Factors Affecting Hedging Decisions Using Evidence from the Cotton Industry

Few farmers utilize futures and options markets to price their crops despite significant educational efforts. This study seeks to analyze producer hedging behavior within the framework of the overall marketing behavior. Producer marketing behavior is modeled as a simultaneous choice between cash sales, cooperative marketing and forward contracts, and hedging. A multinomial logit model is used for empirical estimation using data from a survey administered to a sample of cotton producers from across the U.S. The most important factors that explain the use of forward pricing by cotton producers are producer preferences, farm size, use of crop insurance, risk aversion, income from government payments and off-farm income. Risk aversion, off-farm income, crop insurance and some producer perceptions are important in the choice of the form of forward pricing (direct hedging vs. cooperative marketing and forward contracts).Crop Production/Industries, Marketing,

U.S. Cotton Prices and the World Cotton Market: Forecasting and Structural Change

The purpose of this study was to analyze structural changes that took place in the cotton industry in recent years and develop a statistical model that reflects the current drivers of U.S. cotton prices. Legislative changes authorized the U.S. Department of Agriculture to resume publishing cotton price forecasts for the first time in 79 years. In addition, systematic problems have become apparent in the forecasting models used by USDA and elsewhere, highlighting the need for an updated review of price relationships. This study concluded that a structural break in the U.S. cotton industry occurred in 1999, and that world cotton supply has become an important determinant of U.S. cotton prices. China’s trade and production policy also continues to be an important factor in price determination. The model developed here forecasts changes in the U.S. upland cotton farm price based on changes in U.S. cotton supply, changes in U.S. stocks-to-use ratio (S/U), changes in China’s net imports as a share of world consumption, selected farm policy parameters, and changes in the foreign supply of cotton.forecasting, cotton, price, demand, trade, structural change, farm programs., Demand and Price Analysis, Q100, Q110, Q130,

U.S. Cotton Prices and the World Cotton Market; Forecasting and Structural Change

This report analyzes recent structural changes in the world cotton industry and develops a statistical model that reflects current drivers of U.S. cotton prices. Legislative changes in 2008 authorized USDA to resume publishing cotton price forecasts for the first time in nearly 80 years. Systematic problems have become apparent in the forecasting models used by USDA and elsewhere, highlighting the need for an updated review of price relationships. A structural break in the U.S. cotton industry occurred in 1999, and world cotton supply has become an important determinant of U.S. cotton prices, along with China’s trade and production policy. The model developed here forecasts changes in the U.S. upland cotton farm price based on changes in U.S. cotton supply, the U.S. stocks-to-use ratio (S/U), China’s net imports as a share of world consumption, the foreign supply of cotton, and selected farm policy parameters.forecasting, cotton, price, demand, trade, structural change, farm programs., Agricultural and Food Policy, Agricultural Finance, Crop Production/Industries, Marketing, Production Economics,

Measuring the Potential Economic Impact of a Regional Agricultural Promotion Campaign: The Case of South Carolina

This study evaluated the impact of the South Carolina (SC) agricultural promotion campaign after its first season. Analysis of the survey data revealed that consumer demand for state grown produce has increased by 3.4% which could result in an increase in producer surplus of $2.9 million. Since the SC Department of Agriculture invested$500,000 in the promotion program in 2007, this figure indicates a benefit-cost ratio of 5.8.Demand for local products, state branding and promotion programs, contingent valuation, equilibrium displacement models, Agribusiness, Agricultural and Food Policy, Demand and Price Analysis,

To Fund or Not to Fund: Assessment of the Potential Impact of a Regional Promotion Campaign

This paper develops a framework for assessing the potential economic impact of a regional promotion campaign combining contingent valuation methods with a partial displacement equilibrium model. The proposed approach is applied to the evaluation of the potential economic impact of the locally grown campaign in South Carolina. Results reveal that the first season of the promotion campaign increased consumer willingness to pay for produce by 3.4%. The change in consumer preferences and the corresponding shift in demand increased producer surplus by $3.09 million. This economic benefit, combined with the 2007 promotion campaign investment, resulted in a benefit-cost ratio of 6.18.contingent valuation, economic impact, equilibrium displacement model, regional promotion campaign, Consumer/Household Economics,

