NCCC-134
Home Paper Archive What's new Submissions Program Executive Committee Contact Subscribe

Implications of Growing Biofuels Demands on Northeast Livestock Feed Costs
Todd M. Schmit, Leslie Verteramo,and William G. Tomek
Year: 2008
 

Abstract

The relationship between complete-feed prices and commodity feedstock prices are estimated to analyze the effect of higher commodity prices on feed costs, with particular attention towards the price effects and substitutability of corn distillers dried grains with solubles (DDGS). Assuming the historical positive correlation between corn and DDGS prices, each $1/ton increase in the price of corn increases per ton feed costs between $0.45 and $0.67 across livestock sectors. A negative price correlation would offset some of the cost increases, but under most scenarios feed costs are expected to be at or above those experienced in 2007.

 
Click here for a copy of the paper in Adobe's PDF format.



Do Farmers Hedge Optimally or by Habit? A Bayesian Partial-Adjustment Model of Farmer Hedging
Jeffrey H. Dorfman and Berna Karali
Year: 2008
 

Abstract

Hedging is one of the most important risk management decisions that farmers make and has a potentially large role in the level of profit eventually earned from farming. Using panel data from a survey of Georgia farmers that recorded their hedging decisions for four years on three crops we examine the role of habit, demographics, farm characteristics, and information sources on the hedging decisions made by 106 different farmers. We find that the role of habit varies widely. Information sources are shown to have signiffcant and large effects on the chosen hedge ratios. The farmer's education level, attitude toward technology adoption, farm profitability, and the ratio of acres owned to acres farmed also play important roles in hedging decisions.

 
Click here for a copy of the paper in Adobe's PDF format.



Wheat Variety Selection: An Application of Portfolio Theory to Improve Returns
Andrew Barkley and Hikaru Hanawa Peterson
Year: 2008
 

Abstract

This presentation will report results of research that shows that a portfolio of wheat varieties can enhance profitability and reduce risk over the selection of a single variety. Many Kansas wheat farmers select varieties based on average yield. This study uses portfolio theory from business investment analysis to find the optimal, profit-maximizing and risk-minimizing combination of wheat varieties in Kansas.

 
Click here for a copy of the paper in Adobe's PDF format.



Do Transaction Costs and Risk Preferences Influence Marketing Arrangements in the Illinois Hog Industry?
Jason R.V. Franken, Joost M.E. Pennings and Philip Garcia
Year: 2008
 

Abstract

Studies of hog industry structure often invoke risk reduction and transaction costs explanations for empirical observations but fail to directly examine the core concepts of risk behavior and transaction costs theories. Using a more unified conceptual framework and unique survey and accounting data, this study demonstrates that that risk preferences and asset specificity impact Illinois producers’ use of contracts and spot markets as suggested by theory. Factor analytic methods limit measurement error for indirectly observable risk and transaction costs variables employed in logit regressions. In particular, related investments in specific hog genetics and specific human capital regarding the production process increase the probability of selecting long-tem contracts over spot markets. Producers who perceive greater levels of price risk and/or are more averse to it appear more (less) likely to use long-term contracts (spot markets), and hence, to make such investments.

 
Click here for a copy of the paper in Adobe's PDF format.



Hay Price Forecasts at the State Level
Matthew A. Diersen
Year: 2008
 

Abstract

Higher prices for major crops (e.g., corn, soybeans and wheat) have received considerable attention by analysts, researchers, and producers. A common perception is that acres can be readily bid away from other crops to quickly return to equilibrium price levels. Seldom mentioned are crops that do not trade on a national platform. Principal among these crops probably would be hay from alfalfa and grass. A balance sheet model is developed at the state level for South Dakota. As a state with typically large carryover stocks of hay and multiple markets served, South Dakota presents a stark contrast to states with more stable production, supply, and use. Several structural relations and equations are presented to forecast acres, supply, and price through an inverse demand function. A discussion follows on how to update the price forecast as additional information is obtained. Suggestions are also offered on extending the model to other states.

 
Click here for a copy of the paper in Adobe's PDF format.



Can Real Option Value Explain Why Producers Appear to Store Too Long?
Hyun Seok Kim and B. Wade Brorsen
Year: 2008
 

Abstract

Previous studies suggest that producers tend to store crops longer than makes economic sense. Since decisions to sell are irreversible, there can be a real option value from waiting to sell grain. This real option value may explain why producers appear to store too long. A seasonal mean reversion model is estimated that allows prices to be a random walk within a season, but mean reverting across crop years. Unless prices are extremely low, it is optimal for producers to sell before the mean reversion begins. Thus, the real option value of waiting cannot explain why producers seem to store at a loss in the latter part of crop years.

