THE SUPPLY OF STORAGE UNDER HETEROGENEOUS EXPECTATIONS

Expected prices for storable commodities often lie below spot prices plus interest and marginal storage charges. Recently this gap has been explained as the value of a call option held by a representative storer whenever a positive probability exists that stocks could dwindle to zero. However, the probability of an aggregate stock-out is effectively zero in most markets most of the time. This paper presents an alternative model that explains the gap as an equilibrium between fundamentals traders and noise traders. Applications of the model suggest that rational agents make up 84 percent of the U.S. copper market, and more than 95 percent of the corn and wheat markets.storage, heterogeneous expectations, noise traders, Marketing,

The Potential Value of Agricultural Trade Options

Hedgers located far from organized commodity exchanges suffer a mismatch between their local prices and exchange prices. Futures and options traded on the exchange may still be valuable to distant hedgers, but only to the extent that basis risk is small. Forward contracting allows hedgers to manage risk using a local delivery price, but the Commodity Futures Trading Commission has long banned the sale of off-exchange options, limiting the opportunities available to hedgers. Recently, agricultural trade options (ATOs) have been introduced as over-the-counter option products designed specifically for hedgers. To date, ATOs have found little interest from potential sellers, but the potential demand for these options may be substantial. This study develops a methodology for measuring the potential value of ATOs. It describes and quantifies the demand for corn ATOs by dairy farms in Pennsylvania and estimates the value these farms might place on ATO contracts offered locally.International Relations/Trade,

HEDGING WITH FUTURES AND OPTIONS: A DEMAND SYSTEMS APPROACH

The optimal hedging portfolio is shown to include both futures and options under a variety of circumstances when the marginal cost of hedging is non-zero. Futures and options are treated as substitute goods, and properties of the resulting hedging demand system are explained. The overall optimal hedge ratio is shown to increase when the marginal cost of trading options is reduced. The overall optimal hedge ratio is shown to decrease when the marginal cost of trading futures is decreased. The implication is that hedging demand can be stimulated by reducing the perceived cost of trading options, by educating hedgers about options and by initiating programs like the Dairy Options Pilot Program. The demand systems approach is applied to estimate optimal hedge ratios for dairy producers hedging corn inputs in five regions of Pennsylvania.Hedging, Options, Futures, Marketing,

A Result About the Density of Iterated Line Intersections in the Plane

Let $S$ be a finite set of points in the plane and let $\mathcal{T}(S)$ be the set of intersection points between pairs of lines passing through any two points in $S$. We characterize all configurations of points $S$ such that iteration of the above operation produces a dense set. We also discuss partial results on the characterization of those finite point-sets with rational coordinates that generate all of $\mathbb Q^2$ through iteration of $\mathcal{T}$.Comment: 10 pages, 8 figures (low-res for the arXiv), Computational Geometry: Theory and Application

Have Milk Fat Preferences Shifted? Structural Analysis of New York Milk Consumption

Consumption of lowfat and skim milk has increased substantially over the past decade. This study investigates whether the change is due to price and expenditure effects or to a more fundamental preference change in milk demand. Parametric and nonparametric analytical approaches provide a comprehensive analysis of structural change in milk consumption in New York State. A nonparametric approach first finds evidence of structural change. A parametric likelihood-ratio test then confirms the existence of structural change using a Kalman filter specification. The value of this technical analysis of milk preferences is its implication for labeling initiatives. Milk fat labels have allowed consumers to act on a new set of preferences, thereby improving consumer welfare.Food Consumption/Nutrition/Food Safety,

The Economic Impact of the Cotton Crop on the Texas High Plains, 2008

Early season high winds and late season cool temperatures have worked together to limit the size of the High Plains cotton crop. Over the past 5 years, the High Plains2 has averaged 4.44 million bales produced each year. However, Plains Cotton Growers recently estimated the 2008 crop to be around 3.2 million bales (Wade). If these production numbers materialize, the 28% drop in production will have significant impacts on the regional economy. The purposes of this briefing paper are to: (1) estimate the impact of the cotton crop on the High Plains economy, and (2) estimate the impact of a smaller than average crop.Agribusiness,

THE EFFECT OF CALIFORNIA WEATHER CONDITIONS ON PRICE PREMIA FOR ORGANICALLY GROWN VEGETABLES IN THE UNITED STATES

Organic vegetable producers typically earn a premium over conventional producers to cover the added costs of organic production. The premium can vary greatly, making organic vegetable farming riskier than conventional farming and causing potential financial problems for new organic farming enterprises. Further, organic vegetable production is geographically concentrated in California, and the variation in organic price premia depends upon regional production factors, especially weather conditions. This study examines the relationship between organic vegetable price premia and California weather conditions near organic vegetable farms. Analysis is based on a unique data set of daily prices from the Boston Terminal Wholesale Market and California weather data from the National Climate Data Center.Demand and Price Analysis,

GATORNOMICS: PROFITABLE AND SUSTAINABLE USE OF ALLIGATORS IN THE SOUTHEASTERN UNITED STATES

The American alligator is no longer an endangered species. Alligator farms and ranches are regulated by government agencies, which provide economic incentives to ensure sustainable use. The collection of eggs laid in the wild and the subsequent release of juveniles back into the wild foster a synergy between wild and captive populations, implying that successful regulation must keep producers profitable. Specific policies are assessed in terms of profitability and sustainable use.Resource /Energy Economics and Policy,

Activists and Corporate Behavior in Food Processing and Retailing: A Sequential Bargaining Game

This study examines the strategic interaction between food companies and activists using a game theoretic model of sequential bargaining in the absence of complete information. In a rather confined set of circumstances, findings indicate it is always in the best interest of the food company to comply with activists' demands. More frequently, however, there will be cases where compliance is not optimal, depending on the size of the expected effect of protest, cost of defending against protest, and the cost of protest to the activist.activists, corporate behavior, food industries, sequential bargaining game, Agribusiness,

NON-EXPECTED UTILITY THEORIES: WEIGHTED EXPECTED, RANK DEPENDENT, AND CUMULATIVE PROSPECT THEORY UTILITY

This paper discusses some of the failings of expected utility including the Allais paradox and expected utility's inadequate one dimensional characterization of risk. Three alternatives to expected utility are discussed at length; weighted expected utility, rank dependent utility, and cumulative prospect theory. Each alternative is capable of explaining Allais paradox type problems and permits more sophisticated multi dimensional risk preferences.Risk and Uncertainty,