Frank S. Novak

Acreage Response Under Canada's Western Grains Stabilization Program

An aggregate acreage supply model for the Canadian prairies is estimated assuming that farmers base short-run acreage decisions on the ex ante rational expectation and variance of per-hectare revenue. To account for the effects of government intervention, a structural model of the Western Grains Stabilization Program is incorporated into the estimation framework. Results indicate the Program contributed to modest increases in cropped acreage between 1976 and 1990.

Alternative Pricing and Delivery Strategies for Alberta Cattle Feeders

This study evaluates the risk and returns to cattle feeding in Alberta from the application of alternative marketing and pricing strategies. Feedlot finishing of 650 pound calves and 800 pound yearlings is modeled over the years from 1980 to 1993. The results of the study are based on the domestic and US marketing of live cattle using traditional cash marketing, futures contracts, put options, and forward production contracting systems. Use of the Western Domestic Feed Barley contract is also simulated. The results showed that barley price changes produced relatively small return changes compared to feeder and fat cattle price changes. An important source of return risk was found to be basis risk. Production contracting strategies which eliminated basis risk were found to provide the best returns in a market based risk-return comparison. The use of put options did not add value to cattle feeding investments.

An analysis of alternative cropping decision rules

Abstract The research reported here measures the effects on the probability distribution of the present value of after-tax income of several different cropping decision systems in Alberta. Dynamic flex-cropping decision rules generate higher levels of returns and less downside risk than all other alternatives considered here. Dynamic decision models which ignore taxes and the stochastic dynamic nature of prices produce suboptimal results relative to models which consider these factors and relative to a fixed rotation decision rule. This suggests that careful attention must be paid to the factors included in these models if they are to generate rules which will improve the risk-return trade-off for farm managers.

Pork Risk Management Strategies For The Alberta Hog Industry

This study simulated and evaluated several different types of marketing strategies from 1981 to 1995 and 1990 to 1995 in the Alberta pork industry. The various types of strategies analyzed included cash marketing, routine and selective hedging, routine forward contracting, routine window contracting using either a confidence interval or a projected break-even cost to set the window floor, routine minimum price contracting and selective window contracting. No one marketing strategy stood out as superior in all measurement criteria; increased mean revenues, lowered the standard deviation of revenues, reduced the frequency of large losses and reduced the maximum loss in absolute value. There are two main reasons as to why this was so. In several circumstances, such as the periods of late 1988, early 1989 and late 1994, early 1995 feed prices sharply increased while hog prices sharply declined. Some marketing strategies allowed for the hog price to be somewhat controlled, but did not provide protection on the input side, that is feed prices. Other strategies that used window contracting or minimum price contracting did allow for the eventual price received to cover the projected break-even price, but were expensive in doing so due to the cost of price insurance. This study provides a framework in which to develop shortterm window contracts that are fair to both the contract provider and pork producer.

Environmental and Financial Sustainability of Forest Management Practices

One of the guiding themes for forest management policy throughout much of North America is sustained yield. The basic premise behind this theme is that a constant or non-declining flow of services from the forest is socially desireable. Unfortunately, the act of capturing the benefits of this service (timber harvesting) often has detrimental effects on the timber-productive capacity of a forest site. This paper presents a dynamic program that is used to determine the optimal harvest system choice for a timber stand described by average piece size, stand density, a measure of site quality, and stumpage value. The harvest systems are defined by logging costs, reforesation and rehabilitation costs, and the impact of the system on the productivity of the site. An application of the model is presented for lodgepole pine in Alberta. We conclude that at high discount rates, soil conservation is not economically rational. At lower discount rates, some degree of soil conservation is desirable on the more productive sites. At lower discount rates, there also appears to be an incentive for mroe intensive forest management. Limitations on acceptable harvest practices can have a large impact on optimal rotation age and the volume harvested. There is a large opportunity cost resulting from a requirement for sustainable volume production because of the impact of harvsting on soil productivity.

An Econometric Analysis of the Relationship Between Alberta and United States Livestock Markets

This study uses Vector Autoregressions to investigate and measure the relationship between Alberta slaughter steer prices, United States - Canada exchange rates, Texas slaughter steer prices, nearby live cattle futures prices and live animal exports to the United States (in dollars). The general conclusions are that the exchange rate has a relatively smaller impact on Alberta slaughter steer prices than do U.S. steer markets. Shocks to the exchange rate result in a smaller change to Alberta prices than equally likely shocks to the U.S. futures price. Typically over 1 month periods the U.S.-Canada exchange rate does not play a big role in changing Alberta prices. This may be due to the relative stability of the exchange rate over shorter time periods relative to U.S. cattle prices. Live animal exports are more sensitive to changes in other variables not included in our model than to U.S steer prices, Alberta steer prices or exchange rates. These results have possible implications for Alberta cattle feeder investors. The stronger influence of the futures prices on Alberta prices suggest that Alberta investors first look at the futures market for the price information that most strongly influences the Alberta market. The close relationship of the Alberta market and the futures market implies that the futures market can be used by Alberta cattle investors for risk management. There still exist local Alberta factors that contribute to price risk but the U.S cattle market is the major source of price risk.