 
Click here for a copy of the paper in Adobe's PDF format.



A Comparison of Threshold Cointegration and Markov-Switching Vector Error Correction Models in Price Transmission Analysis
Rico Ihle and Stephan von Cramon-Taubadel
Year: 2008
 

Abstract

We compare two regime-dependent econometric models for price transmission analysis, namely the threshold vector error correction model and Markov-switching vector error correction model. We first provide a detailed characterization of each of the models which is followed by a comprehensive comparison. We find that the assumptions regarding the nature of their regime-switching mechanisms are fundamentally different so that each model is suitable for a certain type of nonlinear price transmission. Furthermore, we conduct a Monte Carlo experiment in order to study the performance of the estimation techniques of both models for simulated data. We find that both models are adequate for studying price transmission since their characteristics match the underlying economic theory and allow hence for an easy interpretation. Nevertheless, the results of the corresponding estimation techniques do not reproduce the true parameters and are not robust against nuisance parameters. The comparison is supplemented by a review of empirical studies in price transmission analysis in which mostly the threshold vector error correction model is applied.

 
Click here for a copy of the paper in Adobe's PDF format.



Hedge Effectiveness Forecasting
Roger A. Dahlgran and Xudong Ma
Year: 2008
 

Abstract

This study focuses on hedging effectiveness defined as the proportionate price risk reduction created by hedging. By mathematical and simulation analysis we determine the following: (a) the regression R2 in the hedge ratio regression will generally overstate the amount of price risk reduction that can be achieved by hedging, (b) the properly computed hedging effectiveness in the hedge ratio regression will also generally overstate the amount of risk reduction that can be achieved by hedging, (c) the overstatement in (b) declines as the sample size increases, (d) application of estimated hedge ratios to non sample data results in an unbiased estimate of hedging effectiveness, (e) application of hedge ratios computed from small samples presents a significant chance of actually increasing price risk by hedging, and (f) comparison of in sample and out of sample hedging effectiveness is not the best method for testing for structural change in the hedge ratio regression.

 
Click here for a copy of the paper in Adobe's PDF format.



Dynamic Decision Making in Agricultural Futures and Options Markets
Fabio Mattos, Philip Garcia and Joost M. E. Pennings
Year: 2008
 

Abstract

This paper investigates the dynamics of sequential decision-making in agricultural futures and options markets. Analysis of trading records of 12 traders identified considerable heterogeneity in individual dynamic trading behavior. Using risk measures derived from the deltas and vegas of trader’s portfolios, we find nearly half the traders behavior is consistent with a house-money effect and the other half with loss aversion. These findings correspond closely to expected behavior inferred from elicited utility and probability weighting functions. The results call into question more aggregate findings that discount probability weighting to develop risk measures which support the notion of more uniform, less heterogeneous, behavior. Understanding behavior in a prospect theory context appears to call for investigation of both the probability weighting and utility functions. Our findings also suggest that strategies for loss-averse traders who consolidate gains and avoid using gains in risk-seeking market activities are effective.

 
Click here for a copy of the paper in Adobe's PDF format.



On Term Structure Models of Commodity Futures Prices and the Kaldor-Working Hypothesis
Gabriel J. Power and Calum G. Turvey
Year: 2008
 

Abstract

Both prices and the volatility of storable agricultural commodity futures contracts have been rising since 2005 and particularly since 2007. This paper aims to answer two principal questions: (i) How has the behavior of these futures prices over time and across maturities changed with the rise of biofuels and their demand-side pres- sure on corn and related crops?, and (ii) Is there now stronger or weaker evidence of the Kaldor-Working convenience yield-storage hypothesis, whereby futures price backwardation can be explained by the high value of remaining inventory stocks when these are near stockouts? The empirical application is to Chicago Board of Trade corn, wheat and soybeans futures. To make use of all available futures data rather than only the nearby, this paper adopts a recently developed affine term structure model approach and conducts estimation in state-space form using the Kalman filter. A novel aspect of the research is that it allows an arbitrary number N of state vari- ables, where more variables provide further precision and curvature but at a higher computational cost. It is found that a three-state variable model containing both ran- dom walk and mean reversion components provides the most parsimonious fit during 1988-2004, but that a simple one-state variable model is optimal for the period 2005- 2007. The main implication is that futures prices since 2005 behave much more like a \random walk" than before. Also, the model allows us to estimate the term struc- ture of volatility and it is found that distant maturity futures should be expected to be much more volatile than historically normal. Two practical but only tentative implications are: (a) hedgers should use significantly lower hedge ratios than before, and (b) for traders, the classic Black-Scholes option pricing solution should perform better now than it has historically. Lastly, the paper finds partial empirical support for the convenience yield relationship with relative inventory stocks, especially for soybeans and wheat.

