Showing papers in "Journal of Agricultural and Resource Economics in 1993"

An analysis of economic efficiency in agriculture: a nonparametric approach

Abstract: A nonparametric analysis of technical, allocative, scale, and scope efficiency of agricultural production is presented based on a sample of Wisconsin farmers The results indicate the existence of important economies of scale on very small farms, and of some diseconomies of scale for the larger farms Also, it is found that most farms exhibit substantial economies of scope, but that such economies tend to decline sharply with the size of the enterprises Finally, the empirical evidence suggests significant linkages between the financial structure of the farms and their economic efficiency

Risk and Probability Premiums for CARA Utility Functions

Abstract: The risk premium and the probability premium are used to determine appropriate coefficients of absolute risk aversion under CARA utility. A defensible range of risk aversion coefficients is defined by the coefficients that correspond to risk premiums falling between 1 and 99% of the amount at risk or to probability premiums falling between .005 and .49 for a lottery that pays or loses a given sum. The consequences of ignoring risk premiums when selecting risk-aversion coefficients for representative decision makers are illustrated by calculation of the implied risk premium associated with the levels of absolute risk aversion assumed in six selected studies.

Sectoral effects of a world oil price shock: economywide linkages to the agricultural sector

Abstract: The effects of a world oil price shock on U.S. agriculture are analyzed in an economywide environment. We use an input-output model to analyze the direct and indirect cost linkages between energy and other sectors of the economy. Then, to allow sectoral output adjustment and the effects on the U.S. current account, we use the U.S. Department of Agriculture/Economic Research Service Computable General Equilibrium (CGE) model to analyze the sectoral effects under three different macro adjustment scenarios. The effects on agriculture are not limited to the direct and indirect energy costs. Exchange rate or foreign borrowing adjustments to higher oil import costs and government support programs for agriculture also matter.

Measuring food safety preferences: identifying consumer segments

Abstract: Conjoint analysis was used to estimate individual preference functions for food safety attributes. Consumer segments were constructed by using cluster analysis to form groups which were homogeneous with respect to preferences regarding food safety. Although substantial differences existed among the three distinct groups, consumers in all segments were willing to pay a moderate amount to ensure that apples met established safety standards. However, a policy which restricts pesticide use would likely result in substantial consumer dissatisfaction, unless it could be achieved with little impact on price or quality.

Valuing Ambiguity: The Case of Genetically Engineered Growth Enhancers

Abstract: A split- valuation method is developed and implemented to elicit the willingness to pay to consume- or avoid consuming- a product of ambiguous quality. The split- valuation method uses experimental auction markets to separate and value the positive and negative attributes of the ambiguous good. The results show that the method can be used to successfully value a good of ambiguous quality. Our application reveals that for a sample of students at a midwestern land-grant institution, the average respondent is willing to pay a premium for meat produced with the use of a genetically engineered growth enhancer that has 30% to 60% fewer calories and is 10% to 20% leaner.

The impact of pollution controls on livestock-crop producers

Abstract: A discrete-time, continuous-space model of a livestock-crop producer is used to examine the long-run effects of phosphorus runoff controls on optimal livestock production and manure application practices. Quantity restrictions and taxes on phosphorus application are shown to reduce livestock supply and impose greater costs on livestock-crop producers than on crop-only producers. Restrictions on manure application, without accompanying restrictions on commercial fertilizer application, will have only a limited effect on phosphorus runoff levels.

Functional Form and U.S. Agricultural Production Elasticities

Abstract: Because so much agricultural policy analysis utilizes estimates of supply and demand elasticities, it is crucial to obtain the most reliable estimates possible. Where reliability cannot be adequately assessed, the sensitivity of elasticities to equally plausible a priori specifications should at least be ascertained. In this article, the sensitivity of U.S. output supply and input demand elasticities to choice of functional form is examined and tests are conducted to identify the preferred functional form. Considerable sensitivity is found to choice of functional form. Although most frequently used, the translog is generally the outlier and is the least preferred among the alternatives.

On modeling systems of crop acreage demands

Abstract: This article presents an alternative approach to the specification of systems of crop acreage responses. Derived demands for acreages of individual crops are specified as conditional on total crop acreage, and related separability and dynamic specifications help to reduce the effects of multicollinearity in the system. A simple econometric model of crop acreage demands for Western Canada illustrates the methodology.

