Volume 25, Issue 2, December 2000

December, 2000

THE DECISION OF WHEN TO BUY A FREQUENTLY PURCHASED GOOD: A MULTI-PERIOD PROBIT MODEL

By: Gould, Brian W.; Dong, Diansheng
Increased availability of scanner-based panel data has enabled researchers to better understand nondurable commodity purchase dynamics. In this study, we focus on one component of the purchase process--when to buy. The relationship between the discrete purchase decision and a set of household and purchase characteristics is quantified using a simulated maximum-likelihood procedure. Given the longitudinal nature of our data, unobserved heterogeneity is addressed by adopting an auto-correlated error structure. Our empirical application is household purchases of cheese. We find evidence of significant persistent unobservable household heterogeneity, which is not eliminated by the inclusion of lagged exogenous variables.
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December, 2000

ESTIMATING PRODUCER’S SURPLUS WITH THE CENSORED REGRESSION MODEL: AN APPLICATION TO PRODUCERS AFFECTED BY COLUMBIA RIVER BASIN SALMON RECOVERY

By: Moore, Michael R.; Gollehon, Noel R.; Hellerstein, Daniel
Application of the tobit model to estimate economic welfare is transferred from the consumer side to the producer side. Supply functions are estimated for multioutput irrigators in the Pacific Northwest. Empirical procedures are then developed for computing expected producer's surplus from the output supply functions. Confidence intervals for the surplus measures are generated using the Krinsky-Robb method. An experiment predicts decreases in surplus given increases in water pumping cost. The experiment replicates possible increases in hydroelectric prices due to the salmon recovery program in the Columbia-Snake River Basin. Output substitution explains producers' ability to mitigate the effect of the price increases on producer's surplus.
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December, 2000

THE VALUE OF ENSO INFORMATION TO AGRICULTURE: CONSIDERATION OF EVENT STRENGTH AND TRADE

By: Chen, Chi-Chung; McCarl, Bruce A.
The agricultural value of El Nino-Southern Oscillation (ENSO) phase knowledge is measured in a value-of-information framework using economic models. We examine the value of considering the full distribution of ENSO phase strength effects as opposed to average ENSO phase strength effects, as well as the implications of considering ENSO impacts on the rest of the world (ROW). A stochastic U.S. agricultural sector model linked with a global trade model is used to assess the value of ENSO phase information. When the full distribution of ENSO phase strength is considered, the value of phase information increases twofold with respect to the average ENSO effects.
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December, 2000

THE EFFECT OF FLUCTUATING WATER LEVELS ON RESERVOIR FISHING

By: Jakus, Paul M.; Dowell, Paula; Murray, Matthew N.
The effect of Tennessee Valley Authority reservoir water levels on recreational fishing is evaluated. Data were collected in east Tennessee during March through August of 1994-97. Water levels were not a major barrier to participation during the six-month period, but levels did affect the number of trips taken by anglers. Maintaining lakes at full pool for one additional summer month would result in an additional one-third trip per angler, or an additional 87,000 trips in the study region. The average net benefit of a full pool is $1.82 per angler, or an aggregate benefit of approximately $476,500 in the region.
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December, 2000

DETERMINING SOCIALLY OPTIMAL NITROGEN APPLICATION RATES USING A DELAYED RESPONSE MODEL: THE CASE OF IRRIGATED CORN IN WESTERN KANSAS

By: Nkonya, Ephraim M.; Featherstone, Allen M.
Nitrate contamination of groundwater is an important problem. The transport of leached nitrate from the root zone to groundwater takes approximately 30 to 60 years. Many previous studies ignore this time lag by assuming instantaneous contamination. This analysis applies a delayed response model to account for the time lag between nitrogen fertilizer applications to the time the leached nitrate reaches groundwater. Results show that accounting for the leached nitrate externality reduces the nitrogen application rate by 13% and the returns above variable costs by 8% for farmers who apply both nitrogen and phosphorus. For farmers who do not use phosphorus, nitrogen use is reduced by 14% and the returns above variable costs by 22%. The application of phosphorous increased returns by more than 100% and significantly reduced leached nitrate.
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December, 2000

PRICING TO MARKET BEHAVIOR: EVIDENCE FROM SELECTED CANADIAN AND U.S. AGRI-FOOD EXPORTS

By: Carew, Richard
This study examines the pricing behavior of Canadian and U.S. agri-food exporters consistent with a model that permits the identification of pricing to market (PTM) behavior and imperfect market competition in agri-food markets. The estimation strategy takes advantage of recently developed panel unit root tests to determine the time-series properties of the data and avoid the problem associated with lower power conventional unit root tests. Among U.S. products, the conventional PTM model indicated evidence of a greater degree of imperfect competition in international markets for U.S. wheat. While price discrimination and market segmentation are apparent for Canadian exports in selected markets, the export adjustment pattern in most cases tended to exacerbate the effect of exchange rate fluctuations on foreign currency prices of Canadian products.
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December, 2000

