MARKET RISK MANAGEMENT, INFORMATION AND PRICE RELATIONSHIPS: ILLINOIS COMMODITIES

Knowledge Area (KA)	Subject of Investigation (SOI)	Field of Science (FOS)	Percent
603	1510	3010	25%
603	1549	3010	10%
603	1820	3010	25%
603	3310	3010	15%
603	3510	3010	25%

Progress 10/01/98 to 09/30/04

Outputs
Research evaluated several dimensions of market risk management, information, and price relationships important to participants in many agricultural markets. One area of research focused on factors that drive derivative usage in small and medium-sized enterprises (SMEs). The influence of these factors on hedging behavior cannot a priori be assumed equal for all SMEs. To address this heterogeneity, we proposed a generalized mixture regression model which classifies firms into segments so that their hedging response to the determinants of derivative usage is the same within each segment. Using a unique data set of 415 SMEs in the hog industry, we found that factors like risk exposure, risk perception, risk attitude, and the decision making unit, among others are useful in explaining hedging behavior. However, the effects of these factors are not homogeneous across firms, and the roots of the heterogeneity can partially be traced to differences in attitudes, perceptions, and to differences in ownership structure. Academically, the results identify factors that influence derivative use, and demonstrate that heterogeneity is critical to developing an appropriate understanding of hedging behavior. From an industry perspective, the results identify the importance of the decision making unit which suggests that managers of SMEs rely heavily on the expertise and advice of consultants and bank account managers. Hence, the use of derivatives among SMEs can be stimulated through targeted programs that promote the advantages of derivatives to the members of these support groups. Second, the heterogeneity in derivative use suggests that financial institutions need to use varied hedging mechanisms to attract different segments. Another area of research provided an overview of the issues and research questions in agricultural futures markets. Futures markets have experienced a dramatic growth over the last 20 years with most of the increase outside of the U.S. There has been a continual introduction of new contracts, new trading rules and systems, and not the least, changing corporate structure and affiliations among futures market exchanges. We reviewed selected research and contributions to agricultural commodity futures and options markets, focusing on the recent empirical contributions aimed at resolving the most current issues, and identification of future research challenges. The review provides a discussion of the empirical contributions in inter-temporal price relationships for storable commodities, hedging, and price behavior. Other research has investigated the ability of selected agricultural futures and options markets to forecast price and its volatility. Volatility forecasts are particularly useful in identifying the price risk associated with buying or selling at specific points in the future. Work on the corn and soybean markets suggests that the implied forwards volatilities generated by the options incorporate effectively market information in their forecasts of price variability in the future. However, the implied forward volatilities for wheat and hogs are much less effective.

Impacts
We continue to provide information of value to industry, to marketing decisions of crop producers, and to the dialogue that exists among professionals interested in these areas. AgMAS continues to provide information to producers on the efficacy of their marketing alternatives and decisions. Findings from our research also have been used to develop a new generation of pricing contracts offered by the grain industry. Research also has identified the importance of heterogeneous behavior in explaining producer use of derivatives. This finding highlights the activities in the grain industry to customize risk management opportunities and signals that exchanges who provide the underlying risk management platform should consider a wider portfolio of risk management instruments. On another level, our research has introduced novel procedures and constructs to the agricultural economics literature that will be used in future analysis of marketing behavior and industry performance. It has also highlighted what is known about two primary risk management tools in agriculture, futures and options markets, and what yet needs to be understood.

