NCCC-134
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Do Agricultural Market Advisory Services Beat the Market?
Scott H. Irwin, Thomas E. Jackson, and Darrel L. Good
Year: 1999
 

Abstract

The purpose of this paper is to address two basic performance questions for market advisory services: 1) Do market advisory services, on average, outperform an appropriate market benchmark? and 2) Do market advisory services exhibit persistence in their performance from year-to-year? Data on corn and soybean net price received for advisory services, as reported by the AgMAS Project, are available for the 1995, 1996 and 1997 marketing years. Performance test results suggest that, on average, market advisory services "beat the market" for the 1995 through 1997 corn and soybean crops. Possible explanations for this result include: i) a unique time period in corn and soybean markets, ii) inefficient commodity markets, iii) the skillfulness of advisory services or iv) a return to risk. The predictability results provide little evidence that advisory service pricing performance can be predicted from year-to-year. When services are grouped by performance quartile, some evidence of predictability is found for the poorest performing services, but not for top performing services.

 
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Corporate Risk Management and the Role of Value-at-Risk
Dwight R. Sanders and Mark R. Manfredo
Year: 1999
 

Abstract

Value-at-Risk (VaR) estimates the downside risk of a portfolio of assets, usually derivatives, at a particular confidence level over a specified time horizon. VaR plays an important role in corporate risk management. This discussion piece highlights the role of VaR in the context of a corporate risk management system. The informational demands of such a system are presented in the context of a foodservice business that uses derivatives products to manage absolute price risk. Risks inherent in the use of derivatives products are also outlined. Through an examination of the informational demands of corporate risk managers, as well as the risks of derivative products, avenues for future research regarding the estimation of VaR measures are presented.

 
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Accuracy of USDA Fed Cattle Price Reporting: Is Mandatory Price Reporting Needed?
Stephen R. Koontz
Year: 1999
 

Abstract

Cattle industry members are concerned over the accuracy of prices reported by the USDA Agricultural Marketing Service (AMS) and there is interest in instituting mandatory price reporting. Currently, AMS relies on voluntary cooperation by feedlots and meatpackers in confirming transactions. Only confirmed transactions are released to the public. This research examines the accuracy of reported fed cattle prices in the southern and central plains states. AMS reported prices are compared to an extensive private database of cattle feeding closeout information for the time period from 6/86 to 6/93. Individual transactions are classified as below the reported range, within the reported range, or above the reported range. An ordered multinomial logit model is used to explain the probability that a transaction is in one of the three classifications. Results suggest that changing cash market conditions and expectations of changing market conditions impact whether or not a transaction is reported. There is evidence that price reporting is inefficient. Reported prices do not adjust to changing market conditions fast enough. However, there is also strong evidence of selective reporting behavior by market participants and that most of the selective reporting would benefit meatpackers. Further, AMS appears to do an effective job of not including nonstandard cattle in price reports. There is also evidence that the reporting ability of AMS is hindered by limited resources. Manadatory price reporting may be warranted in principle but will be difficult to implement in practice.

 
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Who Will Pay for Guaranteed Tender Steak?
Jayson Lusk, John Fox, Ted Schroeder, James Mintert, and Mohammad Koohmaraie
Year: 1999
 

Abstract

Meat tenderness is one of the most important quality characteristics to beef consumers. Current beef quality grading standards are poorly correlated with meat tenderness. Even within the same quality grade, steak tenderness varies considerably. As a result of consumers frequently experiencing poor steak eating experiences, their confidence in, and demand for beef has been adversely affected. A new quality grading system, developed by USDA, more accurately segregates beef into tenderness categories. This study evaluates consumer willingness to pay for steak tenderness in an effort to evaluate this new grading system. Consumers demonstrated a preference for tender steak. Blind steak tests revealed that 72% of consumers preferred tender steak relative to tough steak (as measured via Warner-Bratzler shear force tests) in terms of tenderness preferences. In these blind taste tests, 36% of consumers were also willing to pay an average of a $1.23/lb. Premium for a tender relative to a tough steak. When information regarding tenderness was revealed to consumers together with a taste sample, 90% preferred the tender steak. Overall, 51% of consumers were willing to pay an average premium of $1.84/lb. for a tender relative to a tough steak when the level of steak tenderness was revealed to consumers.

