Volume 31, Issue 3, December 2006

December, 2006

An Analysis of the Role of Tile-Drained Farmland Under Alternative Nitrogen Abatement Policies

By: Petrolia, Daniel R.; Gowda, Prasanna H.
Agricultural nitrogen is a major contributor to Gulf of Mexico hypoxia, and research has shown that agricultural subsurface tile drainage is a major carrier of nitrogen from croplands to streams and rivers. This study compares the results of abating nitrogen under a retired-land minimization policy with those of a new revenue-maximizing policy, paying particular attention to the role of tile-drained land. Findings reveal the retirement-minimizing policy resulted in more tile-drained land being retired and less being fertilizer-managed than was optimal under the net-return maximizing policy. Also, it led to a greater economic burden being shouldered by tile-drained land. Under both cases, tile drainage dominated the abatement process.
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December, 2006

Impact of Mandatory Price Reporting on Fed Cattle Market Integration

By: Pendell, Dustin L.; Schroeder, Ted C.
Geographic fed cattle markets are important because cattle are bulky and perishable, and production and consumption areas are separated. These characteristics make cattle transportation costly and can contribute to segmented markets. This study uses USDA-AMS reported fed cattle market price data from five U.S. regional fed cattle markets to investigate the effects of mandatory price reporting on spatial market integration. Results indicate these markets have been, and remain, highly cointegrated after implementation of mandatory price reporting (MPR). Following introduction of mandatory price reporting, the five regional fed cattle markets have become more fully integrated (i.e., prices tend to move more closely one-for-one following introduction of MPR).
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December, 2006

Valuing Conflicting Public Information About a New Technology: The Case of Irradiated Foods

By: Rousu, Matthew C.; Shogren, Jason F.
Scientists and advocates can disagree on the value of new products or technologies, such as growth hormones, genetically modified organisms, and food irradiation. Both sides of the debate disseminate information to the public hoping to influence public opinion. This study assesses the economic value of both pro and anti public information using food irradiation as a case study. The value of information sources is estimated in isolation and in combination. In isolation, the results indicate each set of information has value. In combination, only the anti-irradiation information is found to have net positive value (persuading some consumers to purchase non-irradiated products). Pro-irradiation information worked to decrease the value of anti-irradiation information by 68% per person.
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December, 2006

Managing Dairy Profit Risk Using Weather Derivatives

By: Chen, Gang; Roberts, Matthew C.; Thraen, Cameron S.
Weather conditions are a primary source of dairy production risk. Hot and humid weather induces heat stress, which reduces lactation. Heat abatement, such as ventilation, directly affects the temperature and humidity. Abatement can increase expected profit, but cannot eliminate the lost revenue caused by heat stress. Weather derivatives can reduce weather-induced profit risk and act as a substitute for abatement at the margin. We test the risk management value of weather derivatives in a utility-maximization framework. The result is that weather derivatives can expand the efficient portfolio frontier. Simultaneously using the weather derivatives and abatement equipment is more favorable than using either alone.
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December, 2006

Forecasting Crop Basis Using Historical Averages Supplemented with Current Market Information

By: Taylor, Mykel R.; Dhuyvetter, Kevin C.; Kastens, Terry L.
This research compares practical methods of forecasting basis, using current market information for wheat, soybeans, corn, and milo (grain sorghum) in Kansas. Though generally not statistically superior, an historical one-year average was optimal for corn, milo, and soybean harvest and post-harvest basis forecasts. A one-year average was also best for wheat post-harvest basis forecasts, whereas a five-year average was the best method for forecasting wheat harvest basis. Incorporating current market information, defined as basis deviation from historical average, improved the accuracy of post-harvest basis forecasts. A naive forecast incorporating current information was often the most accurate for post-harvest basis forecasts.
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December, 2006

Are Cooperatives Efficient When Membership is Voluntary?

