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

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

The conservation compliance provision of the 1985 Food Security Act requires highly erodible land to be cropped according to a locally approved conservation plan. There is overwhelming evidence that conservation compliance has reduced soil erosion. A key issue confronting Congress as they consider 1995 Farm Bill options is the fate of these erosion benefits if commodity programs are eliminated or it the subsidy level is greatly reduced. This study provides policymakers with additional insights into the relationship between conservation tillage practices and government programs by using observed farmer behavior. The central question addressed is: If future program benefits are not tied to conservation practices, will there be a significant decline in the amount of acreage on which conservation practices are adopted? Tillage adoption decisions are modeled within a multinomial logit framework. There is limited evidence to argue that there will be a significant decline in conservation tillage for corn if program benefits are reduced. For wheat, the results suggest that conservation tillage practices are costly, and that wheat farmers may reduce conservation tillage if conservation compliance provisions are weakened or eliminated. However, no-till on wheat fields may increase with more flexibility. For corn, there is significant support for an increased in no-till if more corn-soybean rotations are adopted

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.

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

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.Yield, Ditribution, Hedging, Monte-Carlo

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. Moreover, they have tended to escalate and become an administrative and financial burden to their governments. Alternative approaches to drought management need to be explored, and possibilities discussed here include area-based rainfall insurance against catastrophic droughts, and the development of more accurate timely, and accessible early warning drought forecasts. While we envisage the insurance as an unsubsidized private sector initiative with a number of attractive features, it would require strong support from the government in its formative stages. Improved weather forecasts are likely to remain a government responsibility in the immediate future and would help administrators and relief agencies position themselves for more efficient drought interventions, as well as farmers to adjust their plans to rainfall outcomes