 
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Short-Term Variability in Grid Prices for Fed Cattle
Clement E. Ward and Jong-In Lee
Year: 1999
 

Abstract

This research examined variability in grid prices that can occur within a given day or week for a given set of cattle. Data for one day's slaughter from four plants revealed considerable variation in cattle brought to slaughter by cattle feeders. Several sources of variation were found. Base prices varied $2/dressed cwt., or $15/head, whether using plant averages or formulas tied to reported cash-market prices. Prices across grids added another $2-4/cwt. of variation, another $15 to 30/head. Variation in carcass characteristics contributed significantly to the variation in grid pricing, especially discounted characteristics such as Select and Standard carcasses, Yield Grade 4-5 carcasses, light and heavy carcasses, and non-conforming or "out" carcasses.

 
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Identifying and Managing Economic Risk in Cattle Feeding
Darrell R. Mark, Rodney Jones, and Ted C. Schroeder
Year: 1999
 

Abstract

Closeout data from two western Kansas commercial feedlots are examined to determine how cattle prices, feed costs, and animal performance impact the variability of cattle feeding profits. The relative impacts of these factors are studied across sex, placement weight, and placement month. Fed and feeder cattle prices have the largest impact on profitability. Corn prices, interest rates, and animal performance have smaller, yet relevant effects on profits. Generally, all these factors influence steer profits more than heifer profits. As placement weight increases, feeder cattle prices impact profitability more while corn prices, interest rates, and animal performance influence profitability less. Feeder cattle prices impact profitability greater for spring and fall placements. Animal performance affects cattle feeding profits greater for winter placements. Results suggest that fed cattle and feeder cattle prices should be emphasized in managing the overall risk in cattle feeding because they are the largest contributors to profit variability.

 
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Feeder Cattle Price Slides
B. Wade Brorsen, Nouhoun Coulibaly, Francisca G. C. Richter, and DeeVon Bailey
Year: 1999
 

Abstract

A theoretical model is developed to explain the economics of determining price slides for feeder cattle. The contract is viewed as a dynamic game with continuous strategies where buyer and seller are the players. We determine the value of the slide that assures subgame perfect equilibrium when the seller gives an unbiased estimate of cattle weight. An empirical model using Superior Livestock Auction (SLA) data shows that price slides used are smaller than those needed to cause the producer to give unbiased estimates of weight. Consistent with the model's predictions, producers slightly underestimate cattle weights.

 
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Determinants of Replacement Heifer Price Differentials
Vern Pierce, Joe Parcell, and Richard Randle
Year: 1999
 

Abstract

If the cattle industry is to develop a widely accepted value based marketing system, cattle producers need to produce cattle of known quality that will add value to the animal and simultaneously improve production efficiency. This study uses transaction level data to empirically estimate the marginal implicit trait values of replacement bred heifer characteristics. Results indicated premiums were received for pens of heifers having ten animals, and black in color. Offspring having an expected progeny difference for birth-weight near zero were not discounted. Pens of heifers of Amerifax breed relative to Angus, and having a calving season of early to late March relative to late January to late February were the primary factors that were discounted.

 
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Evaluating Forecast Accuracy of Cattle on Feed Pre-Release Estimates
Kevin Dhuyvetter and Ted Schroeder
Year: 1999
 

Abstract

Forecasts of variables (cattle on feed, placements, and marketings) that are released in the USDA Cattle On Feed (COF) report by 36 private industry analysts and the composite forecast were evaluated along with the forecasts from an autoregressive model. In terms of relative forecast accuracy, a composite forecast was superior to individual analysts which were superior to autoregressive model forecasts. The majority of individual analysts provided statistically similar forecasts. However, some analysts' forecasts were superior and others were inferior. Also, some analysts have a comparative advantage in which variable(s) they forecast. Several analysts provided extreme (high or low) forecasts more often than randomly expected. This may be done to draw attention to their firm because extreme forecasts typically were relatively inaccurate.

