WHEAT QUALITY AND WHEAT YIELDS: TRADE-OFFS AMONG PRICE, YIELD, PROFIT, AND RISK

In this report, important wheat quality attributes and their links to varietal differences are identified, and their technical and economic importance to the milling and baking industries is examined. Wheat class and grading systems used in the United States and other countries are described, and the relationships between wheat classes and wheat varieties and between physical and wholesomeness attributes and grades are identified. The per bushel prices received by farmers' for their wheat depend on the classes and grades of wheat they produce. However, wheat classes and, to some degree, grades are linked to varietal choices and those choices also affect average per acre yields and year-to-year yield variability. Therefore, this report also examines the role of price premiums and yield differences in farmers varietal choice decisions. Price premiums, particularly protein price premiums, play a crucial role in those decisions, both in terms of their average levels and their year-to-year volatility. Evidence from the Pacific Northwest on average protein price premiums and protein price premium volatility is presented, and implications for varietal choice are discussed. Finally, the links between wheat product uniformity and price premiums are evaluated and compared with the costs of obtaining product uniformity through additional wheat cleaning and varietal regulation. Price and yield considerations also have important implications for public and industry-supported research programs. Through federal and state funding for State Agricultural Experiment Stations and federal funding for the USDA Agricultural Research Service, the U.S. government provides substantial support for public research programs to develop new wheat varieties. In many states, these funds are enhanced by additional resources provided by agricultural producers through wheat production levies. How these funds should be allocated across alternative lines of research depends on expected payoffs to both producers and consumers. Private seed companies that operate their own research programs also are concerned about trade-offs between yield and quality in developing new varieties because of potential effects on producer demand for those varieties. These issues are examined in the context of the benefits and costs of public policy and private decisions with respect to quality and yield attributes in varietal R&D programs. The report's key findings are as follows. Wheat producers plant many different varieties of wheat, and their varietal choice decisions depend crucially on the yields they expect to obtain and the prices they expect to receive for the different varieties they consider. In addition, to the extent that producers are risk averse, their varietal decisions are also influenced by differences among varieties with respect to both yield and price volatility. Variations in prices among different classes of wheat largely derive from variety-related differences in intrinsic characteristics such as protein and gluten content and kernel hardness. Variations in prices among different grades of wheat within classes are mainly associated with differences in nonintrinsic characteristics such as cleanliness and the presence of contaminants such as pesticide residues. The potential availability of premiums for specific attributes such as protein and ash content has been used as an economic justification for research targeted to improve wheat quality rather than wheat yields. In general, for any given attribute, if demand remains relatively stable, then as the quantity of the attribute supplied increases, the price of that attribute in the marketplace declines. This has clearly been the case for wheat protein. One important implication of the observed inverse relationship between protein premiums and the supply of high-protein wheat is that the potential economic benefits to producers of plant-breeding programs focused on quality attributes that currently provide price premiums need to be carefully assessed. Finally, with respect to the issue of shipment uniformity, although increasing product uniformity may enhance prices received from end users, achieving increased uniformity also typically imposes costs on producers and the grain-handling system, which may more than offset any potential gains.grain trade, grain quality, wheat trade, wheat quality, U.S. wheat, International Relations/Trade, F1, Q1,

