Carl Zulauf

Monte Carlo Analysis of Mean Reversion in Commodity Futures Prices

This study examines whether mean reversion is present in corn, soybean, wheat, live hog, and live cattle futures prices. Consistent with earlier studies, asymptotic regression results provide substantial evidence of mean reversion in commodity futures price movements. In sharp contrast, the Monte Carlo regression analysis does not provide support for the existence of mean reversion in commodity futures prices. A clear implication is that the asymptotic regression results are misleading. The reason is that the small sample distributions of test statistics are not well approximated by assumed asymptotic distributions. Copyright 1996, Oxford University Press.

A reappraisal of the forecasting performance of corn and soybean new crop futures

Forecasting performance of December corn and November soybean futures contracts during the previous spring was evaluated using the commonly specified price‐level and percent‐change models. These models invoke different assumptions regarding stationarity. Using Steins analytical framework, results for the price‐level model suggest avoidable social loss existed in the soybean market since 1973, because November futures provided biased forecasts. Regression R-super-2s for both corn and soybeans declined substantially between 1952–1972 and 1973–1997, suggesting total social loss increased. By contrast, results from the percent‐change model suggest only unavoidable social loss existed in the corn and soybean markets, because the futures provided unbiased forecasts. R-super-2 increased for corn but declined for soybeans, suggesting unavoidable social loss declined for corn, but increased for soybeans. The important, conflicting nature of the results from the two models underscores the importance of examining alternative model specifications when evaluating price forecasting performance.

Average Crop Revenue Election, Crop Insurance, and Supplemental Revenue Assistance: Interactions and Overlap for Illinois and Kansas Farm Program Crops

Farm-level data from Illinois and Kansas for the 1991–2007 crops are used to examine the interaction and overlap among crop revenue insurance, Supplemental Revenue Assistance (SURE), and Average Crop Revenue Election (ACRE). Compared with 75% Crop Revenue Coverage Insurance (75% CRCP), ACRE provides more payments and has a greater impact on minimum farm revenue for the Illinois farms. In contrast, for the Kansas farms, 75% CRCP has the greater impact. SURE’s relative impact on the Illinois and Kansas farms depends on the metric. The overlap in payments from ACRE and 75% CRCP resulting from covering the same part of the revenue risk distribution is estimated to be less than 5% of ACRE payments. Several proposals for improving the farm safety net are discussed.

Implications of within county yield heterogeneity for modeling crop insurance premiums

Purpose - Farm level data are essential to accurate setting of crop insurance premium rates, but their time series tends to be too short to allow them to be the sole data source. County level data are available in longer time series, however. The purpose of this paper is to present a methodology to make full use of the information inherent in each of these data sets. Design/methodology/approach - The paper uses a novel application of statistical tools for using farm and county level yield data to generate farm level yield densities that explicitly incorporate within county yield heterogeneity while accounting for systemic risk and other spatial or intertemporal correlations among farms within the county. Findings - The empirical analysis shows that current approaches used by the Risk Management Agency to individualize premiums for a farm result in substantial mispricing of crop insurance premiums because they do not adequately capture farm yield variability and yield correlations between farms. The new premium setting method is empirically shown to substantially reduce government subsidies for crop insurance premiums. Originality/value - The paper demonstrates how to extract more information from available data when setting crop insurance premiums, which allows the government to more closely tailor premiums to the farm than do current approaches.

Political Economy of the 2014 Farm Bill

This article assesses the political economy of the 2014 farm bill, which eliminated annual fixed direct payments but offers enhanced downside risk protection against low prices or declining revenue. The farm bill secured substantial bipartisan majorities in a politically contentious Congress. The countercyclical structure of U.S. support is reaffirmed and crop insurance is enhanced as a safety net pillar. Open policy issues include the distribution of benefits among crops, the design of multiple year support around moving-average revenue benchmarks versus fixed references prices, and questions related to crop insurance, including the overall level of premium subsidies. In an international context, we conclude the 2014 farm safety net likely would not have been enacted had multilateral agreement been reached on the 2008 Doha Round negotiating documents; conversely, the 2014 farm bill makes achieving those limits more difficult.

