Cameron S. Thraen

Willingness of land operators to participate in government-sponsored soil erosion control programs

Abstract Data were collected in 1986 from 552 landowners who were operating farms in erosion-prone areas of six Ohio counties. The purpose of the study was to identify predictive factors associated with willingness to participate in two types of soil conservation programs. Willingness to participate in an interest buy-down program was assessed using a three item index which evaluated support for the proposed conservation program. Willingness to sell private row-cropping rights to the federal government for permanent retirement of erosive land from agricultural production was also assessed. Multivariate regression analyses were used to examine the merits of a diffusion-farm structure perspective developed to guide the study. The findings revealed that 21.9% of the variance in the buy-down index and 21.5% of the variance in the purchase of the row-cropping rights factor were explained by the variables included in the model. The findings were basically consistent with theoretical expectations. Diffusion-type variables were shown to be the best predictors of willingness to participate in the government programs assessed.

Investing in Research and Education versus Commodity Programs: Implications for Agricultural Productivity

The long-term impact of research, education, and various government support programs on U.S. agricultural productivity was analyzed using an error correction model. Results indicate that the proposed reduction in commodity program expenditures (e.g. 1996 Farm Bill) is unlikely to reduce agricultural productivity. Results suggest that shifting public funds from commodity programs to education and research would raise U.S. agricultural productivity. Our estimates of long-term rates of return to public research are lower than those from most previous, perhaps due to our improved model specification, but are high enough to justify continued public investments to raise productivity.

Returns to American Agricultural Research: Results from a Cointegration Model

Abstract This study examines the returns to U.S. agricultural research investments for the years 1930 through 1990 using a cointegration model. Time series data on agricultural productivity, public and private research investments, farmers’ education, terms of trade, and commodity programs were found to be nonstationary and cointegrated. The estimated internal rates of return are 27 percent for public research and 6 percent for private research. These estimates from the most comprehensive and timely data assembled to date indicate that returns to public agricultural research compare favorably to real returns on alternative long-run investments, but do not call for large increases in investments suggested by previous studies or for the drop in public research expenditures appropriated by the U.S. Congress in recent years.

Mean-reversion in income over feed cost margins: Evidence and implications for managing margin risk by US dairy producers

With the increased volatility of feed prices, dairy farm managers are no longer concerned with managing only milk price volatility, but are considering the adoption of risk management programs that address income over feed cost (IOFC) margin risk. Successful margin risk management should be founded on an understanding of the behavior of IOFC margins. To that end, we have constructed forward IOFC margins using Class III milk, corn, and soybean meal futures prices. We focus on the characteristics of the term structure of forward IOFC margins, that is, the sequence of forward margins for consecutive calendar months, all observed on the same trading day. What is apparent from the shapes of these term structures is that both in times when margins were exceptionally high and in times when they were disastrously low, market participants expected that a reversal back to average margin levels would not come quickly, but rather would take up to 9 mo. Slopes of the forward margin term structure before and after most of the major swings in IOFC indicate these shocks were mostly unanticipated, whereas the time needed for recovery to normal margin levels was successfully predicted. This suggests that IOFC margins may exhibit slow mean-reverting, rather than predictable cyclical behavior, as is often suggested in the popular press. This finding can be exploited to design a successful catastrophic risk management program by initiating protection at 9 to 12 mo before futures contract maturity. As a case study, we analyzed risk management strategies for managing IOFC margins that used Livestock Gross Margin for Dairy Cattle insurance contracts and created 2 farm profiles. The first one represents dairy farms that grow most of their feed, whereas the second profile is designed to capture the risk exposure of dairy farms that purchase all their dairy herd, dry cow, and heifer feed. Our case study of this program encompasses the 2009 period, which was characterized by exceptionally poor IOFC margin conditions. We analyzed the dynamics of realized IOFC margins in 2009 under 4 different risk management strategies and found that optimal strategies that were founded on the principles delineated above succeeded in reducing the decline in IOFC margins in 2009 by 93% for the Home-Feed profile and by 47% for the Market-Feed profile, and they performed substantially better than alternative strategies suggested by earlier literature.

Adoption of soil conservation practices by farmers in erosion‐prone areas of Ohio: The application of logit modeling

Abstract Data were collected from land operators in erosion‐prone areas of six counties in Ohio to examine the factors that affect adoption of soil erosion control practices. A theoretical perspective was developed from selected components of diffusion and farm structure models. The study findings revealed that the theoretical perspective created for the study was inadequate to predict adoption behaviors examined. Respondents indicated that conventional tillage practices were most frequently used while soil conservation practices were seldom used. It was concluded that existing voluntary soil conservation programs will probably be ineffective until the costs of pollution become significantly higher.

