Reducing Investment Risk in Tractors and Combines with Improved Terminal Asset Value Forecasts

Secondary asset market data for combines and tractors are used to estimate and separate out historical economic depreciation, embodied technological change and time value change. Combines and tractors generally exhibit constant geometric economic depreciation on a year to year basis. Depreciation rates vary by manufacturer. Farm investors can use these manufacturer specific depreciation rates reported here to estimate terminal asset values. The study found significant seasonal differences in machinery depreciation rates. A major source of error in forecasting terminal asset values comes from changes related to time. There is a predictable time component to the constant quality asset index that has not been investigated in previous studies. Unanticipated shocks to demand should be followed by price reversion to long-run average manufacturing costs as industry capacity adjusts to demand. This reversion component is predicable. Investment risk over longer planning horizons may be lower when both depreciation coefficients and time component estimates are employed.Farm Management,

Risk Premia in Tractor and Combine Investments

A farmer planning to use Net Present Value (NPV) analysis on machinery requires estimates of operating benefits over time, an estimate of terminal or salvage values and a risk-adjusted discount rate. Using financial market information and related Root Mean Square Errors on machinery value forecasts, risk premia for combine and tractor investments are estimated for non-diversified investors. These risk premia can be added to the risk free rate in comparable maturity long term bonds to derive an appropriate discount rate for NPV analysis. Where machines are held as single-asset portfolios, risk premia identified for discounting terminal value vary between 5.5% and 8.3% for combines and between 2.4% and 3.6% for tractors, depending on age during the holding period. Where machines are held as parts of multi-asset portfolios, risk premia are usually lower, depending on machinery's weight in the multi-asset portfolio and its covariance with the rest of the portfolio.Farm Management, Risk and Uncertainty,

Hedging Alberta Government's Oil and Gas Revenue: Is Acting Like a Farmer a Viable Strategy?

The provincial government of Alberta in Canada experiences significant annual revenue variability arising from changes in crude oil and natural gas prices. This research evaluated whether Alberta’s non-renewable revenue risk could be managed using a derivatives hedging program. Results from a historical hedging simulation approach suggested that such a program would not have been the most effective method of managing revenue risk over the period of 1995-96 to 2003-04. Total impacts of hedging would have varied from Can-$8 Billion to Can$6 Billion over this time period. These results suggest the Alberta government explore alternative methods to manage non-renewable resource revenue risk.Government Hedging, Risk Hedging, Public Economics, Resource /Energy Economics and Policy, Risk and Uncertainty, Q480, G11,

PORK RISK MANAGEMENT STRATEGIES FOR THE ALBERTA HOG INDUSTRY

Risk and Uncertainty,

Flexible Pricing and Payment Alternatives on Canadian Wheat Board Pooling For Wheat

Crop Production/Industries, Marketing,

PORK MARKET DEVELOPMENT RESEARCH PROJECT: MARKET POTENTIAL FOR ALBERTA'S PORK IN SELECTED U.S. MARKETS

The ethnic Asian market in Washington and Oregon constitutes a sizable niche market for fresh Canadian pork. Since California possesses a large population segment that originates from Asia, the characteristics of the ethnic Asian-origin market in the northern part of that State are also of interest since this may also be a potential niche market for Canadian pork. The objectives of the first part of this study are to evaluate the Asian ethnic markets for fresh pork in the United States Pacific Northwest and Vancouver. In the second part of the project the assessment of the market for fresh pork by Asian-origin consumers was extended to San Francisco. In this extension, a detailed assessment was also made of the product preferences for fresh pork by Asian-origin consumers in San Francisco and the behaviour patterns associated with store choices of these fresh pork consumers. Asian retailers and distributors in Vancouver, Seattle and Portland were surveyed by direct interview during November and December 1996. The survey applied semantic differential scaling questions, open-ended questions and a stated preference task, a conjoint methodology, to examine pork retailer's and distributor's perceptions of fresh pork produced in Western Canada and in the Midwest United States. Personal interviews with wholesalers and retailers were also applied in the San Francisco market survey which was conducted in 1998. Two consumer surveys were also conducted in San Francisco in 1998, directed at Asian-origin consumers of fresh pork. The structure of the market for fresh pork represented by retailers catering to Asian consumers in Vancouver differs from that in Seattle and Portland. The "Asian market" in Vancouver is dominated by many small shops that deal directly with packers. The small shops in Seattle and Portland deal with distributors and wholesalers. Distributors play a small role in Vancouver's retail market. Asian retailers in Seattle deal with a variety of suppliers, including both packers and distributors. In Portland, retailers catering to Asian consumers trade mainly with distributors and a local packer-wholesaler. In San Francisco, Asian stores and butcher shops prefer to obtain pork through smaller joggers, while American style supermarket retailers catering to the Asian consumers purchase pork directly from meat packing companies; fresh pork is sold in different ways in the different types of stores catering to Asian consumers that are found in these markets. The first survey found that Western Canadian pork enjoys an image of superior quality amongst retailers and distributors in Seattle's ethnic Asian market. Asian retailers in Portland are less familiar with Western Canadian pork and did not regard it as highly as did retailers in Seattle. However, distributors in Portland are more familiar with Western Canadian pork and consider it to be superior to Midwest United States pork in terms of overall quality, meat colour and fat trim. In both these markets, Western Canadian pork is generally considered to be expensive. These results are not statistically significant, however they are of economic relevance since most of the major players in the segment were interviewed. Little knowledge of Western Canadian pork was evidenced by retailers or consumers in this market segment in San Francisco. Western Canadian pork presently enjoys a reputation for superior quality amongst the retailers that specialize in sales to Asian consumers in Seattle and Portland. However it is also clear that many members of the trade lack information or experience with Canadian pork. Consequently, there is an opportunity for Canadian processors to maintain or increase market share through more education and promotion to this market segment. The 1998 survey of Asian-origin consumers of fresh pork in San Francisco focused on two aspects: preferences for fresh pork attributes and choice of store for fresh pork purchases. An intercept survey method was chosen to select and interview consumer respondents. Some 40% of the 196 respondents to the store choice survey purchase most of their fresh pork from American style supermarkets, 33% purchase mostly from small Asian stores, 24% from large Asian stores, and the rest from butcher shops. The most popular cut of pork purchased by Asian consumers is loins, followed by pork shoulders and butts, then pork leg, bellies, hock, and offal. The analysis indicated that socio-economic and demographic factors, as well as store attributes, significantly affect Asian consumers' store and product choices. The analysis of the ranking of selected attributes of fresh pork by Asian-origin consumers in San Francisco, California showed that freshness is ranked as the most important attribute, followed by the attributes of the color of meat, lowness in fat, and the whiteness of fat. The attributes of price, freedom from chemicals, and being USDA labelled were also ranked to be of importance. The attributes of little or least importance were knowing that pork came from the US, customized pork cuts, the variety of pork cuts, packaged pork, vacuum packed pork and seasoned and prepared pork. Empirical results from an ordered probit model postulated to explain respondents' rankings of attributes indicate that particular demographic and socio-economic characteristics of Asian-origin consumers influenced the importance rankings for the pork attributes that were identified to be important. For example, Chinese origin consumers were appreciably more sensitive to pork price than were other Asian-origin groups. One facet of the findings is that marketing strategies should not treat Asian-origin consumers as a single homogenous niche group in marketing since there are identifiable sub-groups of these consumers with specific attitudes and preferences. The importance placed on different attributes by particular ethnic subgroups, and their different preferences for stores at which fresh pork is purchased, provides useful information on which to develop strategies to target market development activities at the Asian-origin ethnic subgroups.Marketing, International Relations/Trade,