A Spatial Equilibrium Analysis of Regional Structural Change in the U.S. Dairy Industry

During the past 25 years, regional distribution of U.S. milk production has changed as production in the South and West has grown. This changing regional distribution of production is often cited as a contributing factor to regional discord in the U.S. dairy industry (e.g., Blayney and Southard). The impact of various factors on the regional distribution of milk production has been analyzed. These factors include: federal milk marketing orders (McDowell; Schiek), federal price support policy (Hallberg et al.; McDowell), prices and associated elasticities of raw milk, milk products, and production inputs (Ruane and Hallberg; Batista; Chavas, Kraus, and Jesse; and Weersink and Howard), new technologies (Weersink and Tauer), and demand variables (Ruane and Hallberg). Each of these studies provides insight into the impact of one or two variables upon the changing regional distribution of U.S. milk production. However, without a common data base and analytical technique, it is difficult to compare the relative importance of supply, demand, and policy variables on regional distribution of U.S. milk production. Such a comparative analysis is the focus of this study. Results of this analysis should be of interest to milk producers, consumers, dairy product manufacturers, dairy cooperatives, and policy makers as they adjust to the changing regional distribution of milk production.

Has the Market's Estimate of Crop Price Variability Increased since the 1996 Farm Bill?

Following enactment of the 1996 Farm Bill, corn and soybean implied volatilities covering the preharvest and storage seasons increased 16–23% between 1987–1995 and 1997–2001. The increase was statistically significant at the 90% confidence level. Standard deviation of corn and soybean prices derived from the implied volatilities increased 7–25%, but only the increase for preharvest corn was statistically significant. Further muddling the picture is the decline in variability of annual U.S. average corn and soybean cash price. These mixed findings point to continuing disagreement about governments role in managing farm risk in the post-1996 Farm Bill world. Copyright 2003, Oxford University Press.

Weak- and Strong-Form Rationality Tests of Market Analysts' Expectations of USDA Hogs and Pigs Reports

This study investigates the rationality of pre-release expectations of experts concerning USDA Hogs and Pigs reports. The expectations are weak-form rational in that they are unbiased predictors of actual report values and the forecast errors are not autocorrelated. In a test of strong-form rationality, all of the economic variables examined were not related to the forecast errors. Thus, the evidence is that expectations of the Hogs and Pigs report are strong-form rational.

The Challenge of Postmodernism to Applied Economics

Philosophical systems influence how applied economists choose problems worthy of research, how they analyze those problems, and how they interpret results. Philosophical systems also influence how the other disciplines and the public define problems and assess the proper role for economists in addressing those problems. Western philosophy has followed two major branches or systems in the nineteenth and twentieth centuries. One is the analytical, modern, or Anglo-American tradition. The other is continental philosophy, out of which postmodernism has developed. As a general philosophy, the analytical school is best exemplified by the Enlightenment. It had origins in the philosophy of John Locke, emphasizing that the ideal world lies in a natural order of no collective restraints

Pre-Harvest Pricing Strategies in Ohio Corn Markets: Their Effect on Returns and Cash Flow

This paper contributes to the debate on whether pre-harvest pricing strategies can improve returns over cash sales at harvest. It also examines cash flow needs of such strategies. The analysis is conducted for Ohio corn produced from 1986 through 1999. The pre-harvest strategies evaluated (short futures, long put, synthetic long put, put-call fence) did not statistically improve returns over cash sales at harvest. However, if implemented during or before planting, these naive strategies reduced the standard deviation of annual gross income. Substantial cash flow may be incurred, either to establish the strategy or meet margin calls. Therefore, assessments of pre-harvest pricing strategies should include cash flow needs, along with return and risk. Key Words: cash flow risk, pre-harvest pricing strategies, price risk.