A USER'S GUIDE TO UNDERSTANDING BASIS AND BASIS BEHAVIOR IN MULTIPLE COMPONENT FEDERAL ORDER MILK MARKETS

What are the general ideas behind a futures contract price and the concept of the Basis calculation? The Class 3 milk futures contract traded at the Chicago Mercantile present opportunities for you to forward price your milk if your milk is pooled in a multiple component market such as Federal Order #33. The use of a Class 3 or Class 4 milk contract allows a producer to forward price the butterfat, protein and other solids components of his milk production in multiple-component pricing federal orders or to forward price butterfat and skim in fat/skim federal order markets. Using the futures instruments to protect against uncertain market prices is a new revenue management tool for the dairy industry. Likewise, the use of a Class 3 or Class 4 contract allows a dairy product manufacturer (buyer of liquid milk) to forward price the butterfat, protein and other solids components of his liquid milk needs to protect against rising prices. The use of futures markets to accurately forward price milk either as an output or as an input necessitates that one must know the relative cash price/futures price relationships that are captured in what is called basis. This article will define the general concept of basis as it is used in futures and options markets and how it can be calculated for a milk producer who intends to use Class 3/4 futures contracts as a means to hedge against price declines in a multiple component market. The focus in this paper will be on the Class 3 futures contract and to multiple-component Federal Order markets. The use of the other class contract, the Class 4 futures contract, raises additional issues and will be discussed in a sequel to this paper.Livestock Production/Industries, Marketing,

A Dynamic Impact Model of Regional Income : A Reduced Form Approach

In a time of increased awareness of regional and community repercussions of socio-economic and political decisions which often originate outside of the region or community, there is a strong need for the development of a theoretically acceptable, and statistically applicable method, by which the impact of these various decisions upon the regional economy can be delineated. A priori knowledge, based upon an abstract theoretical model is not sufficient. The ramifications of decisions which affect the income producing sectors of a regional economy are not contained within a vacuum. It is paramount that the regional impacts of such decisions be estimated before the policy implementation takes place. This study explores the use of linear regression and reduced form analysis as a method by which impacts of changing economic sectors on total regional income can be estimated. Analysis of this type will provide the regional economist and public policy makers with an improved basis for interpreting the nature of a regional economic system in the light of national, state, and regional decision implementation. Of primary importance to the growth of a regional economy is the viability of its exporting sector. Economic growth depends upon a continuous marketing of products outside the region, stimulating consumption, investment and income of the region. This presumes that the region experiences a demand for the products it produces in excess of its own local demand; for in general the level of, or changes in local demand, will not be of the magnitude sufficient to support extensive growth of regional income

Expectations, The Lucas Critique and Agricultural Policy: An Econometric Application to the U.S. Dairy Economy

Exact date of working paper unknown.The Lucas critique is developed in a conceptual and econometric application of a rational or 'model consistent I expectations paradigm for modeling producers' economic behavior in a simple macro-economic model of the United States dairy economy. It is demonstrated that the parameters of the estimated behavioral equations are functions of the specific dairy price-support rule in effect

PRICE SUPPORTS, RISK AVERSION AND U.S. DAIRY POLICY: AN ALTERNATIVE PERSPECTIVE OF THE LONG-TERM IMPACTS

Agricultural and Food Policy,

PRICE ENHANCEMENT, RETURNS VARIABILITY, AND SUPPLY RESPONSE IN THE U.S. DAIRY SECTOR

Dairy producers operating in the U.S. have been protected against market price variability by the federal price support program for over 35 years. During the late 1970s tax outlays to operate this program grew at a rapid rate. While many authors have addressed the economic implications of the existing dairy price support program, few have explicitly considered the relationship between risk aversion, capital investment, milk production, and support price policy in this process. This paper considers the role of uncertainty and risk-averse behavior and suggests that these elements are crucial to an economic analysis of the current program and future dairy policy issues.Livestock Production/Industries,

CONDITIONAL FORECASTING FOR THE U.S. DAIRY PRICE COMPLEX WITH A BAYESIAN VECTOR AUTOREGRESSIVE MODEL

A dynamic Bayesian Vector Autoregressive model of the U.S. dairy price complex is estimated based on the Normal-Wishart distribution. The Gibbs sample technique is use with the Normal-Wishart distribution to provide conditional forecasts on the future time-paths of the model variables. The conditional forecasts for key prices are examined. Confidence intervals are calculated for the conditional forecasts.Demand and Price Analysis,

Yugoslavic Agricultural Development Policy: A Comparative Historical Analysis of Aggregate, Social Farm, and Private Farm Productivity

Exact date of working paper unknown.This paper examines the effects of this policy shift on Yugoslavic agricultural Development. During 1955-67 Yugoslavia invested heavily in human capital and physical capital in the social farming sector. However, during 1968-83, a shift in policy brought about a decline in the level of physical investment on the social farms leaving the human capital with little to work with

MANAGING DAIRY PROFIT RISK USING WEATHER DERIVATIVES

Replaced with revised version of paper 05/26/04.Risk and Uncertainty,