Publications

Egelkraut, T.M. and Garcia, P. 2004. A Forecasts of futures prices in the presence of limit moves. Proceedings of the Applied Commodity Price Forecasting and Risk Management Conference. Web Address: http://agecon.lib.umn.edu.
Marsh, J.W., Pennings, J.M.E. and Garcia, P. 2004. Perceptions of futures market liquidity: An empirical study of CBOT and CME traders. Risk Management in Less and More Developed Countries. Monash University, Australia.
Garcia, P., Leuthold, R.M. and Egelkraut, T.M. 2004. Issues and research opportunities in agricultural futures markets. Risk Management in Less and More Developed Countries. Monash University, Australia.
Pennings, J.M.E. and Garcia, P. 2004. Unobserved heterogeneity: Evidence and implications for SMEs' hedging behavior. Journal of Banking and Finance. 28, 1: 951-978.
Garcia, P. and Leuthold, R.M. 2004. A selected review of agricultural commodity futures and options markets. European Review of Agricultural Economics. 31, 3:235-272.
Pennings, J.M.E. and Wansink, B. 2004. Channel contract behavior: The role of risk attitudes, risk perceptions, and channel members' market structures. Journal of Business 77 4: 697-723.
Pennings, J.M.E. 2004. A marketing-finance approach towards industrial channel contract relationships: A model and application. Journal of Business Research 57, 6:601-610.
Isengildina, O., Irwin, S.H. and Good, D.L. 2004. Evaluation of USDA interval forecasts of corn and soybean prices. American Journal of Agricultural Economics 86, 4:990-1004.
Irwin, S.H. 2004. The Farmdoc project: This is still your father's extension program. American Journal of Agricultural Economics 86, 3:772-777.
Sherrick, B.J., Zanini, F.C., Schnitkey, G.D. and Irwin, S.H. 2004. Crop insurance valuation under alternative yield distributions. American Journal of Agricultural Economics 86, 2:406-420.
Cabrini, S.M., Stark, B.G., Hayri, O., Irwin, S.H., Good, D.L. and Martines-Filho, J. 2004. Efficiency analysis of agricultural market advisory services: A nonlinear mixed-integer programming approach. Manufacturing and Service Operations Management 6, 3:237-253.
Pennings, J.M.E. and Garcia, P. 2004. Strategic vs. tactical decisions: What can utility functions tell us? American Journal of Agricultural Economics. Web Address: http://agecon.lib.umn.edu.
Pennings, J.M.E. and Garcia, P. 2004. Strategic vs. tactical risk management functions: What can utility functions tell us? Proceedings of the Applied Commodity Price Forecasting and Risk Management Conference. Web Address: http://agecon.lib.umn.edu.
Marsh, J.W., Pennings, J.M.E. and Garcia, P. 2004. Perceptions of futures market liquidity: An empirical study of CBOT and CME traders. Proceedings of the Applied Commodity Price Forecasting and Risk Management Conference. Web Addresss: http://agecon.lib.umn.edu.
Mattos, F. and Garcia, P. 2004. Price discovery in thinly traded markets: Cash and futures relationships in Brazilian and U.S. agricultural futures markets. Proceedings of the Applied Commodity Price Forecasting and Risk Management Conference. Web Address: http://agecon.lib.umn.edu.

Progress 01/01/03 to 12/31/03

Outputs
Research during the past year evaluated several dimensions of market risk management, information, and price relationships for markets important to Illinois market participants. The most recent evaluation of the pricing performance of market advisory services used data over 1995-2001 for corn and soybean crops. When both average price and risk are considered, only a small fraction of services for corn and a moderate fraction for soybeans outperformed market benchmarks. On the other hand, a majority of the services outperformed a farmer benchmark for both crops. Since farmers can subscribe to one or more of services it is also important to analyze the potential risk reduction gains from diversification across market advisory services. Results show that increasing the number of (equally-weighted) services reduces portfolio expected risk, but the marginal decrease in risk from adding a new service decreases rapidly with portfolio size. Based on these results, farmers are better off choosing portfolios with as few as two or three programs, since the relatively high total subscription costs associated with larger portfolios can be avoided while obtaining most of the benefits from diversification. Further research was conducted to estimate marketing profiles and loan deficiency payment/marketing loan gain profiles for the advisory services. Marketing profiles provide information to evaluate the style of advisory services by making it possible to investigate the evolution of price sensitivity of each set of recommendations made by the advisory services along the marketing window. These profiles will be used to analyze the effect of the style of advisory services on price performance within and across soybean and corn crops over time. Other research has investigated the ability of selected agricultural futures and options markets to forecast price and its volatility. Volatility forecasts are particularly useful in identifying the price risk associated with buying or selling at specific points in the future. Work on the corn market suggests that the implied forwards volatilities generated by the options incorporate effectively market information in their forecasts of price variability in the future. Other work in futures markets has investigated market depth by examining trader perceptions of price changes with order imbalances, the determinants of heterogeneous hedging behavior, factors affecting the success and failure of futures contracts, and the feasibility of a new boxed beef contract.

