Chad E. Hart

Ethanol Expansion in the Food versus Fuel Debate: How Will Developing Countries Fare?

This paper examines the impact of ethanol expansion in the United States, brought about by higher crude oil prices, on agricultural commodity prices. Given the United Statess stature as a major producer and exporter of many agricultural commodities, the resulting increase in commodity prices has spillover effects into the global market. Using the price changes estimated within a multi-commodity, multi-country agricultural modeling system, this paper attempts to show how an increase in world commodity prices would affect the costs of food baskets around the world and how higher food costs will impact food security, particularly in developing countries. In general, we find that countries where corn is the major food grain experience larger increases in food basket cost while countries where rice is the major food grain have smaller food basket cost increases. Countries where wheat and/or sorghum are the major food grains fall in between. Consequently, the highest percentage increases are seen in Sub-Saharan Africa and Latin America where food basket costs are estimated to increase by at least 10%. The lowest percentage increases are seen in Southeast Asia, with cost increases of less than 2.5%.

Drought impact on crop production and the soil environment: 2012 experiences from Iowa

Enormous challenges were presented by the 2012 drought. Poor water availability and high temperatures resulted in significant stress during critical phases of corn (Zea mays L.) and soybean (Glycine max L.) development. These stress factors lead to management challenges with insects, diseases, and reduced nutrient availability and uptake by plants. The drought triggered soil changes, particularly in conventional tillage systems, such as increased fracturing, crusting, and deterioration of soil structure and aggregation. All this reinforced the need for soil conservation planning, especially its necessary role in buffering against unpredictable conditions and the impacts of dry and wet events on production and soil quality. In 2011, the USDAs National Drought Mitigation Center reported that 43% of Iowa experienced moderate-drought conditions and nearly 10% experienced severe-drought conditions. In 2012, 100% of Iowa experienced severe-drought conditions, while 65% experienced extreme-drought conditions by October. This article addresses several effects of drought on soil and crop production and lessons learned that will help develop appropriate drought mitigation strategies for future soil and crop management practices. The 2012 drought created unfavorable soil conditions for plant development and growth and changes in soil structure in many areas in the Midwest. These changes in soil structure included fracturing…

Actuarial Fairness of Crop Insurance Rates with Constant Rate Relativities

Increased availability and demand for low-deductible crop insurance policies have increased focus on crop insurance rating methods. Actuarial fairness cannot be achieved if constant multiplicative factors are used to determine how premiums change as coverage levels increase. A comparison of premium rates generated by the factors used by the two most popular crop insurance products with those generated by a standard yield distribution shows that the popular insurance products overcharge for low-deductible policies in most counties. This overpricing may explain why large premium subsidies were required to induce farmers to move from low-deductible to high-deductible policies beginning in 2001.

Extension′s role in disseminating information about climate change to agricultural stakeholders in the United States

The U.S. Cooperative Extension Service was created 100 years ago to serve as a boundary or interface organization between science generated at the nation′s land grant universities and rural communities. Production agriculture in the US is becoming increasingly complex and challenging in the face of a rapidly changing climate and the need to balance growing crop productivity with environmental protection. Simultaneously, extension budgets are diminishing and extension personnel are stretched thin with numerous, diverse stakeholders and decreasing budgets. Evidence from surveys of farmers suggests that they are more likely to go to private retailers and consultants for information than extension. This paper explores the role that extension can play in facilitating climate change adaptation in agriculture using data from a survey of agricultural advisors in Indiana, Iowa, Michigan and Nebraska and a survey of extension educators in the 12 state North Central Region. Evidence from these surveys shows that a majority of extension educators believe that climate change is happening and that they should help farmers prepare. It also shows that private agricultural advisors trust extension as a source of information about climate change. This suggests that extension needs to continue to foster its relationship with private information providers because working through them will be the best way to ultimately reach farmers with climate change information. However extension educators must be better informed and trained about climate change; university specialists and researchers can play a critical role in this training process.

The Long-Term Structure of Commodity Futures

Futures markets on agricultural commodities typically trade with maximum maturity dates of less than four years. If these markets did trade with maturities eight or ten years distant, futures prices would have value as price forecasts and as a way to structure long-term swaps and insurance contracts. Agricultural commodity markets generally exhibit mean reversion in spot prices and convenience yields. Spot markets also exhibit seasonality. This study develops and implements a procedure to generate long-term futures curves from existing futures prices. Data on lean hogs and soybeans are used to show that the method provides plausible results.

