Volume 36, Issue 1, April 2011

April, 2011

Household Food Stamp Program Participation and Childhood Obesity

By: Robinson, Christina A.; Zheng, Xiaoyong
This study examines the dynamic relationship between a household’s Food Stamp Program (FSP) participation and the extent to which children in the household are overweight or obese. In contrast to previous studies employing static models, our results suggest that FSP participation significantly affects the deviation of current body mass index (BMI) from the ideal level in older male children who are currently underweight and for older female children who are already overweight. For older male children, the effect is desirable; for older females, however, our findings indicate that FSP participation has an adverse effect on their health and may contribute to being overweight or obese.
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April, 2011

Impacts of Rising Food Prices on Poverty and Welfare in Vietnam

By: Vu, Linh; Glewwe, Paul
In 2007 and 2008, international prices of rice and other grains sharply increased, raising fears that poor households in developing countries would become poorer. Yet, these fears often ignored that many of these poor households were food producers. This study examines the impact of rising food prices on welfare in Vietnam. Our results show that, overall, higher food prices raised the average Vietnamese household’s welfare. However, higher food prices made most households worse off. Average welfare was found to increase because the average welfare loss of households whose welfare declined (net purchasers) was smaller than the average welfare gain of those whose welfare increased (net sellers).
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April, 2011

Live and Feeder Cattle Options Markets: Returns, Risk, and Volatility Forecasting

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.
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April, 2011

Electronic vs. Open Outcry: Side-by-Side Trading of KCBT Wheat Futures

By: Shah, Samarth; Brorsen, B. Wade
This study compares liquidity costs of electronic and open-outcry wheat futures contracts traded side-by-side on the Kansas City Board of Trade. Liquidity costs are considerably lower in the electronic market. Liquidity costs in the electronic market are still considerably lower after eliminating the bias created by splitting orders in the electronic market. Price volatility and transaction size are positively related to liquidity costs, while a negative relation is found between daily volume and liquidity costs. Price clustering at whole cent prices occurs in the open-outcry market which helps explain its higher liquidity costs. Daily volumes were distinctively higher during the Goldman-Sachs roll, but not enough to explain the higher liquidity costs in the open-outcry market. Trade size is larger in the open-outcry market, which suggests large traders prefer open-outcry trading.
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April, 2011

Are Agricultural Options Overpriced?

By: Urcola, Hernan A.; Irwin, Scott H.
As agricultural options markets grow, perceptions of overpricing persist among market participants. This study tests the efficiency of corn, soybean, and wheat options by computing trading returns. Several call and put option strategies yield significant profits, but returns are influenced by movements in the futures price, and straddle trading does not lead to significant returns. The combined analysis of put, call, and straddle returns indicates that significant returns can be attributed to drifts in the underlying futures, and that the corn, soybean, and wheat options markets are efficient.
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April, 2011

How Much Do Consumers Benefit from New Brand Introductions? The Case of Potato Chips

By: Arnade, Carlos Anthony; Gopinath, Munisamy; Pick, Daniel H.
This study identifies consumer welfare from new brand introductions in the potato chip market. Price and variety effects of new brand introduction are measured by estimating a demand system underlying an expenditure function. Variety effects are positive in most cities, while price effects are generally negative when consumers exhibit some variety preference. Variety effects dominate price effects in most cities; an opposite effect observed in some cities may indicate high entry barriers or joint brand- and price-based marketing strategies. Results indicate that consumers and producers gain from product innovations, but substantial regional variation exists in the distributional effects of new brand introduction.
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April, 2011

The Economics of Commonly Owned Groundwater When User Demand Is Perfectly Inelastic

By: Wang, Chenggang; Segarra, Eduardo
This paper provides a theoretical analysis of the common-pool resource dilemma in extracting nonrenewable groundwater resources when water demand is perfectly inelastic. It complements the existing theory of groundwater use, which assumes away the possibility of demand perfect inelasticity. Under perfectly inelastic water demand, the common-pool resource dilemma is by-passed if groundwater users are equally productive in water use. If they are not, a new type of inefficiency can arise due to the lack of a rationing mechanism on the basis of productivity. Our analysis suggests that groundwater management research should pay more attention to water demand elasticity and productivity heterogeneity.
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April, 2011