 
Click here for a copy of the paper in Adobe's PDF format.



The Shape of the Optimal Hedge Ratio: Modeling Joint Spot-Futures Prices using an Empirical Copula-GARCH Model
Gabriel J. Power and Dmitry V. Vedenov
Year: 2008
 

Abstract

Commodity cash and futures prices have been rising steadily since 2006. As evidenced by the April 2008 Commodity Futures Trading Commission Agricultural Forum, there is much concern among traditional futures and options market participants that the usefulness of commodity derivatives has been compromised. When basis risk is particularly high, dynamic hedging methods may be helpful despite their complexity and higher transaction costs. To assess the potential benefits of dynamic hedging in volatile times, this paper proposes a novel, empirical copula-based method to estimate GARCH models and to compute time-varying hedge ratios. This approach allows a nonlinear, asymmetric dependence structure between cash and futures prices. The paper addresses four principal questions: (1) Does the empirical copula-GARCH method overcome traditional limitations of dynamic hedging methods? (2) How does the empirical copula- GARCH hedging approach perform, for storable agricultural commodities, compared with traditional GARCH and Minimum Variance (static) hedging methods? (3) Is dynamic hedging more or less effective in the post-2006 biofuels expansion time period? (4) How sensitive is the ranking of methods to the hedging effectiveness criterion used? Preliminary findings suggest that the empirical copula-GARCH approach leads to superior hedging effectiveness based on some, but not all, risk criteria.

 
Click here for a copy of the paper in Adobe's PDF format.



Impacts of government risk management policies on hedging in futures and options:LPM2 hedge model vs. EU hedge model
Rui (Carolyn) Zhang, Jack E. Houston, Dmitry V. Vedenov, and Barry J. Barnett
Year: 2008
 

Abstract

The main objective of this study is to compare the impacts of government payments and crop insurance policies on the use of futures and options measured from a downside risk hedge model with the impacts analyzed by the expected utility (EU) hedge model. Understanding the effects of government-provided risk management tools on the private market risk management tools, such as futures and options, provides value to both crop farmers and policy makers. Comparison of the impacts from the two hedge models shows that crop farmer will hedge less in futures under the LPM2 model than under the EU hedge model. This finding indicates that model misspecification is another reason for the phenomenon that farmers actually hedge less in futures than predicted by the EU model. From the perspective of exploring new research techniques, this study applied two relatively new simulation concepts, copula simulation and conditional kernel density approach, to make the simulation assumptions less restrictive and more consistent with observations. The copula simulation applied in this study allows yield and price to have more flexible joint distribution functions than multivariate normal; the conditional kernel density approach used in farm yield simulation enables the variance of farm yield varies with county yield rather than being constant.

 
Click here for a copy of the paper in Adobe's PDF format.



Cash Settlement of Lean Hog Futures Contracts Reexamined
Julieta Frank, Miguel I. Gómez, Eugene Kunda and Philip Garcia
Year: 2008
 

Abstract

In 1997 the Chicago Mercantile Exchange replaced its live hog futures contract with a cash settlement mechanism based on a Lean Hog Index. Although cash settlement was expected to increase the use of the contract as a hedging tool, producers and packers are concerned that convergence between cash and futures prices is not occurring and that the volatility of the lean hog contract basis has increased in recent years. The purpose of the paper is to reexamine cash settlement of lean hog futures contracts as a hedging tool, focusing on basis behavior and management of basis risk. We also investigate alternative hedging instruments that take into account location differences between regional cash prices and the CME lean hog index. Our results indicate that basis has widened and its variability prior to expiration has increased in the cash settlement period. Nevertheless, there is no evidence that ex-ante basis risk has increased, suggesting that the ability to forecast basis prior to expiration has not decreased with cash settlement. Our findings indicate that a contract on a regional basis can reduce producer price risk and may increase market returns. The benefits of a regional basis appear to accrue from providing the producer with an opportunity to manage the variability in returns associated with both the price level and basis.