Impacts
The research provided valuable information that will improve marketing decisions of crop producers. The results suggest that corn and soybean producers can improve their revenue by about $12 per acre by following the recommendations of the services. While this was not without substantial risk, this improvement also is not inconsequential when compared to the net returns experienced in recent years. The research has had a positive impacted on the way grain is marketed in the U.S. through the stimulation of new and innovative marketing contracts. Specifically, the findings have been used as the empirical foundation for a new generation of pricing contracts offered to producers by the grain industry. Firms such as Diversified Services, Cargill and e-markets have developed new contracts that simply assure that producers receive the average price for grain over some pre-specified time period. An example of the influence of AgMAS research in this regard can be found at the e-markets website. The use of these new-generation marketing contracts appears to be growing rapidly. On another level, the research on the determinants of heterogeneous hedging behavior and the evaluation of market advisory services has been particularly productive as we have introduced new constructs and measurement procedures to the agricultural economics literature that will be used in future analyses of marketing behavior and performance.

Publications

Hagedorn, L.A., Irwin, S.H., Good, D.L., Martines-Filho, J., Sherrick, B.J. and Schnitkey, G.D. 2003. New generation grain marketing contracts. AgMAS Project Research Report 2003-01, Department of Agricultural and Consumer Economics, University of Illinois at Urbana-Champaign, January.
Irwin, S.H., Martines-Filho, J. and Good, D.L. 2003. The pricing performance of market advisory services in corn and soybeans over 1995-2001: A non-technical summary. AgMAS Project Research Report 2003-06, Department of Agricultural and Consumer Economics, University of Illinois at Urbana-Champaign, June.
Irwin, S.H., Martines-Filho, J. and Good, D.L. 2003. The pricing performance of market advisory services in corn and soybeans over 1995-2001. AgMAS Project Research Report 2003-05, Department of Agricultural and Consumer Economics, University of Illinois at Urbana-Champaign, June.
Jeong, K.S., Garcia, P. and Bullock, D.S. 2003. A statistical welfare analysis of Japanese beef policy liberalization. Journal of Policy Modeling. 25, 3(April),237-56.
Martines-Filho, J., Irwin, S.H., Good, D.L., Cabrini, S.M., Shi, W., Stark, B.G., Webber, R.L., Hagedorn, L.A. and Williams, S.L. 2003. Advisory service marketing profiles for soybeans over 1995-2000. AgMAS Project Research Report 2003-04, Department of Agricultural and Consumer Economics, University of Illinois at Urbana-Champaign, June.
Martines-Filho, J., Irwin, S.H., Good, D.L., Cabrini, S.M., Shi, W., Stark, B.G., Webber, R.L., Hagedorn, L.A. and Williams, S.L. 2003. Advisory service marketing profiles for corn over 1995-2000. AgMAS Project Research Report 2003-03, Department of Agricultural and Consumer Economics, University of Illinois at Urbana-Champaign, June.
Pennings, J.M.E and Egelkraut, T.M. 2003. Research in agricultural futures markets: Integrating the finance and marketing approach. Agrarwirtschaft [Agricultural Economics] 52, 6: 300-308.
Pennings, J.M.E., Garcia, P. and Marsh, J.W. 2003. The underlying structure of market depth. Proceedings of the Applied Commodity Price Analysis, Forecasting, and Market Risk Management Conference (NCR-134). hhtp://www.agebb.missouri.edu/ncrext/ncr134/
Stark, B.G., Cabrini, S.M., Irwin, S.H., Good, D.L. and Martines-Filho, J. 2003. Portfolios of agricultural market advisory services: How much diversification is enough? AgMAS Project Research Report 2003-02, Department of Agricultural and Consumer Economics, University of Illinois at Urbana-Champaign, April.
Webber, R.L., Irwin, S.H., Good, D.L. and Martines-Filho, J. 2003. Evaluation of market advisory service performance in hogs. Proceedings of the Applied Commodity Price Analysis, Forecasting, and Market Risk Management Conference (NC-134). hhtp://www.agebb.missouri.edu/ncrext/ncr134/
Bollman, K., Garcia, P. and Thompson, S. 2003. What killed the diammonium phosphate futures contract? Review of Agricultural Economics. 25, 2 (Fall-Winter), 483-505.
Egelkraut, T.M, Garcia, P., Irwin, S.H. and Good, D.L. 2003. An evaluation of crop forecasts for corn and soybeans: USDA and private information services. Journal of Agricultural and Applied Economics. 35, 1 (April), 79-95.
Egelkraut, T.M., Garcia, P. and Sherrick, B. 2003. The term structure of the implied forward volatility: Recovery and information content in corn options. Proceedings of the Applied Commodity Price Analysis, Forecasting, and Risk Management Conference (NCR-134). hhtp://www.agebb.missouri.edu/ncrext/ncr134/
Garcia, P. and Nelson, C.H. 2003. Engaging students in research: The use of professional dialogue. Review of Agricultural Economics. 25, 2 (Fall-Winter), 569-77.
Hauser, R.J., Sherrick, B.J. and Schnitkey, G. 2003. Counter cyclical payments versus crop insurance. Illinois Rural Policy Digest. 1, 3. (Summer).
Mattos, F., Garcia, P. and Leuthold, R.M. 2003. The feasibility of a boxed beef futures contract: Hedging wholesale beef cuts. Proceedings of the Applied Commodity Price Analysis, Forecasting, and Risk Management Conference (NCR-134). hhtp://www.agebb.missouri.edu/ncrext/ncr134/
Pennings, J.M.E. 2003. What drives actual hedging behaviour? Developing risk management instruments. In: Nigel Scott (ed), Agribusiness and Commodity Risk: Strategies and Management, p.63-74. Risk Books, London, United Kingdom. ISBN 1 904339107.
Pennings, J.M.E. and Smidts, A. 2003. The shape of utility functions and organizational behavior. Management Science 49, 9 (September), 1251-1263.
Pennings, J.M.E., Candel, M.J.J.M. and Egelkraut, T.M. 2003. A behavioral decision making-modeling approach towards hedging services. Journal of Behavioral Finance 4, 2, 71-84.