Federal Crop and Crop Revenue Insurance Programs: Crop Revenue Coverage

Risk and Uncertainty,

NAFTA, GATT, AND AGRICULTURE IN THE NORTHERN ROCKIES AND GREAT PLAINS

Over the past seven years, the U.S. government has been involved in trade negotiations that have led to one bilateral and two multilateral agreements whose provisions have substantive implications for U.S. agricultural trade. The first of these sets of trade negotiations led to the bilateral Canada-United States Free Trade Agreement (CFTA). The second resulted in the current multilateral General Agreement on Tariffs and Trade (GATT) which was implemented on January 1, 1995. The third set of negotiations, initiated under the Bush Administration, led to the multilateral North American Free Trade Agreement (NAFTA), which was approved by Congress in November 1993 and implemented on January 1, 1994. The three agreements signed by the U.S. since the late 1980's have been substantively different from most previous agreements because each explicitly addressed trade in agricultural commodities. The result has been that, to a greater or lesser degree, CFTA, NAFTA, and GATT have altered or will alter the structure and behavior of world and domestic markets for agricultural commodities. These commodities include wheat and barley, sugar, and cattle and beef products; such changes are of importance to many Montana producers. The purpose of this report is to provide a detailed description of the agricultural provisions of NAFTA and the recent GATT agreement for wheat, barley, sugar, and cattle and boxed beef, and to discuss possible implications for producers of these commodities. The report does not investigate the consequences of the CFTA. The report begins by describing the general nature of these types of agreements. Brief histories and descriptions of the provisions of NAFTA and GATT are presented as well as overviews of the general agricultural provisions of the two agreements. The final section contains more detailed discussions of the provisions and implications of the agreements that directly relate to wheat, barley, sugar, and livestock products. The author concludes that for U.S. wheat producers, the consequences of both NAFTA and GATT appear to be favorable. Due to NAFTA, Mexican imports of U.S. wheat are likely to rise moderately. How NAFTA will impact U.S. and Canadian competition for the Mexican wheat market is unclear. The implications of GATT for wheat are also modest but generally favorable. Some countries will reduce tariff rates for wheat over the implementation period and improve import access to domestic markets. These adjustments are likely to encourage slight increases in world demand for wheat exports that will provide modest benefits for U.S. wheat producers. Historically, Mexico has levied high tariffs and implemented quantity restrictions via import licensing arrangements for barley imports from Canada and the U.S. Under NAFTA, Mexico allocated an initial quota of 120,000 metric tons per year to U.S. barley producers. This duty-free quota will be increased to about 195,000 metric tons in 2004. Tariffs on over-quota imports will also be removed by 2004. U.S. and Canadian barley producers are likely to benefit from increased Mexican import demand. The implications of GATT for barley are modest but generally favorable. As with wheat, some countries will reduce tariff rates for barley over the implementation period and/or improve import access to domestic markets. These adjustments are also likely to encourage slight increases in world demand for barley exports, thereby benefitting U.S. barley producers. With respect to cattle and beef, under the NAFTA agreement, the U.S. and Mexico have simply exempted each other from their respective import quotas. Prior to NAFTA, Mexico did not impose tariffs on live cattle or beef imports but did levy a small tariff on imports of edible offal. This tariff will be phased out by 2003. The U.S. also abolished modest tariffs on imports of Mexican fresh, chilled, and frozen beef, and imported feed and feeder cattle. Under the GATT agreement, several major beef-producing countries made commitments to reduce trade restrictions and internal supports. The U.S. has agreed to increase access at a low rate of duty and to reduce tariffs on over-quota imports by 15 percent by the year 2000. Some beef-importing countries such as Japan and South Korea have agreed to reduce tariffs and subsidies for domestic producers. The Trade Research Center is sponsoring research to analyze the impact of changes on U.S. beef prices due to GATT and NAFTA. Upcoming publications will discuss that issue. Under NAFTA, trade in sugar and sugar-containing products is subject to extensive provisions. Gradually, over the transition period 1994-2009, Mexico's access to the U.S. market will be expanded to a quota of 250,000 metric tons, if Mexico becomes a net surplus producer. These trade policy adjustments are likely to have minimal effects on the U.S. sugar industry over the first six years of the fifteen-year transition period, but their long-run effects are likely to be much more substantial. The GATT agreement contained only small changes for U.S. sugar policy and is not expected to have much impact on the U.S. sugar market. This special report contains a detailed description of the agricultural provisions of GATT and NAFTA that are of particular interest to producers in the Northern Plains and Rockies. The Center is sponsoring research projects to analyze the economic impacts of these trade agreements on the economy of the region.NAFTA, GATT, agriculture, Agricultural and Food Policy, Q1, F1,

U.S. and Canadian Currency Values and Exchange Rates

International Relations/Trade,

THE EFFECTS OF CHANGES IN THE TAX STRUCTURE ON AGRICULTURAL ASSET REPLACEMENT

This paper uses a deterministic asset replacement model to examine the implications of the 1986 Tax Reform Act (TRA) for replacement investment in U.S. agriculture. The optimal replacement age for an asset is shown to be inversely related to the size of investment tax credits and the present value of depreciation allowances but generally directly related to marginal tax rate. Simulation results indicate that the net effects of the TRA vary across assets. Replacement ages for assets with relatively long depreciation lives (e.g., farm structures) tend to fall. Those for assets with relatively short depreciation lives rise (e.g., tractors).Agricultural and Food Policy,

Federal Crop and Crop Revenue Insurance Programs: Group Risk Plan (GRP) Contracts

Risk and Uncertainty,

Measuring the benefits of social science research:

This paper addresses two questions: The first is "What are the benefits of social science research?"; the second is "How should they be measured?" The response to the first is that, as with research in the physical sciences, the benefits should be identified in terms of changes in economic surplus for different groups. It may be useful to use a framework that considers the incidence of the effects of social science research on firms, households, and govenment agencies. The response to the second question is that estimating returns to social science research using conventional econometric techniques may be particularly difficult. Instead, it may be necessary to resort to a case study approach, but care must be taken to ensure that the cases selected for study are genuinely representative.Research projects, Social sciences Methodology., Impact assessment,

Federal Crop and Crop Revenue Insurance Programs: Income Protection

Risk and Uncertainty,

Domestic Farm Policy For 2007: Forces for Change

Agricultural and Food Policy, Q18,

Segregation of Grain Markets: Consequences for Price Behavior

The introduction of genetically modified grain and oilseed products at the farm level and resistance for these products by consumer groups have led to segmentation in grain markets. This study explores the implications for market price behavior for a segregated soybean market for genetically modified (GM) and non-GM varieties. A stochastic dynamic simulation model of production and storage is solved, and Monte Carlo simulation procedures are used to examine price behavior between GM and non-GM soybeans. The results suggest important differences in price behavior between GM and non-GM soybeans. The results obtained in the model simulations are compared with evidence from the Tokyo Grain Exchange, where non-GM and GM soybean futures contracts have traded simultaneously since May 2000. The evidence from the Tokyo Grain Exchange contracts is largely consistent with the results of the simulation model. Price correlations between the Tokyo Grain Exchange non-GM and GM soybean contracts tended to be similar in magnitude to those found in the simulations.genetically modified organisms, soybeans, storage, Demand and Price Analysis,