 
Click here for a copy of the paper in Adobe's PDF format.



Volatility Persistence in Commodity Futures:Inventory and Time-to-Delivery Effects
Berna Karali and Walter N. Thurman
Year: 2008
 

Abstract

Most financial asset returns exhibit volatility persistence. We investigate this phenomenon in the context of daily returns in commodity futures markets. We show that the time gap between the arrival of news to the markets and the delivery time of futures contracts is the fundamental variable in explaining volatility persistence in the lumber futures market. We also find an inverse relationship between inventory levels and lumber futures volatility.

 
Click here for a copy of the paper in Adobe's PDF format.



Market Depth in Lean Hog and Live Cattle Futures Markets
Julieta Frank and Philip Garcia
Year: 2008
 

Abstract

Liquidity costs in futures markets are not observed directly because bids and offers occur in an open outcry pit and are not recorded. Traditional estimation of these costs has focused on bidask spreads using transaction prices. However, the bid-ask spread only captures the tightness of the market price. As the volume increases measures of market depth which identify how the order flow moves prices become important information. We estimate market depth for lean hogs and live cattle markets using a Bayesian MCMC method to estimate unobserved data. While the markets are highly liquid, our results show that cost- and risk-reducing strategies may exist. Liquidity costs are highest when larger volumes are traded at distant contracts. For hogs the market becomes less liquid prior to the expiration month. For cattle this occurs during the expiration month when the liquidity risk is also higher. For both markets this coincides with periods of low volume. For the nearby contract highest trading volume occurs at the beginning of the month prior to expiration and lowest trading volume occurs in the expiration month. For both commodities the cumulative effect of volume on price change may lead to liquidity costs higher than a tick.

 
Click here for a copy of the paper in Adobe's PDF format.



The Adequacy of Speculation in Agricultural Futures Markets:Too Much of a Good Thing?
Dwight R. Sanders, Scott H. Irwin, and Robert P. Merrin
Year: 2008
 

Abstract

Long-only commodity index funds have been blamed by other futures market participants for inflating commodity prices, increasing market volatility, and distorting historical price relationships. Much of this criticism is leveled without any formal empirical support or even cursory data analyses. The Commodity Futures Trading Commission makes available the positions held by index funds and other large traders in their Commitment’s of Traders report. In this research, we make an initial assessment of the size and activity of index funds in traditional agricultural futures markets. The results suggest that after an initial surge from early 2004 through mid-2005, index fund positions have stabilized as a percent of total open interest. Speculative measures—such as Working’s T—suggest that long-only funds may provide a benefit in markets traditionally dominated by short hedging.

 
Click here for a copy of the paper in Adobe's PDF format.



Hedging Effectiveness around USDA Crop Reports
Andrew McKenzie and Navinderpal Singh
Year: 2008
 

Abstract

It is well documented that “unanticipated” information contained in USDA crop reports induces large price reactions in corn and soybean markets. Thus, a natural question that arises from this literature is: To what extent are futures hedges able to remove or reduce increased price risk around report release dates? This paper addresses this question by simulating daily futures returns, daily cash returns and daily hedged returns around report release dates for two storable commodities (corn and soybeans) in two market settings (North Central Illinois and Memphis Tennessee). Various risk measures, including “Value at Risk,” are used to determine hedging effectiveness, and “Analysis of Variance” is used to uncover the underlying factors that contribute to hedging effectiveness.

 
Click here for a copy of the paper in Adobe's PDF format.



Assessing the Value of Coordinated Sire Genetics in a Synchronized AI Program
Joe Parcell, Daniel Schaefer, Dave Patterson, Mike John, Monty Kerley, and Kent Haden
Year: 2008
 

Abstract

Synchronized artificial insemination was used to inseminate cows using different types of sire genetics, including low-accuracy, calving-ease, and high-accuracy. These three calf sire groups were compared to calves born to cows bred using natural service. We found substantial production efficiency grains, carcass merit improvement, and economic value to calves born to cows following a synchronized artificial insemination program with high-accuracy semen included. The economic advantage to the high-accuracy calf sire group was computed to be in the neighborhood of $40 to $80/head, relative to the natural service calf sire group.

 
Click here for a copy of the paper in Adobe's PDF format.