 
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Forecasting Fed Cattle, Feeder Cattle, and Corn Cash Price Volatility: Time Series, Implied Volatility, and Composite Approaches
Mark R. Manfredo, Raymond M. Leuthold, and Scott H. Irwin
Year: 1999
 

Abstract

Considerable research effort has focused on the forecasting of asset return volatility. Debate in this area centers around the performance of time series models, in particular GARCH, relative to implied volatility from observed option premiums. Existing literature suggests that the performance of any volatility forecast is sensitive to both the data and forecast horizon of interest. This paper rigorously examines the performance of several alternative volatility forecasts for fed cattle, feeder cattle, and corn cash price returns. Forecasts include time series, implied volatility, and composite specifications. The results provide considerable insight into the performance of these alternative volatility forecasting procedures over a range of relevant forecast horizons. The evidence suggests that composite methods be used when both time series and implied volatilities are available. Insight is also gained into the performance of procedures used for scaling 1-period volatility forecasts to longer horizons. However, consistent with the existing volatility forecasting literature, this research confirms the difficulty in finding a "best" volatility forecasting method across alternative data sets and horizons.

 
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The Term Structure of Uncertainty Implied by Option Premia
John A. Shaffer and Bruce J. Sherrick
Year: 1999
 

Abstract

Information describing future asset price distributions is fundamental to nearly all risk management activities. Futures markets are often relied upon to provide information abut the mean of future price distributions, and option markets are often used to recover measures of volatility. In cases where multiple maturities of an underlying asset trade, techniques for inferring implied forward price levels are well-understood, less information is readily accessible about other moments of a future asset price distribution or about the future time path of uncertainty. There is strong and widely-accepted empirical evidence that asset prices do not follow constant volatility models but instead contain intervals of relatively increased and subdued information events (Heynen, et al.). Techniques for recovering implied forward volatility estimates are conceptually equivalent to recovering implied forward price levels, yet little empirical work doing so currently exists. This paper demonstrates a simple technique for inferring implied forward volatilities of asset prices from options data. Using hog futures options market data, the implied term structure of uncertainty is recovered and used to examine the constancy of forecasted volatility, and the expected significance of USDA Hogs and Pigs Report releases. The results indicate a non-constant term structure of uncertainty, yet demonstrate little impact on forecasted volatilities in periods that contain USDA Hogs and Pigs Reports.

 
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Evidence of Farmer Forward Pricing Behavior
Kevin McNew and Wesley Musser
Year: 1999
 

Abstract

The current agricultural marketing literature has considerable controversy about the optimal use of hedging for farmers. Much of this literature has very limited data on farmer behavior and an evaluation of the outcome of this behavior. This paper uses data from a hedging game from marketing clubs in Maryland for 1994-1997. Results indicate that farmers do not achieve price enhancement from hedging. However, their decisions do not conform to implications of optimal hedging models in a number of dimensions. Hedge ratios are near the optimal levels under one interpretation. The paper also provides research and extension implications of the results.

 
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Forecasting Crop Yields and Condition Indices
Paul L. Fackler and Bailey Norwood
Year: 1999
 

Abstract

A model relating crop condition indices to average yields is developed. The model is used to motivate a crop yield forecasting model, which in turn yields estimates of the time path of information flows into the commodity market. An empirical assessment of the forecasting model is undertaken.

 
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A Calendar Spread Trading Simulation of Seasonal Processing Spreads
Christine A. Cole, Terry L. Kastens, Frederick A. Hampel, and Laura R. Gow
Year: 1999
 

Abstract

This study examined the potential reliability of seasonality in intermarket incremental margin calendar crushes, expected margin calendar crushes, and deferred crushes for application in real-time futures trading. Seasonal rolling averages were used to select the expected high (sell) and buy (low) points for out-of-sample trading simulations of four processing spreads: the heating oil crush, the unleaded gasoline crush, the soybean complex crush, and the cattle crush. Results suggest that simply buy (sell) and holding trading strategies based on historical seasonality do not generally produce positive profits that re significantly different from zero. Results indicate that of the twelve crush combinations examined, only the incremental cattle and the May deferred cattle crushes exhibited statistically significant profits. Furthermore, results suggest that although seasonal recurring patterns allude to profit opportunities, these opportunities erode quickly due to rolling and trading transactions costs.

