Crop Yield and Price Distributional Effects on Revenue Hedging

The use of crop yield futures contracts is examined. The expectation being modeled here reflects that of an Illinois corn and soybeans producer at planting, of revenue realized at harvest. The effects of using price and crop yield contracts are measured by comparing the results of the expected distribution to the expected distribution found under five general alternatives: 1) a revenue hedge using just price futures, 2) a revenue hedge using crop yield futures, 3) an unhedged scenario where revenue is determined by realized prices and yields, 4) an unhedged scenario where revenue is determined by realized prices and yields and by participation in government support programs with deficiency payments, and 5) a no hedge scenario where revenue is determined by realized prices and yields and by participation in a proposed revenue-assurance program. We draw four major conclusions from the results. First, hedging effectiveness using the new crop yield contract depends critically on yield basis risk which presumably can be reduced considerably by covering large geographical areas. Second, crop yield futures can be used in conjunction with price futures to derive risk management benefits significantly higher than using either of the two alone. Third, hedging using price and crop yield futures has a potential to offer benefits larger than those from the simulated revenue assurance program. However, the robustness of the findings depends largely on whether yield basis risk varies significantly across regions. Finally, the qualitative results described by the above three conclusions do not change depending on whether yields are distributed according to the beta or lognormal distribution.published or submitted for publicationnot peer reviewe

Managing droughts in the low-rainfall areas of the Middle East and North Africa:

Drought is a recurrent and often devastating threat to the welfare of countries in the Middle East and North Africa (MENA) where three-quarters of the arable land has less than 400 mm of annual rainfall, and the natural grazings, which support a majority of the 290 million ruminant livestock, have less than 200 mm. Its impact has been exacerbated in the last half century by the human population increasing yearly at over 3%, while livestock numbers have risen by 50% over the quinquennium. Virtually no scope exists for further expansion of rainfed farming and very little for irrigation, hence there is competition between mechanized cereal production and grazing in the low rainfall areas, and traditional nomadic systems of drought management through mobility are becoming difficult to maintain. Moreover droughts seem to be increasing in frequency, and their high social, economic, and environmental costs have led governments to intervene with various forms of assistance to farmers and herders, including distribution of subsidized animal feed, rescheduling of loans, investments in water development, and in animal health. In this paper we examine the nature and significance of these measures, both with respect to their immediate benefits and costs to the recipients and to governments, and to their longer term impact on poverty and the environment. We conclude that while they have been valuable in reducing catastrophic losses of livestock and thus alleviating poverty, especially in the low rainfall areas where they are the predominant source of income, continued dependence on these programs has sent inappropriate signals to farmers and herders, leading to moral hazards, unsustainable farming practices, and environmental degradation, while generally benefiting the affluent recipients most.Rainfed farming., Environmental impact analysis., Irrigation., Droughts., Middle East., North Africa.,

CROP YIELD AND PRICE DISTRIBUTIONAL EFFECTS ON REVENUE HEDGING

The use of crop yield futures contracts is examined. The expectation being modeled here reflects that of an Illinois corn and soybeans producer at planting, of revenue realized at harvest. The effects of using price and crop yield contracts are measured by comparing the results of the expected distribution to the expected distribution found under five general alternatives: 1) a revenue hedge using just price futures, 2) a revenue hedge using crop yield futures, 3) an unhedged scenario where revenue is determined by realized prices and yields, 4) an unhedged scenario where revenue is determined by realized prices and yields and by participation in government support programs with deficiency payments, and 5) a no hedge scenario where revenue is determined by realized prices and yields and by participation in a proposed revenue-assurance program. We draw four major conclusions from the results. First, hedging effectiveness using the new crop yield contract depends critically on yield basis risk which presumably can be reduced considerably by covering large geographical areas. Second, crop yield futures can be used in conjunction with price futures to derive risk management benefits significantly higher than using either of the two alone. Third, hedging using price and crop yield futures has a potential to offer benefits larger than those from the simulated revenue assurance program. However, the robustness of the findings depends largely on whether yield basis risk varies significantly across regions. Finally, the qualitative results described by the above three conclusions do not change depending on whether yields are distributed according to the beta or lognormal distribution.Marketing,

Program Participation and Farm-Level Adoption of Conservation Tillage: Estimates from a Multinomial Logit Model

Over the past decade, conservation compliance has reduced soil erosion. What will happen to these erosion benefits if commodity programs are eliminated or if the subsidy level is greatly reduced? This study investigates whether there will be a significant decline in the amount of acreage on which conservation practices are adopted if future farm program benefits are not tied to conservation compliance

Conservation Tillage and Farm Programs

One of the major environmental initiatives of current commodity programs is Conservation Compliance, a provision that requires highly erodible land to be cropped according to a locally approved conservation plan

Impact of the WTO Agreement on MENA Agriculture

The paper reviews the status of MENA agriculture trade and policies in relation with the Uruguay Round Agreement on Agriculture and future WTO negotiations. Using country-specific economy-wide models, the paper quantifies the impact of unilateral trade liberalization and reduction in domestic policy distortions. Drawing on these results and the current status of MENA agriculture, the paper provides recommendations in designing domestic policies to mitigate the likely unfavorable income redistribution effects in the context of the new trading system and increased localization. It also analyzes policy options that would contribute most to the expansion of developing country exports; and how the WTO process can be used to improve domestic policies to support MENA's rural economies."--Abstract.Non-PRIFPRI5; Markets and TradeTM

proceedings from an international conference held in Amman, Jordan, September 2-6, 1997

Non-PRIFPRI5; GRP5EPT

The risk management effects of alternative settlement specifications in commodity futures markets

The economic function of a futures market is performed efficiently only when a high level of competition exists among the participants. The prevention of distortions such as "squeezes" or "corners" has been an area of major concern for futures institutions. At the heart of such distortions lies the type of settlement system associated with the futures contract. The general objective of the thesis is to analyze the present delivery system in the Chicago Board of Trade corn and soybean contracts, alternative physical delivery systems, and cash settlement systems. More precisely, the specific objectives of the study are: (1) to assess and compare the feasibility of alternative settlement delivery systems for corn and soybeans; (2) to develop a method for estimating optimal weights in a cash settlement index that minimizes basis risk; the value of the weighing scheme will be assessed relative to simple-average weights; (3) to construct an index where locations of the underlying prices are randomly selected in a manner which attempts to maintain a "consistent" index while inhibiting manipulation incentives.A theoretical model of futures pricing with delivery option is used to simulate futures prices with different delivery terms and construct cash indices. Several modifications to the current settlement system are made regarding the composition of the delivery set, the size and the nature of the discount/premium used to settle the contract at expiration, and the type of settlement. The results indicate that hedging effectiveness, when measured individually at non-delivery locations, responds to changes in delivery differentials as well as delivery locations. However, as results are aggregated over space, the changes in settlement specifications tend to affect hedging performance only marginally. Results also suggest that cash settlement provides slightly higher levels of hedging effectiveness than any type of multiple physical delivery.U of I OnlyETDs are only available to UIUC Users without author permissio