econometric and neural-network model of fresh tomato retail-farm margins over the period 1980-94. Tests of forecast accuracy show that the neural-network significantly outperforms the econometric model, while the latter is better able to predict turning points in the series.

 
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Systematic Hog Price Management: Selective Hedging and Long-Term Risk Sharing Packer Contracts
John Lawrence and Zhi Wang
Year: 1997
 

Abstract

In addition to futures and options markets, long-term risk sharing hog procurement contracts offered by packers provide some degree of price risk protection for pork producers. The window contract and a moving average hedging strategy generated similar average returns and level of profit risk protection. The cost-plus contract provided a greater degree of risk protection from prices below cost of production and uses a ledger account to ensure that prices average the same as the cash market over the long run.

 
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Design and Pricing of Short Term Hog Marketing Contracts
James Unterschultz, Frank Novak, Donald Bresee, and Stephen Koontz
Year: 1997
 

Abstract

Risk research has not addressed the theoretical and empirical implications of window contracts in the hog industry. Short term window contracts are modeled here as portfolios of puts and calls. A confidence interval approach and a break even approach are used to determine the price window. An empirical simulation found that the price window varied with market conditions. No one window strategy evaluated here stood out as superior in all risk measurement criteria: increased mean revenues, lowered standard deviation of revenues, reduced frequency of large losses and reduced maximum loss.

 
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Managed Futures, Positive Feedback Trading, and Futures Price Volatility
Scott Irwin and Sakoto Yoshimaru
Year: 1997
 

Abstract

The purpose of this study is to provide new evidence on the impact of managed futures trading on futures price volatility. A unique data set on managed futures trading is analyzed for the period December 1, 1998 through March 31, 1989. The data set includes the daily trading volume of large commodity pools for 36 different futures markets. Regression results are unequivocal with respect to the impact of commodity pool trading on futures price volatility. For the 72 estimated regressions (two for each market), the coefficient on commodity pool trading volume is significantly different from zero in only four cases. These results constitute strong evidence that, at least for this sample period, commodity pool trading is not associated with increases in futures price volatility.

 
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Stress Testing Portfolios to Measure the Risk Faced by Futures Clearinghouses
Roger D. Fuhrman
Year: 1997
 

Abstract

Clearinghouses at organized exchanges provide clearing, settlement and risk management systems in supporting exchange traded futures and options. As the exchanges have grown for several decades, questions regarding contract performance and client protection have become more important to market participants. This paper outlines the strategies used by the Board of Trade Clearing Corporation to measure the market risk faced by each clearing member by completing stress tests on portfolios at each firm. These stress tests are part of a multi-tiered system of safeguards that allow the clearinghouse to be the counterparty to every trade on the exchange.

 
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