David A. Hennessy

The Production Effects of Agricultural Income Support Policies Under Uncertainty

This analysis decomposes the production impacts of income support programs into wealth, insurance, and coupling effects. Under the usual assumptions about preferences, the wealth and insurance effects of many support programs increase optimal input levels even for supposedly decoupled programs. If the program is “coupled” in the usual sense, then all three effects often act in the same direction. It is concluded that studies of trade and domestic policy reform in stochastic environments should consider insurance and wealth effects. The derivative conditions required to obtain results are also subjected to scrutiny. Simulations for an Iowa corn producer confirm the comparative statics. Copyright 1998, Oxford University Press.

Input Demand under Yield and Revenue Insurance

Previous studies disagree on the effects of insurance on fertilizer application rates. The effect of increased fertilizer on the probability of low yields primarily determines whether fertilizer and insurance are substitutes or complements. The authors estimate conditional distributions of corn yields to determine if the technical relationship between yields and fertilizer supports the hypothesis that insurance increases optimal application rates. Their results indicate no support for this hypothesis. At all nitrogen fertilizer rates and reasonable levels of risk aversion, nitrogen fertilizer and insurance are substitutes, suggesting that those who purchase insurance are likely to decrease nitrogen fertilizer applications.

Information Asymmetry as a Reason for Food Industry Vertical Integration

Three trends that have been subject to recent discussion are a movement away from undifferentiated agricultural commodities toward more specialized products, reduced reliance on open markets for raw agricultural products, and a movement toward agricultural industrialization. Recent research suggests that demographic trends may be causing the first trend, while the other two are closely related phenomena. This research suggests that information externalities, arising from uncertainty concerning the nature of food quality and problems in detecting quality, may be reasons why vertical coordination is being used to circumvent the marketplace.

On Monoculture and the Structure of Crop Rotations

An issue when seeking to identify rotation choice is persistence in yield-enhancement and input-saving carry-over effects. Focusing on carry-over length and the monoculture decision, we use quasi-convexity of choice functions to develop price-independent and price-dependent principles concerning rotation structure. Iowa corn-soybean rotation data suggest corn has one-year memory. For corn, soybeans in the prior year is yield increasing (16.5 bu./ac.) and nitrogen saving (51 lb./ac.). The hypothesis that soybean has two-year memory cannot be rejected. Corn in the prior year (two years) increases yield by 7 bu./ac. (11.6 bu./ac.). We simulate to find price and practice subsidy levels that support different rotations.

The Use of Archimedean Copulas to Model Portfolio Allocations

A copula is a means of generating an n-variate distribution function from an arbitrary set of n univariate distributions. For the class of portfolio allocators that are risk averse, we use the copula approach to identify a large set of n-variate asset return distributions such that the relative magnitudes of portfolio shares can be ordered according to the reversed hazard rate ordering of the n underlying univariate distributions. We also establish conditions under which first- and second-degree dominating shifts in one of the n underlying univariate distributions increase allocation to that asset. Our findings exploit separability properties possessed by the Archimedean family of copulas.

Tests for the Role of Risk Aversion on Input Use

For risk-averting agents, risks alter production decisions while the existence of institutions to insure against adverse states of nature will likely restore decisions toward levels under risk neutrality. In this article, conditions are identified on a stochastic technology to test H rn 0,≤ : that risk averters choose smaller input levels than risk neutral agents, and H ra 0,≤ : that an increase in risk aversion reduces input use. A robust statistical method to test for dominance is adapted to stochastic production relations. It is found that H rn 0,≤ is likely true for nitrogen application on Iowa corn. Weaker evidence is found in favor of H ra 0,≤ . Copyright 2003, Oxford University Press.

Leadership and the Provision of Safe Food

Modern food production typically involves many interacting stages and two or more decision makers. There is reason to believe that inputs in determining quality likely complement. And it is not possible to regulate many of these inputs. In a food production system possessing these characteristics, we show that leadership by one or more firms through communicating actions may be used as a mechanism to increase overall food quality. As there may be no private incentive to lead, there may be strategic merit in assigning liability through legislation. We also suggest the possibility that genetics are leadership instruments in hog production systems.

Systemic failure in the provision of safe food

Abstract Many deficiencies in the capacity of a food system to deliver safe products are systemic in nature. We suggest a taxonomy of four general ways in which a systemic failure might occur. One relates to the connectedness, or topology, of the system. Another arises from mistrust on the part of downstream parties concerning signals on product attributes, production processes, and the performance of regulatory mechanisms. A third arises when asymmetric information leads to low incentives for preserving food quality. Finally, inflexibilities in adapting to different states of nature may leave the system vulnerable to failures. Innovations in information technology and institutional design may ameliorate many problems, while appropriate trade, industrial organization, science, and public infrastructure policies may also fortify the system.

Crop Yield Skewness Under Law of the Minimum Technology

No satisfactory motivation has been forwarded in favor of any crop yield distribution, including the normal. This article explores the foundations of yield distributions for the Law of the Minimum resource constraint technology at the plot level of analysis. With independent, identical, uniform resource availability distributions the yield skew is positive, whereas it is negative whenever the distributions are normal. Simulations show how asymmetries in resource availabilities determine skewness. It is suggested that a negative yield skew occurs whenever production is tightly controlled so that the left tails of some resources availabilities distributions are thin. Irrigation may increase yield skewness. Copyright 2009, Oxford University Press.

Chapter 2 Uncertainty, risk aversion, and risk management for agricultural producers

Abstract Uncertainty and risk are quintessential features of agricultural production. After a brief overview of the main sources of agricultural risk, we provide an exposition of expected utility theory and of the notion of risk aversion. This is followed by a basic analysis of agricultural production decisions under risk, including some comparative statics results from stylized models. Selected empirical topics are surveyed, with emphasis on risk analyses as they pertain to production decisions at the farm level. Risk management is then discussed, and a synthesis of hedging models is presented. We conclude with a detailed review of agricultural insurance, with emphasis on the moral hazard and adverse selection problems that arise in the context of crop insurance.