Carbon Sequestration in Agricultural Soils

By: Wilman, Elizabeth A.
Although it is common to alternate between till and no-till practices, past research has considered farmers’ tillage options to be limited to the dichotomous choice of whether or not to switch to a long-term no-till regime. This paper expands farmers’ options and models their choices of tillage frequency. Less frequent tilling sequesters more carbon but permits a greater accumulation of weeds, whereas more frequent tilling eliminates weeds but releases carbon (tillage emissions). The timing of tillage balances its marginal benefits and costs. Higher payments from industry or government for atmospheric greenhouse gas reductions will increase marginal cost and reduce tillage frequency. Other key parameters, such as higher rates of tillage emissions or reduced weed impact, also influence tillage frequency. However, for the discount rate and the natural decay rate of carbon, the net change depends on the magnitude of other parameters.
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April, 2011

Machinery-Sharing Contractual Issues and Impacts on Cash Flows of Agribusinesses

By: Wolfley, Jared L.; Mjelde, James W.; Klinefelter, Danny A.; Salin, Victoria
Contractual arrangements for joint machinery ownership between independent agribusinesses are explored. A two-farm economic simulation model of locations in Texas, Colorado, and Montana is developed to provide insight associated with sharing combines. Important variables include combine size (efficiency), yield losses resulting from untimely access to equipment, the penalty structure for untimely delivery, and cost-sharing and depreciation deductions claimed between producers. Combine sharing is risk-reducing in most cases. The gains to both parties are lowest when harvesting periods overlap. While the value of sharing is positive under many scenarios, benefits from sharing are small relative to total farm revenue.
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April, 2011

Tax-Deferred Retirement Savings of Farm Households: An Empirical Investigation

By: Mishra, Ashok K.; Chang, Hung-Hao
This study examines factors affecting tax-deferred retirement savings among farm households. A double-hurdle model is estimated using 2003 Agricultural Resource Management Survey (ARMS) farm-level national data. Results indicate that demographic factors, total household income, off-farm work, and risk preference play important roles in retirement savings plan participation. Retirement savings increase with household size, intensity of off-farm work by farm operator and spouse, and size of farming operation. We find that the amount of retirement savings decreases with operator’s age and increases with spouse’s age, and that cash grain and dairy farmers have lower retirement savings.
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April, 2011

Modeling Stochastic Crop Yield Expectations with a Limiting Beta Distribution

By: Hennessy, David A.
The use of plausible stochastic price processes in price risk analysis has allowed advances not seen in crop yield risk analysis. This study develops a stochastic process for yield modeling and risk management. The Pólya urn process is an internally consistent dynamic representation of yield expectations over a growing season that accommodates agronomic events such as growing degree days. The limiting distribution is the commonly used beta distribution. Binomial tree analysis of the process allows us to explore hedging decisions and crop valuation. The method is empirically flexible to accommodate alternative assumptions on the growing environment, such as intra-season input decisions.
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April, 2011

Modeling Yield Risk Under Technological Change: Dynamic Yield Distributions and the U.S. Crop Insurance Program

By: Zhu, Ying; Goodwin, Barry K.; Ghosh, Sujit K.
The objective of this study is to evaluate the risk associated with major agricultural commodity yields in the United States. We are particularly concerned with the nonstationary nature of the yield distribution, which arises primarily as a result of technological progress and changing environmental conditions over time. In contrast to common two-stage methods, we propose an alternative parametric model that allows the moments of yield distributions to change with time. Several model selection techniques suggest the proposed time-varying model outperforms more conventional models in terms of in-sample goodness-of-fit, out-of-sample predictive power, and the prediction accuracy of insurance premium rates.
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April, 2011

Actuarial Impacts of Loss Cost Ratio Ratemaking in U.S. Crop Insurance Programs

By: Woodard, Joshua D.; Sherrick, Bruce J.; Schnitkey, Gary D.
This study examines the actuarial implications of the loss cost ratio (LCR) ratemaking methodology employed by the Risk Management Agency as a component of base rates for U.S. crop insurance programs, and identifies specific conditions required for the LCR methodology to result in unbiased rates when liabilities trend. Specifically, constant relative yield risk resulting in growing absolute variance through time and other restrictive requirements are required for the LCR to result in unbiased rates. These requirements are tested against a large farm-level data set for Illinois corn. Our findings indicate that the conditions required for appropriate use of the LCR methodology are violated for this high premium volume market, resulting in large implied rate biases. The process does not correct itself through time with the addition of longer rating periods as sometimes claimed. A simple correction function is suggested and demonstrated.
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