Garcia, Philip

By: Colino, Evelyn V.; Irwin, Scott H.; Garcia, Philip; Etienne, Xiaoli
This paper investigates whether the accuracy of outlook hog price forecasts can be improved using composite forecasts in an out-of-sample context. Price forecasts from four widely-recognized outlook programs are combined with futures-based forecasts, ARMA, and unrestricted Vector Autoregressive (VAR) models. Quarterly data are available from 1975.I through 2007.IV for Illinois/Purdue and 1975.I-2010.IV for Iowa, Missouri, and USDA forecasts, which allow for a relatively long out-of-sample evaluation after permitting model specification and appropriate composite-weight training periods. Results show that futures and numerous composite procedures outperform outlook forecasts, but no-change forecasts are inferior to outlook forecasts. At intermediate horizons, OLS composite procedures perform well. The superiority of futures and composite forecasts decreases at longer horizons except for an equal-weighted approach. Importantly, with few exceptions, nothing outperforms the equal-weight approach significantly in any program or horizon. In addition, the equal-weight approach as well as other composite approaches can generally produce larger trading profits compared to outlook forecasts. Overall, findings favor the use of equal-weighted composites, consistent with previous empirical findings and recent theoretical papers.
By: Trujillo-Barrera, Andres; Mallory, Mindy L.; Garcia, Philip
This article analyzes recent volatility spillovers in the United States from crude oil using futures prices. Crude oil spillovers to both corn and ethanol markets are somewhat similar in timing and magnitude, but moderately stronger to the ethanol market. The shares of corn and ethanol price variability directly attributed to volatility in the crude oil market are generally between 10%- 20%, but reached nearly 45% during the financial crisis, when world demand for oil changed dramatically. Volatility transmission is also found from the corn to the ethanol market, but not the opposite. The findings provide insights into the extent of volatility linkages among energy and agricultural markets in a period characterized by strong price variability and significant production of corn-based ethanol.
By: Brittain, Lee; Garcia, Philip; Irwin, Scott H.
This paper examines returns from holding 30- and 90-day call and put positions, and the forecasting performance of implied volatility in the live and feeder cattle options markets. Implied volatility is an upwardly biased and inefficient predictor of realized volatility, with bias most pronounced in live cattle. While significant returns exist from several positions, strategies are strongly affected by drifts in futures prices. However, returns from live cattle puts are persistent, and evidence from 30-day straddle returns indicates the live cattle market overprices volatility. Overpricing is consistent with volatility risk, the effect of which is magnified by extreme market conditions.
By: Franken, Jason R.V.; Pennings, Joost M.E.; Garcia, Philip
Risk reduction and transaction costs are often used to explain contracting in the U.S. hog industry with little empirical support. Using a unified conceptual framework that draws from risk behavior and transaction cost theories, in combination with unique survey and accounting data, we demonstrate that risk preferences and asset specificity impact Illinois producers’ use of contracts and spot markets. In particular, producers’ investments in specific hog genetics and human capital are related to selection of long-term marketing contracts over spot markets. Producers who perceive greater levels of price risk and/or are more averse are more (less) likely to use contracts (spot markets).
By: Woodard, Joshua D.; Garcia, Philip
Previous studies identify limited potential efficacy of weather derivatives in hedging agricultural exposures. In contrast to earlier studies which investigate the problem at low levels of aggregation, we find that better weather hedging opportunities may exist at higher levels of spatial aggregation. Aggregating production exposures reduces idiosyncratic risk, leaving a greater proportion of the total risk in the form of systemic weather risk which can be effectively hedged using relatively simple weather derivatives. The aggregation effect suggests that the potential for weather derivatives in agriculture may be greater than previously thought, particularly for aggregators of risk such as reinsurers.
By: Sanders, Dwight R.; Garcia, Philip; Manfredo, Mark R.
The informational content in live cattle and hog deferred futures prices is assessed using a direct test of incremental forecast ability for two- to twelve-month horizons. For 1976-2007, the results indicate that hog futures prices add incremental information at all horizons, but unique information in live cattle prices declines quickly beyond the eight-month horizon with no incremental information at the twelve-month horizon. The contrast in performance is likely attributable to differences in the quality of public information and the nature of the production process.
By: Egelkraut, Thorsten M.; Garcia, Philip
Options with different maturities can be used to generate an implied forward volatility, a volatility forecast for non-overlapping future time intervals. Using five commodities with varying characteristics, we find that the implied forward volatility dominates forecasts based on historical volatility information, but that the predictive accuracy is affected by the commodity's characteristics. Unbiased and efficient corn and soybeans market forecasts are attributable to the well-established volatility during crucial growing periods. For soybean meal, wheat, and hogs, volatility is less predictable and investors appear to demand a risk premium for bearing volatility risk.
By: Koontz, Stephen R.; Garcia, Philip
The exercise of market power across multiple geographic fed cattle markets is measured with an econometric model which links behavior of the margin between boxed beef and regional fed cattle prices to an oligopsony model of multiple-market conduct. The game theoretic economic model suggests that for market power to be exercised in a single market a discontinuous pricing strategy must be followed. Total market power is enhance if meat-packers coordinate this pricing strategy across geographic markets. Tests reject independence of pricing conduct across geographic markets which suggests multiple-market power is present. The extent of the market power also is consistent with the economic model. More market power is exercised across regions with the same meat-packing firms. However, the magnitude of the market power is small and decreased between the early and late 1980s.
By: Dixon, Bruce L.; Hollinger, Steven E.; Garcia, Philip; Tirupattur, Viswanath
Projections of the impacts of climate change on agriculture require flexible and accurate yield response models. Typically, estimated yield response models have used fixed calendar intervals to measure weather variables and omitted observations on solar radiation, an essential determinant of crop yield. A corn yield response model for Illinois crop reporting districts is estimated using field data. Weather variables are time to crop growth stages to allow use of the model if climate change shifts dates of the crop growing season. Solar radiation is included. Results show this model is superior to conventionally specified models in explaining yield variation in Illinois corn.
By: Garcia, Philip; Adam, Brian D.; Hauser, Robert J.
This study provides additional evidence of the usefulness of mean-variance procedures in the presence of options which can truncate and skew the returns distribution. Using a simulation analysis, price hedging decisions are examined for hog producers when options are available. Mean-variance results are contrasted with optimal decisions based on negative exponential and Cox-Rubinstein utility functions over 56 ending price scenarios and two levels of risk aversion. The findings from our simulation, which considers discrete contracts, basis risk, lognormality in prices, transactions costs, and alternative utility specifications, affirm the usefulness of mean-variance framework.