NCCC-134
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The Impact of Foot-and-Mouth Disease (FMD) on Hog, Pork, and Beef Prices: The Experience in Korea
Jae Sun Roh, Sang Soo Lim, and Brian D. Adam
Year: 2006
 

Abstract

Korea experienced two outbreaks of foot-and-mouth disease (FMD), one in the year 2000 and one in 2002. After the first outbreak, prices for hogs, pork, and beef dropped 15-20% before the government began an intervention program. The effects of these two outbreaks are examined using Box and Tiao’s intervention analysis model and a GARCH model Although the second outbreak resulted in many times more animal deaths than the first outbreak, its effect on prices was much smaller. The reason may be because the government’s response to the first outbreak set a precedent for the second one.

 
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Soybean Acreage Response in Brazil
Mauricio Moraes
Year: 2006
 

Abstract

This paper advances Williams and Thompson (1984) by updating their work and by explicitly accounting for price and yield risk in the analysis of acreage response in Brazil for soybeans and by assessing model specification. Empirical equations were estimated using seemingly unrelated regression (SUR). The robustness of the model was evaluated in the battery of misspecification tests suggested by McGuirk et al. (1993) and McGuirk et al. (1995). The results of the testing procedure suggest that the model is fairly robust in terms of normality, heteroscedasticity and functional form. The results point to parameter instability in the soybean model. The approach to the problem of parameter instability involved dividing the data in two periods and estimating regressions for each period. The signs of the significant coefficients were consistent with expectation, particularly for the second period. Soybean acreage is explained mainly by past acreage, expected prices of soybeans and land competing crops (cotton, rice, and corn), and price and yield risk. Results suggest that market signals played a reduced role in the soybean acreage growth in early years. In contrast, in recent years producers in Brazil became more sensitive to changes in prices and risk. Measures of short-run price elasticity of soybean acreage response are similar to the one obtained by William and Thompson (1984) for soybean supply. Long-run elasticities are significantly smaller.

 
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U. S. and Canadian Livestock Prices: Market Integration and Trade Dependence
Dragan Miljkovic
Year: 2006
 

Abstract

Cointegration of Canadian and U.S. livestock prices points to the existence of market integration in the period 1996:1 to 2004:12 even though the trade flows of livestock and beef products were non-existent for many months in 2003 and 2004 (suggesting market segmentation) due to livestock/beef import bans by both countries due to BSE. It was also determined that Canada’s trade dependence in livestock and beef is cointegrated with Canadian and U.S. livestock prices. However, as the trade dependence variable is shocked, the effects on Canadian and U.S. prices are opposite although one would expect that in an integrated market the price responses to an exogenous shock would be similar or statistically identical. This result reinforces the case against the use of cointegration in determining presence (or absence) of market integration. Empirical results in this article raise some very difficult questions. Gains from trade are well documented. Yet, once a country is very trade dependent, the prices in it are much more vulnerable to exogenous shocks that reduce the trade flows. Canadian livestock prices plummeted and stayed low following the BSE incident and U.S. (and Japanese) import bans on Canadian livestock and beef. Given the long cycles and high sunk cost in the livestock and beef industry, immediate adjustment (reduction in production) for Canadian producers was difficult and always unlikely. Moreover, the possibility of import bans being lifted in the near future may have further shaped their expectations and prolonged the decisions on herd reduction. In the meanwhile, U.S. prices increased following Canada’s trade dependence shock due to BSE and remained above the original long-run equilibrium price.

 
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An Assessment of the Livestock Mandatory Reporting Act
Clement E. Ward
Year: 2006
 

Abstract

Federal government funding for public price reporting began in 1914. Since then, most public market reporting for livestock and meat has relied on voluntary participation by market participants. Populist support in 1999 led to passage of the Livestock Mandatory Reporting Act which replaced the decades old voluntary reporting system with a mandatory system for livestock and meat. Questions were raised by policymakers and others in discussions of the Act’s renewal as to effectiveness of the mandatory reporting system. This paper draws from available information to assess the Act’s effectiveness since its initial implementation. Satisfaction or dissatisfaction with the Act depends on one’s expectations for what the Act was to accomplish or problems the Act was argued to address. Mandatory price reporting for many – after a rocky start – has enhanced the transparency and accuracy of reported prices while increasing the amount and timeliness of information in some needed areas.

 
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Multiple Horizons and Information in USDA Production Forecasts
Dwight R. Sanders and Mark R. Manfredo
Year: 2006
 

Abstract

USDA livestock production forecasts are evaluated for information across multiple horizons using the direct test developed by Vuchelen and Gutierrez. Forecasts are explicitly tested for rationality (unbiased and efficient) as well as for incremental information out to three quarters ahead. The results suggest that although the forecasts are often not rational, they typically do provide the forecast user with unique information at each horizon. Turkey and milk production forecasts tended to provide the most consistent performance, while beef production forecasts provided little information beyond the two quarter horizon.