A dynamic analysis of management strategies for Alberta hog producers

In this paper, we examine risk reductions possible by including off-farm assets with farm assets in a firm growth context. We specify a dynamic investment model in which an individual can invest in hog fmishing barns, stocks, and fmancial holdings. We solve this model for an Alberta hog fmisher using alternative objective functions representing different types of risk preferences. Our results indicate that holding stocks is an effective means of reducing risks and increasing wealth. -

An Economic Analysis of Alternative Cropping Decisions Under Uncertainty

This project has examined after tax gross margin net present values accruing to Albertawheatf armers under three fertilizer and crop rotation systems; a fixed rotation traditional fertilizer system, a static economic fertilizer decision system within a fixed rotation, and a static economic fertilizer decision system within a dynamic flex-cropping framework. Decision rules appropriate to each system were developed for case farms in three Alberta agro-climatic regions; Medicine Hat, Lethbridge and Olds. The flex-cropping issue is expressed in a dynamic programming framework and incorporates elements not fully explored in previous studies; income taxation, variable input level decisions and stochastically determined moisture conditions and crop prices. Decisions are compared by simulating net present values of after tax gross margins for each system. The traditional system generatedthe lowest net present value, approximately 5 to 17 per cent below the static economic system. Greater improvements, on the order of 14 to 31 per cent above the static economic system, were observed by following dynamic flex-cropping decision rules. Not only did the dynamic flex-cropping decision rules generate superior decision rules regarding mean net present values, the rules were also risk efficient. The probability of low gross margins was minimized in all cases by following the dynamic flex-cropping decision rules. The results of this and related studies indicate that dynamic flex-cropping models are viable for solving crop scheduling problems. The prescriptive power of the model is limited by available data, limitations which reside primarily in the agronomic components. The relationship between spring soil moisture, soil nutrients, and yield must be more clearly defined. This may be accomplished through extensive and long term field trials or through use of emerging biophysical models. Standardization of soil moisture classifications, including method of sampling and depth of measurement, would make field data more adaptable for making fertilizer and recropping decisions. The production functions defining the relationship between spring soil moisture levels and yields are particularly important. These require continued empirical attention. The model developed lends itself readily to extensions such as additional crops,fertilizer inputs, erosion costs and soil degradation issues, financial structure of the farm, and evaluating the influence of government programs. Modern computers with large computational and storage capabilities make the implementation of stochastic dynamic programming methodology a viable farm management tool.

An Analysis of Risk and Return in Hog Finishing

The objectives of this study were to measure returns and the variation in returns for hog finishers in Alberta. From this base, different strategies were assessed as to their ability to reduce the level of price risk faced by producers. The National Tripartite Stabilization Program was reviewed along with hedging strategies using the Chicago Mercantile Exchange Live Hogs futures. Risk was measured using the Mean Square Error (MSE) and the Capital Asset Pricing Model (CAPM) beta. A twelve month rolling average of nearby basis was used to predict hog prices. All of these strategies studied, the NTSP, a selective investment model, a 100% hedge and an optimal hedge, reduced risk compared to the base model. The 100% hedge reduced risk to the greatest extent. The NTSP alone reduced risk and increased returns. When using the Capital Market Line as a means of measuring the risk return tradeoff, all the strategies provided a viable alternative for risk reduction compared to the base model. The CAPM betas for the various strategies were very low. Hog finishing could provide a diversification opportunity for holders of a market portfolio.

Assessment of the Effect of the Policy Environment on Farm Decision-Making: Aggregate Acreage Response in the Canadian Prairies Under the Western Grains Stabilization Program

An aggregate acreage supply model for the Canadian prairie provinces is estimated under the assumption that farmers base acreage allocation decisions on the rational ex-ante expectationa and variance of net per hectare revenue. In order to account directly for the effects of government intervention during the period of estimation, a structural model of the Western Grains Stabilization Program is incorporated into the estimation framework. Results indicate that the revenue enhancement and revenue stabilization effects of the program both contributed nearly equally to modest increases in cropped acreage between 1976 and 1990.