Rational Expectations in Agriculture? A Review of the Issues and the Evidence

A rapidly-growing literature on rational expectation modeling and testing is found in agricultural economics. The reviewed studies do not offer a consensus regarding the verification or falsification of the rational expectation hypothesis in agricultural markets. Small sample sizes and the low power of statistical tests in the presence of alternative expectation hypotheses contribute to the variability in conclusions. An additional and confounding source of the variability is specification searching. With a wide variability in specifications, divergent results are to be expected. Despite the lack of consensus, rational expectations modeling and testing has improved our knowledge of both expectation formation in agricultural markets, and the processes of agricultural market equilibrium and price determination.

A Note: The CSCE cheddar cheese cash and futures price long‐term equilibrium relationship revisited

In the early 1990s, 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 potentially important 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 a contract on Cheddar Cheese. As the production of cheese represents over one third of the use of raw milk in the United States, this contract has the potential of serving as an important price risk management tool. Using unit root and cointegration techniques, Fortenbery and Zapata studied the cheese cash‐futures relationship over the period June 1993–July 1995. They reach the conclusion that the cash and futures markets, during the period of their analysis, had not established an economic equilibrium relationship. F&Z raise the important question as to whether the cheddar cheese market is in some sense “slow” to develop or whether there something fundamentally amiss. The work of F&Z provides an important initial step toward understanding the cash–futures relationship. This research revisits the existence of a cointegrating relation using a much longer time period and additional time‐series statistical tests. The results of this study suggest that the data support the establishment of an equilibrium relationship in the cheese markets and therefore provide support for the use of the futures market as a price risk management tool by the dairy industry.

Price Enhancement, Returns Variability, and Supply Response in the U.S. Dairy Sector

Dairy producers operating in the U.S. have been protected against market price variability by the federal price support program for over 35 years. During the late 1970s tax outlays to operate this program grew at a rapid rate. While many authors have addressed the economic implications of the existing dairy price support program, few have explicitly considered the relationship between risk aversion, capital investment, milk production, and support price policy in this process. This paper considers the role of uncertainty and risk-averse behavior and suggests that these elements are crucial to an economic analysis of the current program and future dairy policy issues.

Tails Curtailed: Accounting for Nonlinear Dependence in Pricing Margin Insurance for Dairy Farmers

Livestock Gross Margin Insurance for Dairy Cattle (LGM-Dairy) is a risk management tool for protecting milk income over feed cost margins. In this article, we examine the assumptions underpinning the method used to determine LGM-Dairy premiums. Analysis of the milk-feed dependence structure is conducted using copula methods, a rich set of tools that allow modelers to capture nonlinearities in dependence among variables of interest. We find a significant relationship between milk and feed prices that increases with time-to-maturity and severity of negative price shocks. Extremal, or tail, dependence is the propensity of dependence to concentrate in the tails of a distribution. A common theme in financial and actuarial applications and in agricultural crop revenue insurance is that tail dependence increases the risk to the underwriter and results in higher insurance premiums. We present, to our knowledge, the first case in which tail dependence may actually reduce actuarially fair premiums for an agricultural risk insurance product. We examine hedging effectiveness with LGM-Dairy and show that, even in the absence of basis or production risk, hedging horizon plays an important role in the ability of this tool to smooth farm income over feed cost margins over time. Rating methodology that accounts for tail dependence between milk and feed prices extends the optimal hedging horizon and increases hedging effectiveness of the LGM-Dairy program.

Linking of U.S. monetary policy and exchange rates to world soybean markets

The linkage between macroeconomic policies and agricultural commodity trade has become an important research issue of agricultural economists. This paper investigates the macroeconomic linkage of soybean trade competition between the exporting countries of the United States, Brazil, and Argentina in the EC-12 and Japan import markets. It is argued that U.S. monetary growth may have important impacts on the competitive position of U.S. soybean exports through exchange rates. Two relationships are investigated: (a) the effects of U.S. monetary growth on the agricultural trade weighted exchange rates, and (b) the responsiveness of agricultural commodity prices and U.S. exports to exchange rate movements. Results indicate that a weak dollar increases imports of soybeans and soymeal significantly which serves to increase the equilibrium world price and increase both U.S. and Brazilj Argentina exports in the long run. However, during periods of more expansionary U.S. monetary policy there is little evidence of significant increases in market share position for U.S. soybeans and soymeal in world markets.