Andrew M. McKenzie

Market Incentives for Safe Foods: An Examination of Shareholder Losses from Meat and Poultry Recalls

Meat and poultry recalls, while voluntary, are carried out under governmental oversight. If firms have financial incentives to avoid being implicated in a recall situation, governmental involvement in recalls may cause firms to internalize social costs when making investment decisions concerning food safety controls. To examine these incentives, we analyze federally supervised meat and poultry recalls from 1982 to 1998 within an event study. Results show significant shareholder losses when publicly traded food companies are implicated in a recall involving serious food safety hazards. We find no evidence that the stock market reacts negatively when recalls involve less severe hazards. Copyright 2001, Oxford University Press.

MARKET EFFICIENCY IN AGRICULTURAL FUTURES MARKETS

Market efficiency and unbiasedness are tested in four agricultural commodity futures markets - live cattle, hogs, corn, and soybean meal - using cointegration and error correction models with GQARCH-in-mean processes. Results indicate each market is unbiased in the long run, although cattle, hogs and corn futures markets exhibit short-run inefficiencies and pricing biases. Models for cattle and corn outperform futures prices in out-of-sample forecasting. Results also suggest short-run time-varying risk premiums in cattle and hog futures markets.

Unbiasedness and Market Efficiency Tests of the U.S. Rice Futures Market

This study examines short-run and long-run unbiasedness within the U.S. rice futures market. Standard OLS, cointegration, and error-correction models are used to determine unbiasedness. In addition, the forecasting performance of the rice futures market is analyzed and compared to out-of-sample forecasts derived from an additive ARIMA model and the error-correction model. The results of our unbiasedness tests and the forecasting performance of the rice futures market provide supporting evidence that the U.S. long-grain rough rice futures market is efficient. The results have important price risk management and price discovery implications for Arkansas and U.S. rice industry participants.

LL601 Contamination and Its Impact on U.S. Rice Prices

LL601 is a genetically modified rice variety and unapproved for commercial use. Its presence was found in commercial shipments of U.S. rice in 2006. This article explores its impact on prices and volume marketed for both the United States and Thailand, the major export competitor. The results show a significantly adverse but short duration effect on the U.S. rice market and little to no effect on the Thai rice market.

Which Broiler Part is the Best Part

Predominance of production and marketing contracts in the broiler industry suggests a traditional analysis of price relationships might no longer be appropriate. In this study, markets for broiler cuts are defined as spatial. Results of a vector autoregressive regression analysis of monthly USDA data from 1987 to 2000 verify the price relationship between white meat and whole broiler prices. Price shocks in the boneless skinless breast market have a greater effect than dark meat shocks, suggesting this market is most important in price transmission. These results will assist industry participants to form more effective marketing and pricing strategies, thus adding efficiency to the market.

The dynamic relationships between world and domestic prices of rice under the regime of agricultural trade liberalization in Bangladesh

The article examines the dynamic relationship between the world and the domestic market price of rice for Bangladesh given agricultural trade liberalization. A Johansen multivariate cointegration test was used, followed by an error correction model. Results show that there exists a long-run unidirectional equilibrium relationship, meaning that the domestic prices adjust to the world prices but not vice versa. Our results highlight the dependence of the Bangladeshi rice market on the world rice market and underline the need for adequate policies which specifically address the issue of food security when world prices are very high. The goal of such policies should be to dampen or reduce domestic price volatility induced by the world market.

Managing Price Risk in Volatile Grain Markets, Issues and Potential Solutions

During 2008 extreme price volatility in grain markets led to country elevators incurring unprecedentedly large margin calls on their futures hedges. As a result elevators’ traditional liquidity sources and lines of credit were stretched to breaking point. This article explores the potential liquidity benefits of making available an Over-the-Counter Margin Credit Swap contract to grain hedgers. The swap would enable hedgers to draw upon sources of capital outside the farm credit system to provide liquidity needed to make margin calls. Simulation results clearly show that a Margin Credit Swap contract would provide significant liquidity benefits to hedgers during volatile periods.

How do you straddle hogs and pigs? Ask the Greeks!

Evidence of distortions is found in commodity options premiums around informational events. Option Greeks are used to uncover the nature of these distortions in terms of underlying factors. Both changes in underlying futures prices and implied volatility are mispriced.

How Much is That Exam Grade Really Worth? An Estimation of Student Risk Aversion to Their Unknown Final College Course Grades

This study created an experimental design with which students can empirically assess their risk behavior with respect to exam grades within an expected utility framework. Specifically, the authors analyzed students’ risk preferences associated with taking exams and earning a “risky” unknown grade versus not taking exams and instead obtaining a “sure” grade. Students have grade-choice decisions in nonhypothetical situations that impact their actual exam grades. Estimates indicate that the more risk-averse a student is, the more willing he or she is to accept a lower certain grade and not take an exam than to run the risk of actually taking it. We believe that this experimental setup and its binding results make it an easy but effective way of teaching the obtuse concept of risk aversion.

Hedging Effectiveness Around U.S. Department of Agriculture Crop Reports

It is well documented that ‘‘unanticipated’’ information contained in United States Department of Agriculture (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.