Beef Quality: Will Consumers Pay for Less Fat?

Abstract: A nationwide retail survey is used to estimate hedonic prices of fat characteristics in beef table cuts. Results show that consumers consistently place a negative value on external fat for all table cuts and on seam fat in chuck and round cuts, but do not consistently value intramuscular fat. These consumer preferences are not transmitted to cattle feeders through price signals, even though the current beef grading system can distinguish carcasses with undesirable fat characteristics.

On the Estimation of Separable Demand Models

Abstract: Alternative stochastic specification of conditional demand models are considered. The results of LaFrance concerning the inconsistency of least squares are supported, but the class of models that allow standard instrumental variable estimation is broadened considerably.

Comparison of Liquidity Costs Between the Kansas City and Chicago Wheat Futures Contracts

Abstract: The objectives of this study were to: (a) quantify differences in liquidity costs between Kansas City and Chicago wheat futures contracts, and (b) identify the factors which influence liquidity in these two markets. Regression results suggest that there are significant differences in liquidity costs between Chicago and Kansas City which are in part due to the lower trading volume at Kansas City. However, there appears to be a significantly higher cost of doing business at Kansas City which is independent of trading volume. The implications of these findings to traders is that transacting is more expensive in Kansas City than in Chicago.

Quantifying the effects of new product development: the case of low-fat ground beef

Abstract: Low-fat ground beef (LFGB) is a new product designed to be as palatable as beef products that contain significantly higher levels of fat. A hedonic model shows that each unitary increase in the leanness of ground beef products carries a price premium of $.0206/lb. If LFGB garners a 10% share of the ground beef market, the retail price of all ground beef products will increase by $.01 /lb. and consumption will increase by 39.75 million lbs. The price of commercial cows will increase by $.56/cwt. Price, quantity, and welfare measures are magnified as the market share captured by LFGB increases.

Acreage response, expected price functions, and endogenous price expectations

Abstract: Taking the price of futures as a proxy for expected price, this article treats acreage planted to soybeans, the price of futures, and other variables as jointly dependent. A futures price equation is embedded in a simultaneous equations model along with the consumption demand and acreage response. The model is estimated using both ordinary and three-stage least squares. Estimated price elasticities for consumption demand, demand for stocks, and acreage response equal, respectively, -.5, -1.8, and + .2 (short run) and +.59 (long run).

Clearance sales in the farmland market

Abstract: The ultimate loss financial institutions bear for foreclosed loans is determined by their success in liquidating their acquired property portfolios. This study examines the price received for land sold by private individuals and financial institutions from 1977 through 1990. After adjusting for quality differences, financial institutions received on average 9.2% less than private individuals. Further analysis reveals that commercial banks received a discount of 5.8%, the Farm Credit System (FCS) a 9.2% discount, and Farmers Home Administration (FmHA) a 14.7% discount. For this sample of 13,375 Kansas sales, it is estimated that the sum of the transfers from financial institutions to land buyers amounted to $9.2 million.

Wheat Cleaning Decisions at Country Elevators

Abstract: This article presents a mathematical programming model of wheat cleaning and blending decisions at a country elevator. Simulations are performed to illustrate the sensitivity of cleaning to selected variables, including the value of screenings, transportation costs, and market discounts for excess dockage. In addition, the model is used to assess the impact of including dockage in the grade standards for wheat.

Lifetime Leverage Choice for Proprietary Farmers in a Dynamic Stochastic Environment

