Volume 29, Issue 2, August 2004

August, 2004

Conflicts over Water in the Upper Klamath Basin and the Potential Role for Market-Based Allocations

By: Jaeger, William K.
The curtailment of irrigation on the Klamath Reclamation Project in 2001 is estimated to have cost farmers more than $35 million. This study examines how alternative water allocations among irrigators in the Upper Klamath Basin could have lowered those costs. Per acre marginal water values vary by a factor of 20 due primarily to variations in soil productivity, with the highest productivity lands concentrated in the federal Project. A linear programming model estimates costs for alternative allocations. Findings indicate that compared to the 2001 allocation, costs could be reduced by 75% with a market-based approach.
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August, 2004

The Impact of Market Advisory Service Recommendations on Producers’ Marketing Decisions

By: Pennings, Joost M.E.; Isengildina, Olga; Irwin, Scott H.; Good, Darrel L.
A conceptual framework is developed which provides insight into the factors affecting the impact of market advisory service (MAS) recommendations on producer pricing decisions. Data from a survey of 656 U.S. producers reveal that the perceived performance of the MAS, the way in which MAS recommendations are delivered, as well as the match between MAS and producers' marketing philosophy, are important factors explaining the impact of MAS recommendations. Risk attitude does not affect the impact of MAS recommendations on producers' decisions, suggesting producers are more interested in the price-enhancing characteristics of MAS advice than in its risk-reducing features. Key words: market advisory services, ordered probit model, producers' marketing decisions
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August, 2004

Distributional Welfare Impacts of Public Spending: The Case of Urban versus National Parks

By: Feinerman, Eli; Fleischer, Aliza; Simhon, Avi
This study examines the optimal allocation of funds between national and urban parks. Since travel costs to national parks are significantly higher than to urban parks, poor households tend to visit the latter more frequently, whereas rich households favor the former. Therefore, allocating public funds to improving the quality of national parks at the expense of urban parks disproportionately benefits high income households. By developing a theoretical model and implementing it using Israeli data, findings indicate all households, except for the richest decile, prefer that the park authority divert a larger proportion of its budget from national to urban parks.
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August, 2004

Determining the Price-Responsiveness of Demands for Irrigation Water Deliveries versus Consumptive Use

By: Scheierling, Susanne M.; Young, Robert A.; Cardon, Grant E.
A water-crop simulation/mathematical programming model of irrigation water demand in northeastern Colorado is formulated to develop an original concept of derived demand for consumptive use of water. Conventional demand functions for water deliveries are also developed, and the effect of hypothetical price increases on both consumption and delivery are illustrated. Findings indicate that demand elasticity estimates are quite sensitive to model specification, and consumptive use demand tends to be significantly less price-responsive than delivery demand. Thus price incentives are likely to have only limited impacts on basin-wide water consumption and would not make much additional water available for emerging demands.
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August, 2004

The FAST Method: Estimating Unconditional Demand Elasticities for Processed Foods in the Presence of Fixed Effects

By: Bergtold, Jason S.; Akobundu, Eberechukwu; Peterson, Everett B.
This study estimates a set of unconditional own-price and expenditure elasticities across time for 49 processed food categories using scanner data and the FAST multi-stage demand system with fixed effects across time. Estimated own-price elasticities are generally much larger, in absolute terms, than previous estimates, while our expenditure elasticities are generally much lower. The use of disaggregated product groupings, scanner data, and the estimation of unconditional elasticities likely accounts for these differences. Results of the study suggest providing more disaggregate product-level demand elasticities could aid in the economic analysis of issues relating to industry competitiveness or the impact of public policy.
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August, 2004

Distributional Impacts of Country-of-Origin Labeling in the U.S. Meat Industry

By: Brester, Gary W.; Marsh, John M.; Atwood, Joseph A.
Concerns about the negative effects of U.S. meat and livestock imports on domestic livestock prices have increased interest in country-of origin labeling (COOL) legislation. An equilibrium displacement model is used to estimate short-run and long-run changes in equilibrium prices and quantities of meat and livestock in the beef, pork, and poultry sectors resulting from the implementation of COOL. Retail beef and pork demand would have to experience a one-time, permanent increase of 4.05% and 4.45%, respectively, so that feeder cattle and hog producers do not lose producer surplus over a 10-year period.
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August, 2004