By: Leathers, Howard D.
If profit-maximizing farmers are free to join or not to join a cooperative, it may appear reasonable to assume that a cooperative will exist only when it has cost advantaged over non-cooperative marketing. This paper presents a model in which that result fails. Every individual farmer chooses either to join or not join a cooperative depending on whether transactions costs are lower from cooperative membership or nonmembership. As cooperative membership increases, transactions costs for members decline, but for nonmembers these costs increase. Results of this analysis reveal that an equilibrium exists in which all farmers voluntarily choose to join the cooperative, but more than half of the members wish the cooperative had not been formed, and transactions costs in the aggregate are higher with the cooperative then without it.
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December, 2006

Measuring the Contribution of Water and Green Space Amenities to Housing Values: An Application and Comparison of Spatially Weighted Hedonic Models

By: Cho, Seong-Hoon; Bowker, James Michael; Park, William M.
This study estimates the influence of proximity to water bodies and park amenities on residential housing values in Knox County, Tennessee, using the hedonic price approach. Values for proximity to water bodies and parks are first estimated globally with a standard ordinary least squares (OLS) model. A locally weighted regression model is then employed to investigate spatial nonstationarity and generate local estimates for individual sources of each amenity. The local model reveals some important local differences in the effects of proximity to water bodies and parks on housing price.
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December, 2006

Show Quality Quarter Horse Auctions: Price Determinants and Buy-Back Practices

By: Taylor, Mykel R.; Dhuyvetter, Kevin C.; Kastens, Terry L.; Douthit, Megan; Marsh, Thomas L.
This study estimates the price determinants of show quality quarter horses sold at auction. Several characteristics including genetic and physical traits, quality of pedigree, and performance record of the horse, as well as the horse's offspring, were found to significantly impact selling price. Sale order positively affected price and appears to be driven by buyers rather than intentional ordering of the horses. A common practice at horse auctions is for the seller to reject the final bid offered and buy back the horse. Model-predicted prices for these buy-back horses indicate they are not undervalued by the final bids, based on their characteristics.
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December, 2006

End Materials

This section includes: JARE Editor's Report December 2006; Reviewers November 2005-October 2006; WAEA 2005 Award Winners; WAEA Past Presidents, 1927-2006; Past Editors; JARE Author Index, Volumes 29-31, 2004-2006; JARE Key Words Index, Volumes 29-31, 2004-2006
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December, 2006

Ground Water Quantity and Quality Management: Agricultural Production and Aquifer Salinization over Long Time Scales

By: Knapp, Keith C.; Baerenklau, Kenneth A.
An economic model of ground water salinization is developed. Starting from a full, high-quality aquifer, there is an initial extraction period, an intermediate waste disposal period, and a final drainage period. Drainage management is initially source control and reuse, but eventually culminates in evaporation basins and a system steady-state. This process occurs over long time scales but is consistent with historical observation. Efficiency is qualitatively similar to common property though quantitative magnitudes differ substantially. Regulatory pricing instruments are developed to support the efficient allocation. The system is not sustainable in that net returns generally decline through time until the steady-state.
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December, 2006

Research and Publishing: Relevance and Irreverence

By: Brester, Gary W.
The value, relevance, and efficacy of conducting and publishing research has been widely debated throughout the agricultural economics profession. On the one hand, some argue that the research process creates little value and directly competes with teaching/outreach output. On the other hand, others argue that research provides answers to important questions, improves human capital, and complements teaching/outreach activities. I argue that the research and publishing process develops human capital, improves the quality of teaching/outreach, reduces bias, generates new ideas, improves societal welfare, creates innovation, and is essential for public policy debate.
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December, 2006

The Economics of Efficient Phosphorus Abatement in a Watershed

By: Ancev, Tihomir; Stoecker, Arthur L.; Storm, Daniel E.; White, Michael J.
This study presents a method to determine efficient environmental targets at a watershed level. Efficient targets are devised by estimating abatement cost and cost of environmental damages and minimizing their sum. The method was applied to a case study of phosphorus pollution in a watershed in Oklahoma. Several cumulative scenarios with alternative abatement options were simulated and efficient targets were determined. As the number of abatement options at disposal to agricultural sources increased, their optimal abatement expanded relative to the abatement at the point source. Efficient targets were found to be dependent on the choice of policy that stimulates abatement.
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December, 2006

Interaction Between Food Attributes in Markets: The Case of Environmental Labeling

By: Grolleau, Gilles; Caswell, Julie A.
Some consumers derive utility from using products produced with specific processes, such as environmentally friendly practices. Means of verifying these credence attributes, such as certification, are necessary for the market to function effectively. A substitute or complementary solution may exist when consumers perceive a relationship between a process attribute and other verifiable product attributes. We present a model where the level of search and experience attributes influences the likelihood of production of eco-friendly products. Our results suggest that the market success of eco-friendly food products requires a mix of environmental and other verifiable attributes that together signal credibility.
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December, 2006

Intermediate Volatility Forecasts Using Implied Forward Volatility: The Performance of Selected Agricultural Commodity Options

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.
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