Progress 01/01/02 to 12/31/02

Outputs
Research during the last year evaluated the pricing performance of market advisory services for the 1995-2000 corn and soybean crops. The net price received by a subscriber to market advisory programs was calculated for the 1995-2000 corn and soybean crops. Market and farmer benchmarks were developed for the performance evaluations. Two market benchmarks were specified in order to test the fragility of performance results to changing benchmark assumptions. The 24-month market benchmark averaged market prices for the entire 24-month marketing window. The 20-month market benchmark was computed in a similar fashion, except the first four months of the marketing window were omitted. The farmer benchmark was based upon the USDA average price received series for corn and soybeans in Illinois. The same assumptions applied to advisory program track records were used when computing the market and farmer benchmarks. Four basic indicators of performance were applied to advisory program prices and revenues over 1995-2000. The results provide limited evidence that advisory programs as a group outperformed market benchmarks, particularly after considering risk. In contrast, substantial evidence existed that advisory programs as a group outperformed the farmer benchmarks, even after taking risk into account. Whether the superior performance of advisory programs versus the farmer benchmark was attributed to luck or skill depends on one's theoretical perspective. Efficient market theory favors a luck interpretation, while behavioral market theory favors a skill interpretation. Regardless of the theoretical perspective, there was little evidence that advisory programs with superior performance can be usefully selected based on past performance. What drives the behavior of consumers when faced with a product-related crisis, such as that involving food contamination or live-threatening design flaws? We developed a model that by de-coupling risk response behavior of consumers into the separate components of risk perception and risk attitude, a more robust conceptualization and prediction of consumers' reactions are possible. Such a framework helps to provide answers on how the agricultural industry can deal with such type of crises. We developed an agency model to investigate risk shifting in an agricultural marketing channel, using time series analysis. We show that the fixed payment can be negative for a linear contract to be optimal if the principal is risk neutral and the agent is risk averse, instead of risk neutral. Empirical results indicate that the fixed payment to the farmers (agents) has decreased over time, even to negative levels, and that the risk premium asked for by the farmers remained almost constant. These results suggest that risk has shifted from wholesalers, processors, and retailers to farmers, as a consequence of the former having gained more power.