 
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Why Don't Country Elevators Pay More for High Quality Wheat? The Effects of Risk Information
Brian D. Adam and Sueng Jee Hong
Year: 1999
 

Abstract

Previous research has found that country elevators that re the first in their area to grade wheat and pay quality-adjusted prices would receive above-normal profits at the expense of their competitors. These early-adopting elevators would pass on to producers 70% of the quality-based price differentials received from next-in-line buyers. If competing elevators also adopt these practices, profits for all elevators would return to near normal, and elevators would pass on to producers nearly all price differentials received from next-in-line buyers. However, that research could not explain why more elevators were not becoming "early adopters" by paying quality-adjusted prices.An additional explanation for country elevators failing to pass on to producers quality-adjusted prices is risk aversion. If producers are risk averse, an elevator that imposes discounts for lower quality wheat, even while paying a higher price for high quality wheat, risks losing business if producers believe that a competing elevator may be more likely to pay them a higher price net of discounts. Producers likely are uncertain about the quality of their grain before they deliver it to an elevator, and thus are uncertain about the net price they will receive. Risk-averse producers would prefer a certain price to a quality-adjusted price that is equally likely to be higher (because of a premium) or lower (because of a discount).A simulation model is used to measure the effects of risk-averse producers and limited quality information on profits that can be earned by an elevator that pays quality adjusted prices. Results suggest that while risk aversion is important, the amount of information producers have about the quality of their wheat is even more important.

 
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Volatility Models for Commodity Markets
Paul L. Fackler and Yanjun Tian
Year: 1999
 

Abstract

The time structure of volatilty in futures prices and implied volatility implicit in option premia is derived from an underlying model of spot price behavior. The model suggests a number of characteristic features that should be present in observed market prices. These features are found in soybean futures and options on soybean futures.

 
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Price Volatility in Dairy Markets: A Story of Stocks?
Rob Weaver and William Natcher
Year: 1999
 

Abstract

The role of private, government and total stocks as determinants of price volatility in the dairy markets is analyzed based on monthly price data (U.S. geographic area average). Results reported here find no strong evidence that changes in beginning stock levels or beginning stock change have played a substantial role in contributing to price volatility in butter, cheese, or non-fat dry milk markets analyzed. These results are notable given substantial changes in government policy impacting these markets during the sample period. Each market was dominated by government purchases of stocks to manage the price. It follows by definition that these periods price induced ending period government stocks. However, this paper considered evidence concerning the hypothesis that when such government stock transactions were terminated, prices may have become more volatile. To focus on a possible causal role of stocks, we focus on beginning stocks and their role in determining prices formed at a later time. We find no role played by the levels of beginning stocks and very little evidence of a role played by changes in beginning stocks as determinants of volatility in monthly average key dairy complex prices. These results must be interpreted within the context of several caveats. First, monthly averaging and geographic averaging of prices may obscure important variation that would reflect evidence of a role of stocks. Second, data analyzed may contain systematic errors that occur a role for stocks

 
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Commodity Futures Contract Viability: A Multidisciplinary Approach
Joost M. E. Pennings and Raymond M. Leuthold
Year: 1999
 

Abstract

We propose a framework in which the decisions and wishes of potential customers are investigated simultaneously with the necessary technical properties that need to be met for trading to take place. Within this framework the relationship between trading volume and hedging effectiveness is examined. Both basis risk and market depth risk are taken into account, and the relationship between farmer's characteristics and the probability of using futures is examined. The relationships are tested on a set of data gathered in a stratified sample of 440 famrers by means of computer-assisted personal interviews and on transaction-specific futures data. Structural equation models and multiple regression models are used to validate the relationships. The hedging effectiveness and the variables that play a role in the farmer's use of futures are related to the tools of the exchange.

 
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Payoffs to Farm Management: How Important is Grain Marketing?
Heather Nivens and Terry L. Kastens
Year: 1999
 

Abstract

Economically, a well managed firm is one that consistently makes greater profits than competing firms in the industry. In terms of production agriculture, good management is demonstrated by profits that are persistently greater than those of similarly structured, neighboring farms. This research examined the effects of four management practices on profit per acre for nearly 1,000 Kansas farms over 1987-96. The four management practices were price management, cost management, technology adoption (less-tillage), and yield management. Of these four it was found that cost management and technology adoption had the greatest effect on profit per acre and a farm being able to differentiate itself from other neighboring farms. Yield was found to be moderately significant and price was found to have the smallest impact of all. Therefore, if producers wish to have continuously high profits their efforts are best spent in management practices over which they have the most control, namely, in the areas of cost control and technology adoption.