POLICY CHANGES AND THE DEMAND FOR LOTTERY-RATIONED BIG GAME HUNTING LICENSES

By: Scrogin, David; Berrens, Robert P.; Bohara, Alok K.
Lotteries are commonly used to allocate big game hunting privileges. In this study, lottery demand and consumer surplus are modeled before and after policy changes designed to increase participation. The application is to New Mexico elk hunt lotteries. Given the volume and variety of hunts, we adopt a disaggregated and flexible count modeling approach. Two welfare measures are estimated: Marshallian surplus and a proposed measure that incorporates consumer uncertainty. The Marshallian measure produces smaller and slightly less precise estimates. However, regardless of the surplus measure examined, welfare increased significantly with the policy changes, while revenues changed by less than 1%.
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December, 2000

CONTRACTING OVER COMMON PROPERTY: COST-SHARE CONTRACTS FOR PREDATOR CONTROL

By: Yoder, Jonathan K.
Predator control cost-share contracts among livestock producers to control coyote predation date back to 1630 in North America and are common today among sheep producers in western states. Typically, per unit assessments are imposed on a monitorable input, and revenues are used to purchase predator control for participants' land. This study presents a model which provides refutable implications for the structure and distribution of these contracts over time and space. Historical and contemporary state and county data on sheep producer assessments support a model that is applicable more generally to the problem of investment in common property inputs.
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December, 2000

THE LOCATION OF FOOD MANUFACTURING PLANT INVESTMENTS IN CORN BELT COUNTIES

By: Henderson, Jason R.; McNamara, Kevin T.
Capturing value-added activity is often promoted as a rural development strategy, but this is difficult for specific communities lacking the resources to support food manufacturing activity. This study analyzes the relationship between local attributes and food manufacturing plant investments in Corn Belt counties between 1987 and 1995. Plant investment locations tend to occur in counties with access to input and product markets, developed transportation networks, agglomeration economies, favorable fiscal policies, and a low wage environment. Supply-oriented firms locate near agricultural commodities and low-cost labor. Demand-oriented firms favor locations near product markets and transportation systems.
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December, 2000

RELATIVE EFFECTIVENESS OF USDA’S NONPRICE EXPORT PROMOTION INSTRUMENTS

By: Kinnucan, Henry W.; Xiao, Hui; Yu, Shixue
The USDA's Foreign Agricultural Service funds three types of activities to promote agricultural exports: consumer promotion, technical assistance, and trade servicing. These "instruments" are analyzed using an adaptation of Muth's model. Results indicate that consumer promotion always increases the derived demand for the U.S. agricultural commodity, but that under certain conditions technical assistance and trade servicing can have a perverse effect. Applying the model to cotton promotion in Japan, the results suggest that, owing to cotton's modest share of retail value, the current emphasis on consumer promotion may be misplaced. Specifically, it appears that producer returns can be enhanced by emphasizing technical assistance projects that save on the marketing input.
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December, 2000

IMPLICATIONS OF CROP YIELD AND REVENUE INSURANCE FOR PRODUCER HEDGING

By: Coble, Keith H.; Heifner, Richard G.; Zuniga, Manuel
New types of crop insurance have expanded the tools from which crop producers may choose to manage risk. Little is known regarding how these products interact with futures and options. This analysis examines optimal futures and put ratios in the presence of four alternative insurance coverages. An analytical model investigates the comparative statics of the relationship between hedging and insurance. Additional numerical analysis is conducted which incorporates futures price, basis, and yield variability. Yield insurance is found to have a positive effect on hedging levels. Revenue insurance tends to result in slightly lower hedging demand than would occur given the same level of yield insurance coverage.
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December, 2000

CORN PRICE EFFECTS ON COST OF GAIN FOR FEEDLOT CATTLE: IMPLICATIONS FOR BREAKEVEN BUDGETING

By: Anderson, John D.; Trapp, James N.
Elasticities calculated from an econometric model of cost of gain (COG) for cattle in feedlots indicate that COG is considerably less responsive to corn price changes than breakeven budgets assume. This difference in elasticities can lead to substantial errors in COG estimates obtained from budgeting. Size of error will depend upon the initial corn price and the magnitude of corn price change. Given average corn price levels and month-to-month changes, the error in budget-based net revenue projections will be about $3/head.
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December, 2000

