Do Futures Benefit Farmers?

Simulations are used to analyze welfare and market- and farm-level effects of making futures available to producers of a storable commodity. Key features of the model are the explicit consideration of dynamic impacts due to inventories, and of aggregate market effects associated with futures adoption by some producers. Application to the natural rubber market shows that futures availability can lead to sizeable market- and farm-level effects. Futures availability enhances consumer welfare, reduces non-adopter welfare, and yields important welfare gains for adopters when their market share is small and welfare losses when they account for a sufficiently large market share.Commodity markets; futures; natural rubber; rational expectations; storage model; welfare analysis

HOW LARGE IS THE COMPETITIVE EDGE THAT U.S.-BASED FUTURES PROVIDE TO U.S. FARMERS?

The present study advocates a simulation approach to analyze quantitatively the impact of having locally-based markets for price derivatives. A major result is that market outcomes do not appear to be sensitive to most of the underlying parameters of the model other than demand elasticity and transportation costs. For the case of inelastic demand, introduction of a futures market in a country provides domestic producers with a competitive edge if transportation costs. The most important insight of the present analysis is that, under realistic scenarios it need not be the case that local producers will gain a competitive edge over foreign producers by introducing a futures market based on the local spot prices.Commodity markets, derivative markets, futures markets, welfare analysis, rational expectations, Marketing,

Does Duality Theory Hold in Practice? A Monte Carlo Analysis for U.S. Agriculture

The Neoclassical theory of production establishes a dual relationship between the profit value function of a competitive firm and its underlying production technology. This relationship, usually referred to as the duality theory, has been widely used in empirical work to estimate production parameters without the requirement of explicitly specifying the technology. We analyze the ability of this approach to recover the underlying production parameters and its effects on estimated elasticities and scale economies measurements, when data available for estimation features typical realistic problems. We design alternative scenarios and compute the data generating process by Monte Carlo simulations, so as to know the true technology parameters as well as to calibrate the dataset to yield realistic magnitudes of noise. This noise introduced in the estimation by construction prevents duality theory from holding exactly. Hence, the true production parameters may not be recovered with enough precision, and the estimated elasticities or scale economies measurements may be more inaccurate than expected. We compare the estimated production parameters with the true (and known) parameters by means of the identities between the Hessians of the production and profit functions.duality theory, firm’s heterogeneity, measurement error, data aggregation, omitted variables, endogeneity, uncertainty, Monte Carlo simulations., Crop Production/Industries, Production Economics, Risk and Uncertainty, Q12, D22, D81,

Argentine Agriculture under GATT

Argentina is the world\u27s second largest exporter of grains, oilseeds, and oilseed products. Traditionally, Argentina\u27s economic policies have taxed the agricultural sector, which produces goods for exports, to subsidize the mostly insulated industrial sector. Despite this unfavorable treatment, the agricultural sector has remained Argentina\u27s economic mainstay and competes successfully in world markets. Recurrent economic crises have led to substantial changes in Argentine economic policies, which may eventually reduce the agricultural sector\u27s burden of subsidizing the manufacturing sector\u27s growth. Although this transition may take several years to accomplish, the predicted outcome is even greater competitiveness of Argentina\u27s agricultural exports in world markets. From the perspective of the General Agreement on Tariffs and Trade (GATT), Argentina\u27s agricultural sector stands to benefit greatly from trade liberalization. Argentine farmers have been taxed rather than subsidized, so they have no preferential treatment to lose in the GATT negotiations. Also, subsidized agricultural production and exports from countries such as those in the European Community have greatly undermined the profitability of Argentine farm businesses. If these countries agree to decrease or remove their subsidies as a result of the GATT, the Argentine agricultural sector should benefit

Cointegration Analysis of Commodity Prices: Much Ado about the Wrong Thing?

This study highlights some problems with using the Johansen cointegration statistics on data containing a negative moving average (NMA) in the error term of the data generating process. We use a Monte Carlo experiment to demonstrate that the asymptotic distribution of the Johansen cointegration statistics is sensitive to the NMA parameters and that using the stated 5% critical values results in severe size distortion. In our experiment, using the asymptotic critical values resulted in empirical size of 76% in the worst case. To date a NMA in the error term was known to cause poor small sample performance of the Johansen cointegration statistics; however our study demonstrates that problems associated with a NMA in the error term do not improve as sample size increases. In fact, the problems become more severe. Further, we show that commodity prices in the U.S. tend to exhibit this property. We recommend that researchers pretest data for NMA in the error term before using the standard asymptotic critical values to test for cointegrating rank.cointegration, Johansen cointegration test, moving average, Agricultural Finance, Financial Economics, C32, C15,