Effects of Country-of-Origin Labeling on Meat Producers and Consumers

By: Lusk, Jayson L.; Anderson, John D.
Although several studies have estimated the costs of country-of-origin labeling (COOL), no previous study has documented how these costs will be distributed across the livestock sector or how producer and consumer welfare will be affected. This analysis presents an equilibrium displacement model of the farm, wholesale, and retail markets for beef, pork, and poultry that documents how producers and consumers will be affected by COOL. Findings reveal that as the costs of COOL are shifted from the producer to the processor and retailer, producers are made increasingly better off while consumers are made increasingly worse off. Further, an increase in aggregate consumer demand of 2% to 3% is likely sufficient to offset lost producer welfare due to COOL costs.
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August, 2004

Household Expenditure Patterns for Carbohydrate Sources in Russia

By: Shiptsova, Rimma; Goodwin, Harold L., Jr.; Holcomb, Rodney B.
This study provides a unique view of the demand for carbohydrate sources in Russia at the household level. The data used in this analysis were obtained from a 1996 survey in eight Russian metropolitan areas. An almost ideal demand system (AIDS) model is used to examine the expenditures for potatoes, bread, flour, rice, and pasta. The impacts of household demographic factors on the consumption of carbohydrates are also discussed.
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August, 2004

Environmentally Adjusted Agricultural Productivity in the Great Plains

By: Rezek, Jon P.; Perrin, Richard K.
This study adjusts 1960-1996 agricultural productivity gains in a panel of Great Plains states to account for the discharge of pesticide and nitrogen effluents into the environment. The agricultural-environmental technology is approximated with translog distance functions that allow us to contrast traditional versus environmentally adjusted productivity gains. Findings indicate technical change has been increasingly biased toward environmentally friendly production. While the environmental adjustment reduced overall productivity gains during the sample period, in recent years adjusted productivity outpaced the traditional measure, reflecting the pro-environment bias in technical change.
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August, 2004

An Analysis of the Effects of Uncertainty and Irreversibility on Farmer Participation in the Conservation Reserve Program

By: Isik, Murat; Yang, Wanhong
A real options model is developed to examine the determinants of farmer participation in the Conservation Reserve Program (CRP). This study contributes to the literature by developing a framework for ex post analysis of uncertainty and irreversibility. It extends the applications of real options models to analyze farmer participation in the CRP. The model incorporates land and owner attributes, and determines whether uncertainty and irreversibility affect the probability of participation. Option values play a significant role in farmer decisions to retire land by reducing the probability of participation. These results have implications for the design and implementation of conservation programs.
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August, 2004

A Bayesian Approach to Optimal Cross-Hedging of Cottonseed Products Using Soybean Complex Futures

By: Rahman, Shaikh Mahfuzur; Dorfman, Jeffrey H.; Turner, Steven C.
Cottonseed crushers face substantial risk in terms of input and output price variability and they are limited in their planning by the lack of a viable futures contract for cottonseed or cottonseed products. This study examines the feasibility of cross-hedging cottonseed products using the soybean complex futures. Different cross-hedging strategies are evaluated for eight time horizons relative to the expected profit and utility of the crusher. A Bayesian approach is employed to estimate both model parameters and optimal hedge ratios, allowing consistency with expected utility maximization in the presence of estimation risk. The results reveal that both whole cottonseed and cottonseed products can be successfully cross-hedged using soybean complex futures. The profitability of cross-hedging cottonseed products depends on the size of the contract, the optimal choice of strategy, the time of hedge placement, and the hedging horizon.
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August, 2004

Improving Cattle Basis Forecasting

By: Tonsor, Glynn T.; Dhuyvetter, Kevin C.; Mintert, James R.
Successful risk management strategies for agribusiness firms based on futures and options contracts are contingent on their ability to accurately forecast basis. This research addresses three primary questions as they relate to basis forecasting accuracy: (a) What is the impact of adopting a time-to-expiration approach, as compared to the more common calendar-date approach? (b) What is the optimal number of years to include in calculations when forecasting livestock basis using historical averages? and (c) What is the effect of incorporating current basis information into a historical-average-based forecast? Results indicate that use of the time-to-expiration approach has little impact on forecast accuracy compared to using a simple calendar approach, but forecast accuracy is improved by incorporating at least a portion of current basis information into basis forecasts.
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