Abstract: This article reviews various models that may be used to explain optimal lever- age choice for the proprietary farmer in a stochastic dynamic environment and develops a new model that highlights the risk of failure rather than the usual concept of risk as the variability of wealth. The model suggests that in addition to the usual factors, farm financial leverage is affected by age, wealth, and the opportunity cost of farming. Farmers often make substantial changes in financial leverage over time. A frequently observed pattern is for a young farmer to start out heavily in debt, and pay down the debt over time, if the farm is successful. Young farmers who are unsuccessful seek alter- native employment in the agribusiness sector, or join the rural-to-urban migration move- ment. Given constant parameters for risk aversion and the underlying probability distri- bution, systematic planned changes in leverage over time are not consistent with existing static models of farm leverage choice (such as Barry, Baker, and Sanint 1980, 1981; and Collins). In addition, many existing models of dynamic leverage choice either fail to explain this behavior, or are based on unattractive assumptions. A popular explanation for these leverage changes is that young farmers are willing to take chances while older farmers are more conservative.' Even though changing risk aversion could explain changing lifetime leverage choices, there is little evidence that farmers become more risk averse with age. 2 An alternative explanation is that leverage choice is a dynamic process. This could mean that even if risk aversion or the parameters of the relevant density function did not change, a farmer could plan to change leverage over time. This article introduces a stochastic optimal control model of farm leverage choice that models failure risk rather than the typical concept of variability of wealth. An analytic solution is presented that gives qualitative results on how optimal leverage changes over time and in response to changing wealth and the changing opportunity cost of being a farmer. The first section discusses previous dynamic stochastic models of proprietary leverage. The second section develops an alternative model of farm leverage choice that considers the farmer's risk of bankruptcy. The text discusses the assumptions and impli- cations of the models, with most technical material left to appendices. The final section summarizes and states the primary testable implications of the model. The model suggests, in addition to the usual factors that affect the costs and benefits of leverage, that wealth, the opportunity cost of farming, and age also affect optimal leverage choice.

A GSD Estimation of the Relative Worth of Cover Crops in Cotton Production Systems

Abstract: Cover crops can help reduce the negative environmental impacts of cotton production. Using time series yield data, this study utilizes generalized stochastic dominance to evaluate the relative worth, via risk premiums, of three cover crop and two conventional production systems based on expected net returns of each system and decision maker risk attitude. Results indicate, within the limitations of the study, two cover crop regimes possess a high degree of dominance over conventional systems. Determination of the dominant regime depends upon the risk attitude of a specific decision maker. This research suggests cover crop production systems may be feasible alternatives to conventional practices.

A Nonparametric Efficiency Analysis of California Cotton Ginning Cooperatives

Abstract: In the spirit of Learner's commitment to sensitivity analysis, we employ Far- rell's nonparametric efficiency methodology and compare our results with those of Sexton, Wilson, and Wann Testing the implicit assumption of technical efficiency in the methodology employed by Sexton, Wilson, and Wann, we find that the lack of technical efficiency is the cotton gins' main cause of overall inefficiency We extend the nonparametric methodology by subjecting the shad- ow prices of technical efficiency to nonparametric statistical tests to draw stron- ger conclusions In addition, the nonparametric methodology permits us to make gin-specific recommendations to improve the performance of the gins metric work, we employ a vastly different methodology to previously analyzed data to test for the sensitivity of the results We analyze a sample of ginning cooperatives located in the San Joaquin Valley of California Sexton, Wilson, and Wann (hereafter SWW), using the econometric methodology of Atkinson and Halvorsen, who extended the Lau and Yotopoulos methodology, analyzed the efficiency of the aforementioned ginning cooperatives They concluded that as a whole, the sample of ginning cooperatives did not exhibit absolute price efficiency (ie, were not profit maximizers) because they overutilized variable inputs relative to their profit max- imizing levels SWW were not able to conclude, however, that any one of the variable inputs was either over or underutilized relative to the two other variable inputs In other words, they found that all three variable inputs were overutilized in roughly the same proportion Said differently, SWW found that the ginning cooperatives sampled were cost minimizers but not profit maximizers The methodology employed by SWW is an econometric procedure based on duality theory, and can only test for absolute price efficiency (ie, profit maximization) and relative price efficiency (ie, cost minimization) for the group of cooperatives as a whole If the group is found to be inefficient (as SWW found), their methodology does not permit them to identify which individual gins are inefficient, nor does it permit them to identify the source of the inefficiency in the individual gins Moreover, the methodology employed

Monetary Impacts on Prices in the Short and Long Run: Further Results for the United States

Abstract: This study examines the long-run neutrality of money and the short-run dynamics of farm and nonfarm prices to the monetary shock, using Johansen's approach Results find a long-run equality of prices, but not neutrality In the short run, farm prices adjust faster than nonfarm prices to a monetary shock

The Dynamic Effects of Agricultural Subsidies in the United States

Abstract: This article analyzes the dynamics effects of the farm subsidies in the United States. The subsidies a farmer receives are based upon historical plantings, also called based acreage. It is sometimes optimal for a farmer temporarily not to participate in a program in order to increase future subsidies. The farmer's optimal policy is the solution to a deterministic dynamic program. Farmers with low base acreage opt out of these programs, whereas those with high base acreage participate in them. The article examines aggregate data involving corn, cotton, rice, and wheat during 1987. It shows that these programs increase the output of each of these crops and represent an annual deadweight loss of more than $2 billion.