STATE TRADING ENTERPRISES AND REVENUE GAINS FROM MARKET POWER: THE CASE OF BARLEY MARKETING AND THE CANADIAN WHEAT BOARD

By: Schmitz, Troy G.; Gray, Richard S.
According to the U.S. General Accounting Office, the Canadian Wheat Board (CWB) is the largest state trading enterprise reporting to the World Trade Organization under article XVII requirements. This study estimates the market power exerted by the CWB in international barley markets. The analysis incorporates international price discrimination across markets for similar types of barley, the intertwining relationships between feed and malting barley markets, and producer behavior in the absence of the CWB. The CWB was able to capture an annual average of $72 million in additional revenue beyond the amount that would have been generated by purely competitive multiple sellers of Canadian barley during the period 1985-94.
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December, 2000

DESIGNING FOOD SAFETY REGULATIONS: THE EFFECT OF INSPECTION POLICY AND PENALTIES FOR NONCOMPLIANCE ON FOOD PROCESSOR BEHAVIOR

By: Starbird, S. Andrew
In the United States, federal, state, and local governments are involved with the regulation of the safety of the food supply. Food safety regulations that set standards for food processors usually include inspection policies for monitoring performance and penalties for processors who do not comply with regulatory standards. In this analysis, we examine how penalties and inspection policies interact to influence processor behavior. We distinguish between internal penalties (imposed by the regulator) and external penalties (imposed by the market or by the court). Using a model of the processor's expected annual cost, we find that under a given inspection policy internal penalties are only relevant under specific conditions. For cases in which internal and external penalties can be influenced, we use comparative statics to discover that internal penalties are more economically efficient for motivating processors than external penalties. These results imply that regulators should utilize internal penalties for noncompliance rather that rely on market or court-imposed penalties.
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December, 2000

THE COST OF THE KYOTO PROTOCOL TO U.S. CROP PRODUCTION: MEASURING CROP PRICE, REGIONAL ACREAGE, WELFARE, AND INPUT SUBSTITUTION EFFECTS

By: Konyar, Kazim; Howitt, Richard E.
This study analyzes the impact of implementing carbon permit trading considered under the Kyoto Protocol, and the subsequent expected increase in energy and resource prices on U.S. crop production. The focus is on input substitution, net farm income, regional crop acreage, and crop prices. The analysis is carried out with a calibrated mathematical programming model which covers the major crops produced in the 48 contiguous states on a regional basis. The model accounts for both the variable inputs and the allocatable inputs of land and irrigation water, and it permits input substitution when farmers are faced with external shocks. The results suggest that when energy prices increase, the net cost to the crop-producing sector depends on the farmer's ability to substitute crop inputs and the elasticity of demand for the crops. The impacts of carbon tax cost increases differ significantly among crops and regions. Overall, crop acreage and output decrease, total net revenues increase in most regions, and consumer surplus declines.
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December, 2000

RISK AND RETURNS OF DIVERSIFIED CROPPING SYSTEMS UNDER NONNORMAL, CROSS-, AND AUTOCORRELATED COMMODITY PRICE STRUCTURES

By: Ramirez, Octavio A.; Somarriba, Eduardo
This study analyzes the risks of diversified tropical cropping systems that combine cocoa, plantain, and tree-crop components in different proportions versus traditional monocultures. A technique for modeling the expected values, variances, and covariances of correlated time-series variables that are autocorrelated and nonnormal (right or left skewed and kurtotic) is applied to simulate commodity prices. The importance of using simulated cumulative density functions (cdf's) which reflect the most important characteristics of the stochastic behavior of prices for analyzing risk and returns of diversified agricultural systems is demonstrated. The analysis priovides evidence in favor of diversified cocoa-plantain-Cordia agroforestry system technologies versus the traditional monocultures.
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December, 2000

CONTRACT INCENTIVES AND EXCESSIVE NITROGEN USE IN AGRICULTURE

By: Preckel, Paul V.; Shively, Gerald E.; Baker, Timothy G.; Chu, Mei-Chin; Burrell, Jessica Eide
This study examines incentives for input use under tournament contracts. We analyze implications of contract design for nitrate-based environmental externalities generated by agricultural producers. Outcomes are compared from contracts awarded by tournament to those from fixed-payment contracts. Our findings show contract insecurity can distort input use. The model developed in this analysis is applied to a region of the U.S. where tournament-based production is prevalent and groundwater contamination is a problem. We find contract insecurity increases nitrogen use by about 12%, resulting in a 17% increase in nitrate leaching. Implications for contract modification to reduce environmental externalities while maintaining contract incentives are discussed.
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