Matthew T. Holt

Acreage Decisions Under Risk: The Case of Corn and Soybeans

An acreage supply response model is developed under expected utility maximization. The resulting framework is used to specify and estimate a system of risk-responsive acreage equations for corn and soybeans in the United States. Particular attention is given to the truncation effects of government price supports on the distribution of corn and soybean prices. Also, a wealth variable is included in the acreage equations. The empirical results indicate that risk and wealth variables play an important role in corn-soybean acreage decisions. The analysis also shows that cross-commodity risk reduction is important in acreage allocation decisions.

Price Transmission and Asymmetric Adjustment in the U.S. Beef Sector

The U.S. livestock sector has experienced numerous structural changes in recent years. For example, the meatpacking industry has experienced many mergers and acquisitions leading to significant increases in industry concentration. In particular, the four-firm concentration ratio for steer and heifer slaughter, a frequently cited statistic and an important indicator of industry concentration, increased from 35.7% in 1980 to 79.8% in 1997 (USDA). There have also been significant regional shifts in livestock production and changes in marketing practices, with decreased use of public markets in many areas. For some products, traditional auction markets have been largely replaced by contract production and sales. Cattle inventories have also trended downward over the last two decades. This has been accompanied by decreases in the number of producers and, in some cases, with significant increases in the scale of operations. The vertical transmission of shocks among various levels of the market is an important characteristic describing the overall operation of the market. Of course, price is the primary mechanism by which various levels of the market are linked. The extent of adjustment and speed with which shocks are transmitted among producer, wholesale, and retail market prices is an important factor reflecting the actions of market participants at alternative market levels. The nature, speed, and extent of adjustments to market shocks may also have important implications for marketing margins, spreads, and mark-up pricing practices. An extensive literature has examined mar-

MARKET EFFICIENCY IN AGRICULTURAL FUTURES MARKETS

Market efficiency and unbiasedness are tested in four agricultural commodity futures markets - live cattle, hogs, corn, and soybean meal - using cointegration and error correction models with GQARCH-in-mean processes. Results indicate each market is unbiased in the long run, although cattle, hogs and corn futures markets exhibit short-run inefficiencies and pricing biases. Models for cattle and corn outperform futures prices in out-of-sample forecasting. Results also suggest short-run time-varying risk premiums in cattle and hog futures markets.

The Commodity Terms of Trade, Unit Roots, and Nonlinear Alternatives: A Smooth Transition Approach

This article extends the recent literature on the Prebisch-Singer hypothesis of a long-run decline in the relative prices of primary commodities. Our main innovation is testing for and estimating nonlinear alternatives to a secular deterioration. Specifically, we use bootstrap procedures to test the linear unit root model against models belonging to the family of smooth transition autoregressions (STARs) for twenty-four commodities, 1900–2003. In nineteen cases we reject the linear null at usual significance levels. In sixteen cases we are able to successfully fit STAR-type models. Simulation results show there is little support for the Prebisch-Singer hypothesis. Copyright 2009, Oxford University Press.

Hedging Multiple Price Uncertainty in International Grain Trade

Commodity and freight futures contracts are analyzed for their effectiveness in reducing uncertainty for international traders. A theoretical model is developed for a trader exposed to several types of risk. OLS hedge ratio estimation is compared to the SUR and the multivariate GARCH methodologies. Explicit modeling of the time-variation in hedge ratios via the multivariate GARCH methodology, using all derivatives, and taking into account dependencies between prices, results in reductions in risk, even after accounting for transaction costs. Results confirm that while the commodity futures contracts are important for hedging risk, freight futures are a useful mechanism for reducing risk. Copyright 2000, Oxford University Press.

Generalized Habit Formation in an Inverse Almost Ideal Demand System: An Application to Meat Expenditures in the U.S

The Inverse Almost Ideal Demand System (IAIDS) model of Moschini and Vissa (1992) and Eales and Unnevehr (1994) is extended to include: (1) general, nonlinear, nonadditive habit effects; and (2) a specification for habit stock terms that allows purchases from the distant past to influence current consumption (long memory). The resulting models are compared with a linear habit effects model and a static specification. The empirical estimation is on U.S. quarterly meat expenditures (1961–1993), with each model being subjected to a battery of misspecification tests. Results of these tests, along with tests of homogeneity and symmetry restrictions, indicate clearly that the most generalized dynamic specification-the one with nonlinear, nonadditive long-memory habit stock effects-is preferred. Furthermore, persistence effects are found to be qualitatively important in that flexibility, consumption scale, and habit flexibility estimates differ, in some instances substantially, between alternative specifications.

On Nonlinear Dynamics: The Case of the Pork Cycle

New methods for analyzing nonlinear dynamic processes are used to evaluate the hogcorn price ratio. The results present evidence of nonlinear dynamics in the pork cycle. Moreover, while GARCH processes account for some of the nonlinearities, the pork cycle is apparently characterized by more complex dynamic forms. The empirical analysis provides some evidence of the presence of chaos in the pork cycle. The results also indicate that the dynamic process generating the pork cycle is nonlinear and cannot be adequately characterized by a small number of state variables.

Risk Behavior and Rational Expectations in the U.S. Broiler Market

This study examines the empirical implications of extending the rational expectations hypothesis (REH) to include price uncertainty. A general estimation framework that incorporates both the restrictions on structural parameters and the variance-covariance terms is developed. GARCH time-series processes are used to generate time-varying expectations of both the means and the variances of exogenous variables. The empirical application is with a quarterly model of the U.S. broiler industry; the results indicate that the rational expectation of price variance is an important determinant of broiler supply. A formal test indicates that the restrictions implied by the REH cannot be rejected.

Market Instability and Nonlinear Dynamics

The potential role of nonlinear dynamics in generating market instability is investigated using a simple market equilibrium model of the U.S. dairy industry. The supply function reflects the nonlinear dynamics of the dairy herd, as estimated by Chavas and Klemme. It is shown that, in the absence of any uncertainty, an inelastic demand contributes to market instability and chaos.

Sharp Breaks or Smooth Shifts? an Investigation of the Evolution of Primary Commodity Prices

This paper explores the behavior of real commodity prices over a 50--year period. Attention is given to how the shifting means for various commodity prices have changed with a special emphasis on behavior since the mid 2000s. To identify structural changes in commodity prices, we estimate shifting--mean autoregressions by using: the Bai and Perron (1998) procedure for determining structural breaks; low frequency Fourier functions; and a procedure that specifies shifts to be smooth logistic functions of time. We find that the pattern in the timing of shifts is suggestive of the causal factors underlying the recent boom. Copyright 2012, Oxford University Press.