 
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Testing the Possibility of Private Crop Insurance and Reinsurance Markets
H. Holly Wang, Joseph L. Krogmeier, and Bingfan Ke
Year: 1999
 

Abstract

Risk theory tells us if an insurer can effectively pool a large number of individuals to reduce the total risk, he then can provide the insurance by charging a premium close to the actuarially fair rate. There is a common belief that only when the random loss is independent, the risk can be effectively pooled, therefore because crop yield is not independent among growers crop insurance market cannot survive without government subsidy. In this paper, a weaker condition, asymptotic nonpositive correlation (a.n.c.), is presented as sufficient for effective risk pooling. US crop yield data are used to test the hypothesis and we cannot reject that US yields are a.n.c. As a result, private crop insurance/reinsurance markets are expected to be able to exist.

 
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Forecasting performance of Storable and Non-Storable Commodities
Scott Daniel, Ted Schroeder, and Kevin Dhuyvetter
Year: 1999
 

Abstract

This study examines the relationship between the futures price at the time of production/placement decision and the price at the time of the harvest/marketing decision for the storable commodities corn, soybeans, and wheat and non-storable commodities, fed cattle and hogs. Additionally, a model is employed to identify determinants of the error associated with the use of a springtime futures price as a forecast for the harvest period price of corn, soybeans, and wheat. Results indicate that the springtime futures price is a biased forecast for the harvest price of corn, soybeans, and wheat. However, the price forecast is an unbiased estimate for the price of cattle and hogs during the marketing period. The predictability of supply and demand estimates and the time period of the price forecast for the storable commodities are significantly related to the error associated with the forecast.

 
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Post-Harvest Grain Storing and Hedging with Efficient Futures
Terry L. Kastens and Kevin Dhuyvetter
Year: 1999
 

Abstract

This study is a simulation that tests whether Kansas wheat, corn, milo (grain sorghum) and soybean producers could have used deferred futures plus historical basis cash price expectations to profitably guide post-harvest unhedged and hedged grain storage decisions from 1985 through 1997. The signaled storage decision is compared to a representative Kansas producer whose crop sales mimic average Kansas marketings each year. Twenty-three grain price locations are examined. The simulation resulted in an 11-cent per bushel annual increase in grain storage profits for wheat producers, 27 cents for soybeans, -17 cents for corn, and -20 cents for milo; but storage profit differences varied substantially across locations. Inferences for random Kansas cash price locations were generally robust to alternative assumptions about interest rates or storage costs, but sensitive to assumptions of model starting dates and basis specification. Hedging tended to decrease risk but not impact profitability. Few results were consistent across the numerous scenarios involving different crops, locations, and specifications for futures-plus-basis post-harvest grain storage signaling models; thus, this research does not reject cash market efficiency.

 
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Modeling Ex Ante Price Expectations within the U.S. Broiler Market
Andrew McKenzie and Matthew T. Holt
Year: 1999
 

Abstract

A statistically optimal inference about market agents' ex ante price expectations within the U.S. broiler market is derived using futures prices of related commodities in conjunction with a quasi-rational forecasting regression equation. Specifically, the relationship between the variances and covariances among broiler cash prices, and spot futures prices of related commodities are exploited. The relationship between movements in the relevant cash price series and movements in related futures prices allows us to decompose changes in the expected cash price series into anticipated and unanticipated components. This modeling approach follows closely the work of Hamilton (1992), and allows us to determine the relative importance of various informational sources in the formation of broiler price expectations. The modeling framework is extended beyond that considered by Hamilton in that production is added to the model. As such, this is the first known attempt to endogenize supply response using futures prices within a quasi-rational expectations framework. Both the true supply shock and ex post broiler price forecast errors were found to have a small but significant influence on ex ante price expectations. The quasi-rational forecasting regression, however, captured most of agents' ex ante price expectations over the sample period.

