Oliver Mußhoff

Economic Hysteresis in Hog Production

German hog production only responds in a very limited way to price fluctuations in the pork market. The hog production concentrates on a few regions though it is not bound to special natural conditions such as soil quality. Furthermore, the volume of production does not vary over time. Relatively high market risks, sunk costs and the flexibility of the decision maker to defer investments characterize decision problems in hog production. Thus the real option approach is chosen to explain the inertia in production capacity. By the use of panel data of specialized hog farms from the German Farm Accountancy Data Network, an empirical investment model is estimated. Formally, the model has the structure of a generalized ordered probit model. This approach allows to test for economic hysteresis in the adjustment of hog production capacity. The results confirm that uncertainty and flexibility widen the optimal range of inaction.

The former Iron Curtain still drives biodiversity-profit trade-offs in German agriculture

Agricultural intensification drives biodiversity loss and shapes farmers’ profit, but the role of legacy effects and detailed quantification of ecological–economic trade-offs are largely unknown. In Europe during the 1950s, the Eastern communist bloc switched to large-scale farming by forced collectivization of small farms, while the West kept small-scale private farming. Here we show that large-scale agriculture in East Germany reduced biodiversity, which has been maintained in West Germany due to >70% longer field edges than those in the East. In contrast, profit per farmland area in the East was 50% higher than that in the West, despite similar yield levels. In both regions, switching from conventional to organic farming increased biodiversity and halved yield levels, but doubled farmers’ profits. In conclusion, European Union policy should acknowledge the surprisingly high biodiversity benefits of small-scale agriculture, which are on a par with conversion to organic agriculture.East German collective farms reduced biodiversity but raised profits, in contrast to smaller private farms in West Germany, with legacy effects that continue today.

Meteorological forecasts and the pricing of weather derivatives

In usual pricing approaches for weather derivatives, forward-looking information such as meteorological weather forecasts is not considered. Thus, important knowledge used by market participants is ignored in theory. By extending a standard model for the daily temperature, this paper allows the incorporation of meteorological forecasts in the framework of weather derivative pricing and is able to estimate the information gain compared to a benchmark model without meteorological forecasts. This approach is applied for temperature futures referring to New York, Minneapolis and Cincinnati with forecast data 13 days in advance. Despite this relatively short forecast horizon, the models using meteorological forecasts outperform the classical approach and more accurately forecast the market prices of the temperature futures traded at the Chicago Mercantile Exchange (CME). Moreover, a concentration on the last two months or on days with actual trading improves the results.

Improved Program Planning with Formal Models? The Case of High Risk Crop Farming in Northeast Germany

In this paper we explore whether the incorporation of systematic time series analyses and mathematical optimization procedures in the practical planning process has the potential to improve production program decisions. The cases of four German cash crop farms are investigated over six planning periods. In order to avoid solutions that simply exceed the farmer’s risk tolerance, the apparently accepted variance of the observed program’s total gross margin is used as an upper bound in the optimization. For each of the 24 planning occasions, the formal model is used to generate optimized alternative programs. The total gross margins that could have been realized if the formally optimized programs had been implemented are then compared to those that were actually realized. We find that the farmers could have increased their total gross margins significantly if—instead of using simple routines and rules of thumb—they had used adequate methods of statistical analysis combined with the formal optimization model.

Comprehension in risk elicitation experiments

ABSTRACT Economic experiments are increasingly conducted with field populations for whom comprehension of instructions may be more difficult to achieve. We investigate how framing experimental instructions in a familiar context and incentivizing the experimental task may affect comprehension. Based on an experiment with 146 German farmers, we compare four different versions of a Holt-and-Laury multiple price list. We find that incentives have a small positive effect on comprehension, as measured by the probability of making inconsistent choices and subjects’ self-assessment. In the absence of incentives, framing negatively affects comprehension. Comprehension is enhanced for farmers who score high on a numeracy test. We conclude that contextual framing might confuse subjects, whereas incentives can help to facilitate comprehension of experimental instructions.

Agrarrelevante Extremwetterlagen und Möglichkeiten von Risikomanagementsystemen: Studie im Auftrag des Bundesministeriums für Ernährung und Landwirtschaft (BMEL)