Impacts
The results suggest that corn and soybean producers can improve their revenue per acre by about $14 per acre by following the services' recommendations. While this was not without substantial risk, this improvement also is not inconsequential when compared to the net returns experienced in recent years. Finally the research has had a positive impact on the way grain was marketed in Illinois through the stimulation of new and innovative marketing contracts. Specifically, the findings have been used as the empirical foundation for a new generation of pricing contracts offered to producers by the grain industry. Firms such as Diversified Services, Cargill and e-markets have developed new contracts that simply assure that producers receive the average price for grain over some pre-specified time period. An example of the influence of AgMAS research in this regard can be found at the e-markets website. The use of these 'new-generation' marketing contracts appears to be growing rapidly. The consumer project provides the agricultural industry with a tool to structure the discussion on how to communicate crises to consumers and serves as a basis for concrete marketing policy. Risk shifting has become an important topic for agricultural economists and policy makers, as marketing firms seem to have become larger and larger compared to farms. The marketing power project provides insight in the how the concentration in the agricultural marketing channels affect farmers' risk exposure.

Publications

Pennings, J.M.E., Irwin, S.H. and Good, D.L. 2002. Producers use of risk management tools: What, when and how? Proceedings of the 2002 NCR-134 Conference on Applied Commodity Price Analysis, Forecasting, and Market Risk Management. Department of Agricultural Economics, Colorado State University. http://agecon.lib.umn.edu.
Irwin, S.H., Martines-Filho, J. and Good, D.L. 2002. The pricing performance of market advisory services in corn and soybeans over 1995-2000. AgMAS Project Research Report 2002-01, Department of Agricultural and Consumer Economics, University of Illinois at Urbana-Champaign, April 2002.
Pennings, J.M.E., Irwin, S.H. and Good, D.L. 2002. Surveying farmers: A case study. Review of Agricultural Economics. 24(2002):266-277.
Irwin, S.H., Martines-Filho, J. and Good, D.L. 2002. Tracking the performance of market professionals: 1995-2000 results for corn and soybeans. AgMAS Project Research Bulletin 2002-01, Department of Agricultural and Consumer Economics, University of Illinois at Urbana- Champaign, April 2002.
Meulenberg, M.T.G. and Pennings, J.M.E. 2002. A marketing approach to commodity futures exchanges: A case study of the dutch hog industry. Journal of Agricultural Economics 53 (March): 51-64.
Pennings, J.M.E 2002. Pulling the trigger or not: Factors affecting behavior of initiating a position in derivatives markets. Journal of Economic Psychology 23 (April): 263-278.
Kuiper, W.E., Pennings, J.M.E. and Meulenberg, M.T.G. 2002. Identification by full adjustment: Evidence from the relationship between futures and spot prices. European Review of Agricultural Economics 29 (1): 67-84.
Pennings, J.M.E, Wansink, B. and Meulenberg, M.T.G. 2002. A note on modeling consumer reactions to a crisis: The case of the madcow disease. International Journal of Research in Marketing 19 (1): 91-100.
Pennings, J.M.E. 2002. Book review of: Stock-market psychology: How people value and trade stocks. Edward Elgar Publishing, 2001, ISBN 1-84064-736-1. Journal of Economic Psychology 23, (4): 546.
Pennings, J.M.E. 2002. Comments on pricing and risk management instruments of the future: What are the analytical needs? Annual Office for Futures and Options Research Symposium: In honor of Raymond M. Leuthold and in recognition of the 30th Anniversary of the IMM, Chicago, May 16, 2002.
Pennings, J.M.E. and Wansink, B. 2002. Transforming financial objectives into marketing decisions: The role of channel contracts and derivatives. Marketing Science Institute Conference, Measuring Marketing Productivity: Linking marketing to Financial Returns, October 4-5, Dallas, USA.
Pennings, J.M.E. and Wansink, B. 2002. Using financial facilitating services to leverage shareholder value in channel contracting relationships. Proceedings, 2002 Marketing Science Conference, June 27-30, University of Alberta, Edmonton, Canada.
Ittersum, K., Pennings, J.M.E., Wansink, B. and van Trijp, H.C.M. 2002. The effect of reference points on the importance of attributes. Proceedings, 2002 Marketing Science Conference, June 27-30, University of Alberta, Edmonton, Canada.
Nageotte, C., Thompson, S., Pennings, J.M.E. and Westgren, R. 2002. Familiarity vs. efficiency: Evidence of economic paradoxes in agricultural supply chains. Proceedings 5th International Conference on Chain Management in Agribusiness and the Food Industry, p. 597-607, June-7-8, Wageningen University, Noordwijk aan Zee, The Netherlands.
Hauser, R.J. 2002. 2002 Farm Bill. Illinois Rural Policy Digest. Summer 2002, Vol 1, No. 1.
Hauser, R.J. 2002. The emperor has no clothes, I?m a lousy golfer, and Brazil has soybeans. Illinois Rural Policy Digest. Fall 2002, Vol 1, No. 2.
Hauser, R.J. 2002. Comments on the policy and regulatory effects the use of futures markets. Annual Office for Futures and Options Research Symposium: in honor of Raymond M. Leuthold and in recognition of the 30th Anniversary of the IMM, Chicago, May 16, 2002.
Hauser, R.J. 2002. Highlights of the 2002 Farm Bill. www.farmdoc.uiuc.edu/policy/farmbill02.