A spatial Bayesian approach to weather derivatives

Purpose – While the demand for weather‐based agricultural insurance in developed regions is limited, there exists significant potential for the use of weather indexes in developing areas. The purpose of this paper is to address the issue of historical data availability in designing actuarially sound weather‐based instruments.Design/methodology/approach – A Bayesian rainfall model utilizing spatial kriging and Markov chain Monte Carlo techniques is proposed to estimate rainfall histories from observed historical data. An example drought insurance policy is presented where the fair rates are calculated using Monte Carlo methods and a historical analysis is carried out to assess potential policy performance.Findings – The applicability of the estimation method is validated using a rich data set from Iowa. Results from the historical analysis indicate that the systemic nature of weather risk can vary greatly over time, even in the relatively homogenous region of Iowa.Originality/value – The paper shows that w...

Price Mean Reversion, Seasonality, and Options Markets

Options on agricultural commodities with maturities exceeding one year seldom trade. One possible reason to explain this lack of trading is that we do not have an accurate option pricing model for products where mean reversion in spot-price levels can be expected. Standard option pricing models assume proportionality between price variance and time to maturity. This proportionality is not a valid assumption for commodities whose supply response brings prices back to production costs. The model proposed here incorporates mean reversion in spot-price levels and includes a correction for seasonality. Mean reversion and seasonality are both observed in the soybean market. The empirical analysis lends strong support to the model.

An Insurance Approach to Risk Management in the Ethanol Industry

The vast majority of crop and revenue insurance policies sold in the United States are singlecrop policies that insure against low yields or revenues for each crop grown on the farm. But, increasingly, producer income is based more on the value of crops that have been converted into a value-added product such as ethanol. Moreover, the recent increases in energy and commodity price levels and volatilities emphasize the importance of risk management to ethanol investors. This paper uses an insurance approach to outline a risk management tool which mimics the gross margin level of a typical corn-based ethanol plant. The gross margin, premium, and indemnity levels are calculated on a per bushel basis to enable producers/investors to utilize the product based on their ownership share in the production facility. The fair premium rates are shown to be quite sensitive with respect to corn and energy price levels and volatilities.

Modelling the Outcomes of CAP Reform

Preceding and just following the 1992 Common Agricultural Policy (CAP) reform, there were numerous analyses by modellers on both sides of the Atlantic. Information provided by these analysts was of interest to decision-makers and industry groups in the European Union (EU) as well as to those in the United States, Canada, Australia and others that expected to see significant impacts of these changes on their agricultural markets. Policy-makers in Europe and elsewhere expected significant impacts of these policy reforms, but quantification of the impacts could be useful in evaluating the direction and magnitude of the changes.

Profitability of organic and conventional soybean production under 'green payments' in carbon offset programs

Emphasis on reducing emissions from the greenhouse gases (GHG), carbon dioxide (CO 2 ), nitrous oxide (N 2 O) and methane (CH 4 ) has increased in recent years in the USA, primarily for industry, transportation, energy and agricultural sectors. In this study, we utilized on-farm data collected by the USDA-National Agricultural Statistics Service (NASS) Agricultural Resource Management Survey (ARMS), secured under an agreement with the USDA-Economic Research Service (ERS) to analyze the profitability of organic and conventional soybean production, based on changes that ‘green payments’ in a cap-and-trade system would introduce in agricultural markets in the USA. In particular, the analysis focused on establishing whether organic producers would be better positioned to sequester carbon (C) and reap the benefits of the C-offset scheme compared to conventional producers, given the differences in costs, management practices and environmental benefits between organic and conventional production methods. We estimated several changes in profitability of soybean producers according to management practices, incentives for the generation of offset credits, and increase in energy input prices that a potential cap-and-trade system may introduce in future agricultural markets in the USA. Survey data suggested that even with lower yields, conventional producers could profit from converting to organic agriculture, given organic price premiums. In addition, taking into consideration both direct and indirect costs, average cost for conventional-till (CT) organic soybean production was approximately 9% lower than no-till (NT) conventional production. With a C market and payments for soil C sequestration through potential Clean Energy legislation, additional profit could be accrued by organic producers, because organic production would have 28% greater ton CO 2 eq. acre −1 yr −1 sequestration than conventional NT. Thus, the environmental benefits from GHG reduction could incentivize increased conversion from conventional to organic production across the USA.