Das Verbundforschungsvorhaben untersuchte regional differenzierte Anderungen agrarrelevanter Extremwetterlagen in Deutschland und deren Auswirkungen auf die Landwirtschaft einschlieslich Sonderkulturen und Forstwirtschaft. Auswertungen der Stationsdaten von 1961 bis 2013 des Deutschen Wetterdienstes sowie Daten aus 21 Klimamodelllaufen bis zum Jahr 2100 zeigten unter anderem einen Anstieg extremer Hitzetage, die auch in Zukunft haufiger werden sollen. Ferner wurde in den letzten 20 Jahren eine Zunahme der Tage ohne Niederschlag im Marz und April sowie eine Zunahme extrem trockener Tage im Sommer beobachtet, wobei letztere zukunftig weiter zunehmen sollen. Zunehmende Hitze und Trockenheit beeintrachtigen vor allem die Ertragsbildung bei einigen Ackerkulturen, wie z.B. beim Weizen. Im Wald ist die Verjungungsfahigkeit vor allem unter Fichte und Kiefer gefahrdet. Bei einigen Extremwetterlagen, die insbesondere im Acker- und Sonderkulturanbau hohe Schaden verursachen, wie z. B. Hagel, Starkniederschlage und Spatfroste, besteht wegen fehlender Beobachtungsdaten bzw. nicht eindeutiger Wechselwirkungen weiterer Forschungsbedarf. Nach den Ergebnissen besteht angesichts vielfaltiger Anpassungsoptionen in der Land- und Forstwirtschaft keine unmittelbare Notwendigkeit, Risikomanagementsysteme staatlich verstarkt zu unterstutzen.

Einzelbetriebliche Auswirkungen politischer Strukturreformen in der Landwirtschaft: Erste empirische Erkenntnisse

Die einzelbetrieblichen Auswirkungen politischer Reformen beschaftigen (Agrar)Okonomen seit Langem und sind aufgrund der anstehenden Reform der gemeinsamen EU-Agrarpolitik in 2014 hoch aktuell. In diesem Beitrag werden die Effekte der EU-Agrarrefomen der letzten 20 Jahre und der Einfuhrung des Erneuerbare-Energien-Gesetzes auf die Hohe der Einkommen landwirtschaftlicher Betriebe, auf Uberwalzungseffekte auf dem Pachtmarkt sowie auf das Einkommensrisiko erstmalig empirisch untersucht. Hierzu steht ein Datensatz landwirtschaftlicher Betriebe aus Nordrhein-Westfalen uber einen Zeitraum von 1984/85 bis 2010/11 zur Verfugung, der anhand einer Paneldatenanalyse ausgewertet wird. Die Ergebnisse zeigen, dass die besagten Reformen einen signifikanten Einfluss auf die Hohe der betrieblichen Einkommen, der Pachtpreise sowie des Einkommensrisikos hatten. The farm level effects of political reforms have been discussed in the literature for a long time and are highly relevant against the background of the upcoming reform of the Common Agricultural Policy in the EU in 2014. In this paper, the impact of the EU agricultural reforms of the last 20 years and the introduction of the German Renewable Energy Sources Act are quantified with regard to arable farm income level, transmission effects on land rental markets and arable farm income risk. For this purpose, a dataset of arable farms from North Rhine Westphalia over the period from 1984/85 to 2010/11 is investigated by means of a panel data analysis. The results suggest that the political reforms had a significant impact on the farm income level, the level of land rental prices and the farm income risk.

Displaying expected values in risk elicitation tasks: the effect of information in experimental risk research

Abstract We investigate the influence of providing expected lottery results to experiment participants in two common risk attitude elicitation tasks. In a between-subject design, either the Holt and Laury task or the Eckel and Grossman task is carried out by a sample of 208 students. We find no significant effect of shown expected values on the risk attitude measured by the tasks. This result even holds true if we divide the experiment participants into specific sub-groups, i.e. female and male, or lower numeracy and higher numeracy participants. Furthermore, comprehension and processing time are not significantly influenced by presented expected values. Therefore, we conclude that providing information on expected values does not influence decision-making in tasks involving risk. This result indicates the robustness of elicited risk attitudes to variation in common experimental methods, and demonstrates that more information could be provided without creating bias in the results.

Estimating investment equations in imperfect capital markets

Numerous studies have tried to provide a better understanding of firm-level investment behaviour using econometric models. The model specification of more recent studies has been based on two main approaches. The first, the real options approach, focuses on irreversibility and uncertainty in perfect capital markets; of particular interest is the range of inaction caused by sunk costs. The second, the neo-institutional finance theory, emphasises capital market imperfections and firms’ released liquidity constraints. Empirical applications of the latter theory often refer to linear econometric models to prove these imperfections and thus do not account for the range of inaction caused by irreversibility. In this study, a generalised Tobit model based on an augmented q model is developed with the intention of considering the coexistence of irreversibility and capital market imperfections. Simulation-based experiments allow investigating the properties of this model. It can be shown how disregarding irreversibility reduces effectiveness of simpler linear models.

Multiple switching behavior in different display formats of multiple price lists

ABSTRACT A common approach to elicit risk attitude is the multiple price list with a series of binary choices. However, a frequently observed problem when using multiple price lists is that participants switch more than once from the safer to the riskier option, thus exhibiting multiple switching behaviour. The present study analyses whether the visualization of different multiple price lists reduce multiple switching behaviour. Therefore, we conduct two types of multiple price lists in two different display formats. Participants are randomly assigned into a textual or a visual group and carry out both multiple price lists in the corresponding display format. Our results reveal that different types of multiple price lists lead to differences in the extent of multiple switching behaviour. Moreover, we show that the visualization of a multiple price list can be an instrument to greatly reduce multiple switching behaviour.