Progress 01/01/01 to 12/31/01

Outputs
The Illinois Resource Allocation Model (IRAM) was updated by re-estimating the demand and supply econometrics and updating the data used in the optimization program. The model was used to assess income implications of Farm Bill proposals. A value-at-risk model was used to test the performance of alternative volatility forecasts for fed cattle, feeder cattle, and corn prices. VaR was also used to estimate optimal hedges in the soybean complex, and to identify factors influencing Illinois elevator bid prices for corn. Work continued in the area of evaluating market advisory services through the AgMAS project. Findings and reports are of considerable interest to producers, lenders and agribusinesses.

Impacts
Payment and production implications for Illinois and Midwest farmers of Farm Bill proposals from Combest, Harkin, Lugar, and others were estimated and reported during the fall of 2001 to lenders, agribusinesses, and farmers to help them with their decision-making and forecast processes. Agricultural firms can use the Value-at-Risk technique to effectively assess risk exposure, optimal hedges, and determine which instruments of risk management to use. Behavioral models can be use to identify those factors affecting whether farmer-hedgers use the futures market or not. The AgMAS results suggest that 1) services as a group have not provided advice that resulted in an average corn price above the average market price, 2) services as a group provided advice that resulted in an average soybean price marginally above the average market price, 3) services as a group provided advice that resulted in an average wheat price below the average market price, 4) performance of an individual advisory service from year to year is not predictable, and 5) the marketing style of services varies considerably, but is somewhat consistent from year to year.

Publications

JIRIK, M.A., IRWIN, S.H., GOOD, D., MARTINES-FILHO, J. and JACKSON, T.A. 2001. Do agricultural market advisory services beat the market? Evidence from the wheat market over 1995-98. AgMAS Project Research Report 2001-01, March 2001.
PENNINGS, J.M.E., GOOD, D.L., IRWIN, S.H. and GOMEZ, J.K. 2001. The role of market advisory services in crop marketing and risk management: A preliminary report of survey results. AgMAS Project Research Report 2001-02, March 2001.
MARTINES-FILHO, J., GOOD, D.L. and IRWIN, S.H. 1999. Pricing performance of market advisory services for wheat. AgMAS Project Research Report 2001-03, April 2001.
IRWIN, S.H., GOOD, D.L. and GOMEZ, J.K. 2001. The value of USDA outlook information: An investigation using event study analysis. Paper presented at NCR-134 Conference on Applied Commodity Price Analysis, Forecasting, and Market Risk Management, St.Louis Missouri, April 23-24, 2001.
PENNINGS, J.M.E., IRWIN, S.H. and GOOD, D.L. 2001. Modeling farmer's use of market advisory services. Paper presented at NCR-134 Conference on Applied Commodity Price Analysis, Forecasting, and Market Risk Management, St.Louis Missouri, April 23-24, 2001.
GOOD, D. and BENDER, K. 2001. Marketing practices of Illinois specialty corn and soybean handlers. AE-4743 Department of Agricultural and Consumer Economics, University of Illinois, September 2001.
PENNINGS, J.M.E. and GARCIA, P. 2001. Measuring producers' risk preferences: A global risk attitude construct. Am. J. Agr. Econ. 83 (November):993-1009.
PENNINGS, J.M.E., GOOD, D.L., IRWIN, S.H. and GOMEZ, J.K. 2001. The role of market advisory services in crop marketing and risk management: A preliminary report of survey results. AgMAS Project Research Report 2001-01, p. 1-36.
PENNINGS, J.M.E. and KLEINMUNTZ, D.N. 2001. Risk attitude, risk perceptions, revealed preferences and use of derivatives. Proceedings 2001 Institute for Operations Research and the Management Scineces Conference, November 4-7, Miami Beach.
PENNINGS, J.M.E. and GARCIA, P. 2001. Unobserved hetrogeneity: Evidence and implications for hedging behavior. Proceedings NCR-134 Conference: Applied Commodity Price Analysis, Forecasting, and Market Risk Management, April 23-24, St. Louis, Missouri.
PENNINGS, J.M.E., GOOD, D.L. and IRWIN, S.H. 2001. Modeling farmers' use of market advisory services. Proceedings NCR-134 Conference:Applied Commodity Price Analysis, Forecasting, and Market Risk Management, April 23-24, St. Louis, Missouri.