 
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Is Storage at a Loss Merely an Illusion of Aggregation?
Jason R.V. Franken, Philip Garcia, and Scott H. Irwin
Year: 2006
 

Abstract

The storage at a loss paradox of positive inventories despite inadequate spot-futures price spread coverage of storage costs is an unresolved issue of long-standing interest to economists. Alternative explanations include risk premiums for futures market speculators, convenience yields from having inventories on hand, and the mismeasurement/aggregation of data. T-test analyses of disaggregated data suggest soybean price behavior consistent with intertemporal arbitrage conditions and corn price behavior that may imply convenience yields.

 
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The Effects of Hurricane Katrina on Corn, Wheat and Soybean Futures Prices and Basis
Angel Lara-Chavez and Corinne Alexander
Year: 2006
 

Abstract

Hurricane Katrina caused considerable damage to transportation infrastructure, grain export facilities, and to some crop areas in 2005. Assuming that financial market participants considered the disruption of the grain transportation system by Katrina as having an important impact on fundamental supply and demand factors, futures and/or national basis would subsequently adjust. The objective of this research was to determine the reaction in corn, wheat, and soybean futures and basis due to Katrina using an event study methodology. One parametric (Constant mean return) and one nonparametric procedure (Corrado’s rank test) were used to define whether there were statistically significant abnormal returns. During Katrina abnormal returns were larger on the wheat futures market than on the corn and soybean futures markets, which could be partially explained by the timing of the Katrina’s landfall with the grain export activities. However, there were only a few statistically significant daily abnormal returns in the futures prices due to the hurricane. There was some evidence of significant cumulative abnormal returns in the corn and wheat futures markets prior to and surrounding the Katrina’s landfall. In conclusion, the majority of the corn market reaction to Katrina’s damage occurred in the basis and not in the futures market. For the soybean market there was weak evidence of significant reaction in both basis and futures prices. In the case of wheat, the basis was not evaluated and wheat futures prices reacted to the disruption caused by Katrina. The reaction in the corn, wheat and soybean futures prices due to Katrina could have being moderated by the presence of large stocks and large expected production levels of these grains in 2005 or simply by the fact that the damage caused by the hurricane did not affect fundamental supply and demand factors; rather, they only affected transportation logistics.

 
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A Term Structure Model for Commodity Prices: Does Storability Matter?
Chuanyi Lin and Matthew C. Roberts
Year: 2006
 

Abstract

Econometric models of commodity prices have been estimated for more than 80 years, but both structural and time series models require ad hoc assumptions to capture all the features of commodity price series. Commodities can be broadly divided into two categories: storable and non-storable. The purpose of this study is to investigate the effects of storability on commodity futures pricing, especially whether meats can be reasonably approximated by storable commodity term structure models. From the empirical analysis of seven commodity futures prices, the two-factor Schwartz model is found to perform well for less storable commodities.

 
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Empirical Confidence Intervals for WASDE Forecasts of Corn, Soybean and Wheat Prices
Olga Isengildina, Scott H. Irwin, and Darrel L. Good
Year: 2006
 

Abstract

This study suggests that confidence intervals for WASDE forecasts of corn, soybean, and wheat prices may be improved if they are estimated using an empirical approach. Empirical confidence intervals are calculated following Williams and Goodman’s (1971) method and use historical forecast errors to estimate forecast error distributions which is then used to predict confidence limits for future forecast errors. Three procedures for empirical distribution estimation are compared: 1) histogram, 2) changing distribution, 3) fixed distribution. The results suggest that the fixed distribution approach using logistic distribution provided accurate confidence intervals for WASDE corn, soybean, and wheat price forecasts.

 
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Is the Local Basis Really Local?
Mark R. Manfredo and Dwight R. Sanders
Year: 2006
 

Abstract

Conventional wisdom suggests the local cash – futures basis is determined from local supply and demand conditions. However, it may be the case that local elevators look to other locations, such as terminal locations, and adjust for transportation differentials when determining the basis for their particular market. If so, certain grain marketing locations (e.g., export and interior terminal locations) may play an important role in discovering and ultimately determining the basis for other local markets. This hypothesis is examined for the #2 yellow corn basis at various export terminal (Gulf; Toledo), river terminal (Illinois River; Omaha) and interior (S. Central Illinois; N. Central Iowa; Denver) locations. Specifically, if the basis calculated at one market location is found to lead the basis at another market location, then this suggests that the leading market plays a role in determining the basis for the other market. The findings suggest that corn basis calculated at the export terminal markets of Toledo and the U.S. Gulf, as well as the Illinois River, may indeed provide valuable information in determining the basis for other river terminal and interior locations.