Do corn farmers have too much faith in the sugar program

Abstract: Corn producers frequently have been told that the sugar program provides an important stimulus to corn demand through its positive influence on the high fructose corn syrup sector. In this article we quantify the extent of this support and find it to be very small-not more than 3¢ per bushel, and probably less. Previous studies have overstated this effect due a lack of attention to the interindustry linkages in the sweetener complex.

Electronic market use by oklahoma lamb producers

Abstract: Socioeconomic and production system characteristics of a sample of Oklahoma sheep producers were employed to examine the decision to use or not use an electronic market for slaughter lambs. Producer attributes that influence electronic market use were identified with qualitative choice models. The results help identify characteristics of electronic markets which influence their success. The findings also have implications about educational opportunities for cooperative extension.

Farm Value of Topsoil in Spring Wheat Production

Abstract: Relationships among topsoil removal treatments and additions of nitrogen and phosphorus fertilizer on spring wheat yields are used to determine the effects on net returns and to estimate the marginal value of soil. The results indicate that risk-averse managers are not willing to make an expenditure for controlling erosion from the first 2.5 inches of soil if the erosion rate is 20 tons/acre/year or less and the planning horizon is 20 years or less. These managers would be willing to make an erosion control investment for the second 2.5 inches of soil equivalent to $4.90 to $5.20/acre from the twenty-first to forty-third year in the planning horizon.

The robustness of single index models in crop markets: a multiple index model test: comment

Abstract: A recent article by Steven C. Blank purports to evaluate the assumptions underlying the single index model (SIM) when it is applied in the farm planning context. Instead, it evaluates the extent to which the capital asset pricing model (CAPM) equilibrium conclusions arise in crop returns. While these issues have been dealt with previously (Hutchinson and McKillop; Collins), the important differences between the CAPM and the SIM apparently are not yet well understood by many. The SIM regresses each individual set of crop returns (CRi) on an index I, CRi = a, + ,I + Ei, and uses the estimates of the three parameters to approximate a full covariance matrix in a normative farm planning model as an alternative to the more complex Markowitz model. The CAPM, on the other hand, is a model of equilibrium returns to risky assets which states that if a long list of asset homogeneity and market efficiency assumptions are met, the equilibrium expected return on a risky asset (Ri) should be a linear function of its beta coefficient, Ri = Rf + f(RM - R), where Rf is the riskless rate of return and RM is the expected return to a market index of all risky assets. The SIM simply is an approximation technique. The CAPM is a model of equilibrium returns for risky assets. While the SIM may or may not be useful as an approximation to the Markowitz portfolio model, it is clear that there is no reason for crop returns in a particular region (on their excess returns over the rental rate) to be precisely related to their systematic risk. Therefore, Blank's analysis is fundamentally flawed because it does not test the SIM in any way, but instead tests and rejects CAPM hypotheses that should be rejected a priori. Sharpe (1963) proposed the SIM as a normative tool which could be used to approximate the Markowitz portfolio model. His primary objectives were conservation of computer time and dealing with large portfolio problems on small computers. However, an additional feature was that the beta coefficient obtained from regressing the individual activity returns on an index could be regarded as a measure of the risk that a particular activity would add to a well diversified portfolio. No such measure exists for the Markowitz model. For a model that considers n potential activities, one must consider the combined effects of an activity's variance along with the effects of n - 1 covariances. In this spirit, Collins and Barry proposed using the SIM for farm planning as an approximation of a full covariance model for farm planning. The SIM has several possible advantages for farm planning in the context of diversified farming. It allows large problems to be quickly solved on very small computers (or even hand calculators) and the betas provide a basis for comparing the risk contributions of alternative crops. In addition, only 3n parameters must be estimated to evaluate the risk of a SIM portfolio, while (n 2 + n)/2 parameters must be estimated for the full covariance model. This reduces the estimation required from limited data when n > 5. Most of all, they thought the SIM might have more intuitive appeal to farmers than the Markowitz model. But the important point is that the SIM is intended to have a normative purpose, i.e., provide a simple approximation of a Markowitz model for formulating approximately risk efficient farm plans. Tests of the robustness should evaluate this objective, i.e., the SIM is robust when it approximates