Progress 01/01/00 to 12/31/00

Outputs
Value-at-Risk (VaR) predicts the probability of portfolio losses over a specified time period due to adverse price movements in a portfolio. This research has allowed us to test the performance of alternative volatility forecasts for fed cattle, feeder cattle, and corn cash price returns. Although no one forecasting technique stands out, composite forecasts performed well and consistently over a number of alternative scenarios. VaR is also used to generate optimal hedges in the soybean complex, and to identify factors influencing Illinois elevator bid prices for corn. Findings support the potential usefulness of the VaR procedure, but it is complicated to correctly identify the structure of the variances. The structure of the grain marketing industry has changed dramatically overtime, and raised concerns about the representativeness of the prices received by producers. Using survey data from Illinois elevators, research finds that prices are relatively consistent with the factors influencing operating costs, and the spatial distribution of markets. Behavioral decision-making models are being used to identify those factors, unobservable and observable, as farmer-hedgers consider whether to use futures contracts or not. Farmer's beliefs and perceptions related to market orientation, risk exposure, risk attitude, futures market performance, ease of use and entrepreneurial behavior play important roles in their use of futures contracts. Physical factors affecting their use include the influence of others in decision making, basis risk and market-depth risk. Farmers are not homogenous regarding futures usage, and availability of alternative contracts are important. The AgMAS project evaluates the effectiveness and accuracy of marketing advisory services as they assist producers in marketing their corn and soybeans. The results of this research indicate: 1) that services as a group have not provided advice that resulted in an average corn price above the average market price, 2) that services as a group provided advice that resulted in an average soybean price marginally above the average market price, 3) that services as a group provided advice that resulted in an average wheat price below the average market price, 4) performance of an individual advisory service from year to year is not predictable, and 5) the marketing style of services varies considerably, but is somewhat consistent from year to year. These results tend to support the efficient market hypothesis.

Impacts
Agricultural firms can use the Value-at-Risk technique to effectively assess risk exposure, optimal hedges, and determine which instuments of risk management to use. Behavioral models can be use to identify those factors affecting whether farmer-hedgers use the futures market or not. Market advisory services as a group do not seem to provide marketing advice that consistently results in a price better than the market average, reflecting efficient markets.