 
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Value of Single Source and Backgrounded Cattle as Measured by Health and Feedlot Profitability
Babatunde Abidoye and John D. Lawrence
Year: 2006
 

Abstract

Commingling cattle in the feedlot increases the odds of cattle getting sick. However, backgrounded cattle are less susceptible to diseases which allow the generalizing statements like “backgrounding is just like single source”. Using data from over 15,000 cattle fed in 12 Iowa feedlots, we show that although backgrounded cattle do better than preconditioned cattle commingled in the feedlot, they have poorer carcass quality, health, and performance than single source cattle. Backgrounded cattle should be discounted $8.24/head relative to single source, and only received a small premium over multi-source preconditioned cattle though not significantly different.

 
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Price and Profit: Investigating a Conundrum
Carl R. Zulauf, Gary Schnitkey, and Carl T. Norden
Year: 2006
 

Abstract

Although few in number, studies consistently find that price explains little, if any, of the variation in profit across farms. This contrasts with farmers’ opinions regarding the importance of price, as well as the use of price supports as a primary policy instrument. Using farm level data from the Illinois Farm Business Farm Management program for calendar years 1996 through 2004, a potential explanation for this conundrum is identified. Price is significantly more correlated with a farmer’s variation in management return from year to year (approximately, +0.45) than with the variation in management return across farmers (approximately, +0.10). Thus, the conundrum arises out of different perspectives: farmers focus on the performance of their own farm over time while studies have focused on the variation among farms.

 
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The Value of Information Provision at Iowa Feeder Cattle Auctions
Harun Bulut and John D. Lawrence
Year: 2006
 

Abstract

Controlling a variety of feeder cattle characteristics, and market and sale conditions, we estimate that certified vaccinations claims along with at least 30 days weaning claims bring in a premium of $6.13/cwt, which is nearly two times of that for similar uncertified claims, compared to no vaccinations and weaning claims at all in Iowa feeder cattle auctions. This indicates that the third-party certification is supported in the market as a tool to signal quality in terms of vaccinations and weaning claims towards preconditioning.

 
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Farmers’ Subjective Perceptions of Yield and Yield Risk
Thorsten M. Egelkraut, Bruce J. Sherrick, Philip Garcia, and Joost M. E. Pennings
Year: 2006
 

Abstract

Using survey responses of Illinois corn farmers to differently framed yield questions, we examine their subjective information by relating stated yields and risk to the corresponding objective county measures. The results show that farm-level yields can be best characterized by soliciting probabilistic information, which provides more accurate yield assessments than an open-ended frame and consistent estimates of producers’ subjective risk. Moreover, we find that overconfidence can be confused with differences in relevant information and that using recent data may be more appropriate in examining subjective risk statements. Our results are important for agricultural policy-makers and researchers, particularly those who work with surveys that include questions about producers’ yields.

 
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A Comparative Evaluation of Cash Flow and Batch Profit Hedging Effectiveness in Commodity Processing
Roger A. Dahlgran
Year: 2006
 

Abstract

Agribusinesses make long-term plant-investment decisions based on discounted cash flow. It is therefore incongruous for an agribusiness firm to use cash flow as a plant-investment criterion and then to completely discard cash flow in favor of batch profits as an operating objective. This paper assumes that cash flow and its stability are important to commodity processors and examines methods for hedging cash flows under continuous processing. Its objectives are (a) to determine how standard hedging models should be modified to hedge cash flows, (b) to outline the differences between cash flow hedging and profit hedging, and (c) to determine the effectiveness of hedging in reducing cash flow variability. A cash flow hedging methodology is developed. This methodology is similar to that used for batch profit hedging. This methodology balances the daily cash flow destabilizing effect of futures positions against the periodic cash flow destabilizing effect of cash price changes. The resulting cash flow hedges are simulated for soybean processors. These hedges are less effective than batch profit hedging. The reduction in cash flow variance achieved through hedging, though small, is nonetheless statistically significant.

 
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Probability Distortion and Loss Aversion in Futures Hedging
Fabio Mattos, Philip Garcia, and Joost M.E. Pennings
Year: 2006
 

Abstract

We analyze how the introduction of probability distortion and loss aversion in the standard hedging problem changes the optimal hedge ratio. Based on simulated cash and futures prices for soybeans, our results indicate that the optimal hedge changes considerably when probability distortion is considered. However, the impact of loss aversion on hedging decisions appears to be small, and it diminishes as loss aversion increases. Our findings suggest that probability distortion is a major driving force in hedging decisions, while loss aversion plays just a marginal role.

 
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