COMPARISON OF CONVENTIONAL AND TRANSGENIC TECHNOLOGIES UNDER ALTERNATIVE CULTURAL PRACTICES FOR COTTON IN GEORGIA

This study was conducted to determine allocative efficiency and cost effectiveness of growing conventional and transgenic cotton varieties under alternative cultural practices in South Georgia. A data envelopment model was used to compare costs and returns associated with various combinations of tillage and technology. The results suggest that combination of genetically modified cotton varieties and strip till cultivation practices yields a more efficient use of inputs relative to the level of output.Crop Production/Industries, Research and Development/Tech Change/Emerging Technologies,

The Value of USDA Situation and Outlook Information in Hog and Cattle Markets

The economic value of public situation and outlook information has long been a subject of debate. The purpose of this study is to investigate the economic value of USDA reports in hog and cattle markets. The investigation is based on event study analysis, with the "events" consisting of the release of six major USDA situation and outlook reports for hogs and cattle from 1985 through 2003. These include Cattle, Cattle on Feed, Cold Storage, Hogs and Pigs, Livestock, Dairy and Poultry Outlook (LDPO), and World Agricultural Supply and Demand Estimates (WASDE) reports. As a result of the process of modeling volatility of hog and cattle prices, a TARCH-in-mean model was specified that closely followed the distribution of these price movements. The effects of external information were evaluated within this model using dummy variables in the variance equation. The analysis revealed a statistically significant impact of all but Cattle and Cold Storage reports on live/lean hog returns and all but LDPO reports on live cattle returns. Hogs and Pigs reports had the highest impact on live/lean hog returns by increasing average conditional standard deviation by 118.6% following the release of these reports. Cattle and Hogs and Pigs reports had the highest impact on live cattle returns by increasing average conditional standard deviation in both cases 44.8%. These results suggest that the information contained in USDA situation and outlook reports provides economically valuable information to livestock market participants.Livestock Production/Industries, Marketing,

Quantile Regression Methods of Estimating Confidence Intervals for WASDE Price Forecasts

This paper explores the use of quantile regression for estimation of empirical confidence limits for WASDE forecasts of corn, soybean, and wheat prices. Quantile regressions for corn, soybean, and wheat forecast errors over 1980/81 through 2006/07 were specified as a function of forecast lead time. Estimated coefficients were used to calculate forecast intervals for 2007/08. The quantile regression approach to calculating forecast intervals was evaluated based on out-of-sample performance. The accuracy of the empirical confidence intervals was not statistically different from the target level about 87% of the time prior to harvest and 91% of the time after harvest.Demand and Price Analysis,

DOES THE MARKET ANTICIPATE SMOOTHING IN USDA CROP PRODUCTION FORECASTS?

This study examines whether market participants anticipate the predictable component in USDA revisions of corn and soybean production forecasts during 1970/71 through 2003/04 marketing years. The analysis revealed that markets consistently under-predicted October corn production revisions and over-predicted September soybean production revisions. These biases may be attributable to inefficient use of information about smoothing in USDA revisions. In all other cases market analysts seemed to be aware of USDA smoothing practices and generally efficiently incorporated this information into their own forecasts.Marketing,

The Value of USDA Situation and Outlook Information in Hog and Cattle Markets

This study investigates the impact of six major USDA reports in hog and cattle markets: Cattle; Cattle on Feed; Cold Storage; Hogs and Pigs; Livestock, Dairy, and Poultry Outlook (LDPO); and World Agricultural Supply and Demand Estimates (WASDE). A TARCH-in-mean model, with dummy variables to measure the impact of USDA reports and other external factors, is used to model close-to-open live-lean hog and live cattle futures returns from January 1985 through December 2004. The analysis revealed a statistically significant impact of all but Cattle and Cold Storage reports in live/lean hog futures, and all but Cold Storage reports in live cattle futures. Hogs and Pigs reports had the highest impact on live/lean hog returns by increasing conditional standard deviation 96%. Cattle, Cattle on Feed, and Hogs and Pigs reports had the highest impact on live cattle returns by increasing conditional standard deviation between 26% and 37.5%.cattle, event study, hogs, livestock, public information, TARCH model, USDA reports, Livestock Production/Industries, Marketing,