 
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Hog Profit Margin Hedging: A Long-Term Out-of-Sample Evaluation
Gary D. Kee and David E. Kenyon
Year: 1999
 

Abstract

This paper is long-term evaluation of the profit margin hedging strategy suggested by Kenyon and Clay. To implement this strategy an expected profit margin is estimated based on the amount of pork, corn price, and soybean meal price. Additionally, the profit margin that can be "locked in" by the futures market is calculated from the futures prices of live hogs, corn and soybean meal with an allowance for other cost. The hedging rule is to hedge hogs, corn and soybean meal when a profit margin of fifty-five percent above the expected profit margin can be "locked-in" with the futures. In their original paper, using data from 1975-82, Kenyon and Clay found this method of hedging stabilized cash flow while increasing the overall profit level. Using data from 1983-98, we find no difference in profits from hedging versus not hedging. The most obvious reason for the lack of success is the inability to predict the expected profit margin with the simple model used by Kenyon and Clay. Additionally, in this study as with any long-term study dealing with cost, a continuous, realistic cost structure that is available throughout the study period is a serious limitation.

 
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Agricultural Economists' Effectiveness in Reporting and Conveying Research Procedures and Results
Joe L. Parcell, Terry L. Kastens, Kevin C. Dhuyvetter, and Ted C. Schroeder
Year: 1999
 

Abstract

This study reviews articles published in the Journal of Agricultural Economics from 1994 to 1998 which used regression analysis to determine agricultural economists' effectiveness in reporting and conveying research procedures and results. Based on the authors experiences of surveying articles for this study, we have several suggestions on how to better express reporting of results and how to better separate statistical from economic significance. First, clearly define the dependent variable - preferably in the results table. Second, when applicable, report parameter estimates in an interpretable form either in the table or in a subsequent table. Third, when applicable, report summary statistics. Fourth, report degrees of freedom conspicuously in the results table. Fifth, do not hesitate to report that statistically insignificant variables have been dropped. Lastly, weigh economic importance aside from statistical significance - use simulation to express economic significance.

 
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They Trade Shrimp in Minneapolis? An Examination of the MGE White Shrimp Futures Contract
Dwight R. Sanders and Joost M. E. Pennings
Year: 1999
 

Abstract

The successful introduction of risk management products to industries unfamiliar with futures markets (e.g., dairy, aquaculture, and environmental resources) is likely to become increasingly important as futures exchanges consider alternative structures (e.g., for-profit) and the trading platform evolves (i.e., electronic trading). Here, we examine the performance of the Minneapolis Grain exchange's white shrimp futures contract, one of the first futures contracts aimed at the aquaculture industry. Although the market structure conforms to most of the traditional criteria for a successful futures contract, the contract's performance is disappointing in terms of liquidity and hedging effectiveness. It is not clear if this is due to a poorly designed contract or a lack of participation (i.e., cash-futures arbitrage) required for convergence and a predictable basis.

 
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A Full Bayesian Analysis of Structural Changes with the AIDS Model: The Case of Meat Demand
Ibrahima Yague, Steven C. Turner, and Jeffrey H. Dorfman
Year: 1999
 

Abstract

This study applies to a Bayesian methodology to the oft-examined issue of whether a structural change has occurred in U.S. meat demand. The Bayesian approach allows us several advantages over earlier studies. First, we can estimate the true AIDS model instead of the commonly substituted linear-approximate version. Second, we derive the marginal posterior distribution of the time period in which the structural change occurred. This provides greater insight into whether the data is sharply or mildly informative as to such a structural change. Finally, we can derive posterior density results for the changes in parameters and elasticities across the two regimes. The results show the data to be highly informative with respect to a structural change in meat demand in the fourth quarter of 1975, but less evidence is found for changes in the majority of individual model parameters.

 
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Bankers' Forecasts of Farmland Value
Ted Covey
Year: 1999
 

Abstract

Bankers exhibit superior information-discrimination skills in contrast to an unbiased constant-forecast model regarding the future quarterly trend in farmland values. However, this skill has to be weighed against bankers' greater forecast bias. Bankers were especially accurate at assigning low-biased, highly resolved probabilities to quarterly downtrends. Given that previous land values had experienced a long-term downward trend, this suggests that bankers are able to use recent lessons learned from their experiences with long-term trends in their forecasts of short-term trends for the same direction. Bankers' excessive optimism concerning rising land values suggests they may be holding excessively large portions of their assets in farm real estate loans, as well as requiring too little farmland as collateral on real estate loans, leaving them more exposed to default risk than they realize.

 
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