AGRICULTURE IN CANADA: WHO WILL GROW THE FOOD?

Key issues in the current agricultural debate include the future of family farms, levels of government support for farms, the roles of marketing institutions and the effect of new trade arrangements. In part, these issues have arisen because of recent price volatility, but the agricultural debate has also raised basic questions: Can farming in Canada survive, and if so, what will the new farms look like? The future of farming is approached through evidence on land values and assessments of alternative land use. The future structure of farms is approached through a review of farm size, location and product mix. Farm sizes are increasingly bi-modal, with small farms relatively insulated from farm markets, and large specialized farms dependent on the market for a narrow range of commodities. Policy changes influencing product mix or regional specialization are also reviewed. About one-half of farm output in Canada now comes from the prairie region of Canada. Open trading relationships and subsidy changes are further modifying the regional location of farming. Changes in marketing board arrangements and withering of prime farmland restrictions will lead to further shifts. The following appear to be key factors in assessing future directions for farming and farm structure: For small farms, numbers are not declining, but these operations contribute relatively little to farm output. For commercial farms, technology and scale factors are leading to larger sizes and increasing specialization. Specialization is expected to occur regionally as well as within farms, and the prairie provinces are likely to become an increasingly important part of Canadian agriculture. The sizes of commercial farms are such that few farms will be financed by single families, and the balance sheets as well as the management structures of new commercial farms will increasingly mirror those in the non-farm economy.Food Security and Poverty,

Investment Analysis of Agri-Food Ventures: What Risk Premia are Appropriate? The Silence of the Literature

Financial principles of project investment analysis deal with the cost and benefit flows over time. Invariably, the correct future cash flows and exact risks are unknown. The agricultural academic literature devotes substantial energy to discussing the estimation of the cash flows but it is relatively silent on applied estimation of risk. Empirical studies on agri-food ventures have made little or no attempt to estimate appropriate risk adjusted discount rates or other risk measures. Choice of discount rate has been arbitrary. Thus little guidance has been given to practitioners analysing agri-food investments as to the appropriate risk adjusted discounts rates. The Capital Market Line provides a relatively straightforward way to calculate risk premiums for project investments by non-diversified investors. These risk premiums can then be used in Net Present Value investment analysis.Agribusiness, Risk and Uncertainty,

NEW GENERATION CO-OPERATIVES (NGC) AS A MODEL FOR VALUE-ADDED AGRICULTURAL PROCESSING IN ALBERTA: APPLICATIONS TO FACTORS AFFECTING CHOICE OF PRICING AND PAYMENT PRACTICES BY TRADITIONAL MARKETING AND NEW GENERATION CO-OPERATIVES

This study examines the factors affecting choice of pricing and payment practices by traditional marketing and new generation co-operatives for commodities delivered by their members. These factors include the demographic variables related to type of co-operative organization, level of competition in commodity market, and risk-return perceptions of members and co-operatives. Data for the analysis were obtained through a mail survey. Questionnaires were send to one hundred and ninety five (195) co-operatives in mid-west states of the U.S.A. and Canada. Altogether 93 co-operatives responded to the survey. Mean score analysis, factor analysis and multinomial logit analysis were done. The results indicate that traditional marketing co-operatives are more likely to choose spot market cash price, while new generation co-operatives are more likely to choose pooling practices. Traditional marketing co-operatives appear to be concerned about the members' cash flow needs and members' uncertainty of return; they are also more responsive to increased competitive level in commodity market. New generation co-operatives are more concerned with avoiding the risk of co-operatives' operating deficits and survival of co-operatives. This has implications for new co-operatives just beginning in business.Agribusiness,

Case Study: Value Added in the Oats Industry in Alberta and Western Canada 1998

Crop Production/Industries,