How Much Can Outlook Forecasts be Improved? An Application to the U.S. Hog Market
Evelyn V. Colino, Scott H. Irwin and Philip Garcia
Year: 2008
 

Abstract

This study investigates the predictability of outlook hog price forecasts released by Iowa State University relative to alternative market and time-series forecasts. The findings suggest that predictive performance of the outlook hog price forecasts can be improved substantially. Under RMSE, VARs estimated with Bayesian procedures that allow for some degree of flexibility and model averaging consistently outperform Iowa outlook estimates at all forecast horizons. Evidence from the encompassing tests, which are highly stringent tests of forecast performance, indicates that many price forecasts do provide incremental information relative to Iowa. Simple combinations of these models and outlook forecasts are able to reduce forecast errors by economically significant levels. The value of the forecast information is highest at the first horizon and then gradually declines.

 
Click here for a copy of the paper in Adobe's PDF format.



Hedging in Presence of Market Access Risk
Glynn T. Tonsor
Year: 2008
 

Abstract

Existing literature predominantly assumes perfect knowledge of production methods when deriving optimal futures position hedging rules. This paper relaxes this assumption and recognizes situations where producers interested in hedging may not know the exact input mix that will subsequently be used in their physical operations. This uncertainty is built into a conceptual model subsequently used to demonstrate the impacts of this risk on optimal hedging behavior.

 
Click here for a copy of the paper in Adobe's PDF format.



The Marketing Performance of Illinois and Kansas Wheat Farmers
Sarah N. Dietz, Nicole M. Aulerich, Scott H. Irwin, and Darrel L. Good.
Year: 2008
 

Abstract

The purpose of this paper is to investigate the marketing performance of wheat farmers in Illinois and Kansas over 1982-2004. The results show that farmer benchmark prices for wheat in Illinois and Kansas fall in the middle-third of the price range about half to three-quarters of the time. Consistent with previous studies, this refutes the contention that Illinois and Kansas wheat farmers routinely market the bulk of their wheat crop in the bottom portion of the price range. Tests of the average difference between farmer and market benchmark prices are sensitive to the market benchmark considered. Marketing performance of wheat farmers in Illinois and Kansas is about equal to the market if 24- or 20-month market benchmarks are used, is slightly above the market if a 12-month price benchmark is used, and is significantly less than the market if the harvest benchmark is used. The sensitivity of marketing performance to the market benchmark considered is explained by the seasonal pattern of prices. While Illinois producers performed slightly better than their counterparts in Kansas, notable differences in performance across these two geographic areas is not observed.

 
Click here for a copy of the paper in Adobe's PDF format.



Implication of Cotton Price Behavior on Market Integration
Yuanlong Ge, Holly H. Wang, and Sung K. Ahn
Year: 2008
 

Abstract

The cotton market in China is highly interactive with international markets, especially, the US market. The prices in these two markets can reveal important market relations. Investigating the data of futures prices from the New York Board of Trade (NYBOT) and the Zhengzhou Commodity Exchange (CZCE) using several time series methods, we find a long-run cointegration relationship between these I(1) series. Furthermore, a bi-directional Granger Causality between these two futures markets is detected with Generalized Autoregressive Conditional Heteroskedasticity (GARCH) error specifications. We also find the relationship is impacted by the Chinese exchange rate policy change in the 2005.

 
Click here for a copy of the paper in Adobe's PDF format.



Organic Premiums of U.S. Fresh Produce
Travis A. Smith, Biing-Hwan Lin, and Chung L. Huang
Year: 2008
 

Abstract

The study uses the 2005 Nielsen Homescan panel data to estimate price premiums and discounts associated with product attributes, market factors, and consumer characteristics, focusing on the organic attribute for 5 major fresh fruits and 5 major fresh vegetables in the United States. The results suggest that the organic attribute commands a significant price premium, which varies greatly from 13 cents per pound for bananas to 86 cents per pound for strawberries among fresh fruits and from 13 cents per pound for onions to 50 cents per pound for peppers among fresh vegetables. In terms of percentages, the estimated organic price premiums vary from 20% above prices paid for conventional grapes to 42% for strawberries among fresh fruits and from 15% above prices paid for conventional carrots and tomatoes to 60% for potatoes. Furthermore, prices paid for fresh produce are found to vary by other product attributes, market factors, and household characteristics.

 
Click here for a copy of the paper in Adobe's PDF format.


Home | Paper Archive | What's New | Submissions | Program | Executive Committee | Contact Us | Subscribe