Publications

Wei, A. and Leuthold, R.M. 2000. Agricultural futures prices and long memory processes. U. of Illinois, Office for Futures and Options Research Working Paper 00-04, May.
Wenzel, B.P., Hill, L.D. and Garcia, P. 2000. The effects of the micro-market structure on Illinois elevator corn prices. Proceedings of the NCR-134 Conf. on Applied Commodity Price Analysis, Forecasting and Market Risk Management, Chicago, http://www.agebb.missouri.edu/ncrext/ncr134/.
Zulauf, C.R., Goodbar J.A., Irwin, S.R. and Leeds, R.P. 1999. Returns to storage for Ohio corn, 1964-1996 crop years. J. Am. Society of Farm Managers and Rural Appraisers. 63:117-126.
Leuthold, R.M. and Kim, M.K. 2000. Hedging short-term corn price risks in Tokyo versus Chicago's project A. U. of Illinois , Office for Futures and Options Research Working Paper 00-02, January.
Leuthold, R.M. and Kim, M.K. 2000. Managing overnight corn price risks: e*hedging versus Tokyo. J. Agribus. 18,3:275-288.
Manfredo, M.R., Garcia, P. and Leuthold, R.M. 2000. Time-varying multiproduct hedge ratio estimation in the soybean complex: A simplified approach. Proceedings of the NCR-134 Conf. on Applied Commodity Price Analysis, Forecasting and Market Risk Management. Chicago, http://www.agebb.missouri.edu/ncrext/ncr134/.
Manfredo, M.R. and Leuthold, R.M. 2000. Market risk and the cattle feeding margin: An application of value-at-risk. Agribus.: International J. 17,3 (Forthcoming).
Martines-Filho, J., Good, D.L. and Irwin, S.H. 2000. 1999 pricing performance of market advisory services for corn and soybeans. U. of Illinois, AgMAS Report 2000-04, December.
Pennings, J.M.E. and Leuthold, R.M. 2000. A behavioral approach towards futures contract usage. U. of Illinois, Office for Futures and Options Research Working Paper 00-08, October.
Pennings, J.M.E. and Leuthold, R.M. 2000. Hedging revisited: Resolving contractual conflicts. U. of Illinois, Office for Futures and Options Research Working Paper 00-01, January.
Pennings, J.M.E. and Leuthold, R.M. 2000. Introducing new futures contracts: Reinforcement versus cannibalism. J. International Money Fin. (Forthcoming).
Pennings, J.M.E. and Leuthold, R.M. 2000. The motivation for hedging revisited. J. Fut. Mkts. 20:865-885.
Pennings, J.M.E. and Leuthold, R.M. 2000. The role of farmer's behavioral attitudes and heterogeneity in futures contracts usage. Am. J. Agr. Econ. 82,4:908-919.
Thompson, S. and Kunda, E. 2000. E-commerce and agricultural markets. U. of Illinois, Office for Futures and Options Research Working Paper 00-03, April.
Good, D.L., Irwin, S.H., Jackson, T.E., Jirik, M.A. and Martines-Filho, J. 2000. 1998 pricing performance of market advisory services for corn and soybeans. U. of Illinois, AgMAS Report 2000-01, February.
Irwin, S.H., Good, D.L., Martines-Filho, J. and Jackson, T.E. 2000. Do agricultural market advisory services beat the market? Evidence from the corn and soybean markets over 1995-1998. U. of Illinois, AgMAS Report 2000-03, November.
Jirik, M.A., Good, D.L., Irwin, S.H., Jackson, T.E. and Martines-Filho, J. 2000. The 1995 through 1998 pricing performance of market advisory services for wheat. U. of Illinois, AgMAS Report 2000-02, June.
Kim, M.K. and Leuthold, R.M. 2000. The distributional behavior of futures price spreads. J. Agr. and Applied Econ. 32,1:73-87.

Progress 01/01/99 to 12/31/99

Outputs
Value-at-Risk (VaR) predicts the probability of portfolio losses over a specified time period due to adverse price movements in a portfolio. This technique has received considerable attention in the finance world, academics and practitioners alike. In the first application in the agricultural commodities environment, we applied the technique to predicting large losses in the cattle feeding margin. Using several alternative measures, results show well-calibrated estimates of VaR denote violations (losses exceeding the VaR estimate) to be commensurate with the stated level of confidence. Application of this technique shows considerable promise for agricultural firms in understanding and managing their price risks. Firms can use VaR to assess the risk exposure of assets prior to and after the implementation of risk management strategies, thereby determining which instruments of risk management to incorporate. A side benefit of this research allowed us to test the performance of alternative volatility forecasts for fed cattle, feeder cattle, and corn cash price returns. Although no one forecasting technique stands out, composite forecasts performed well consistently over a number of alternative scenarios. For the first time, simultaneous, multiproduct (feeder cattle, fed cattle and corn) optimal hedging was designed and simulated for the cattle feeding enterprise. These hedging strategies significantly reduced the means and variances of the cattle feeding margin compared to no hedging, with variance reduction always exceeding 50%. Exactly which strategy to select depends on the agent's degree of risk aversion. Clearly, following multiproduct hedging recommendations will prevent the cattle feeder from taking excessive, unnecessary positions in the futures market. The AgMAS project evaluates the effectiveness and accuracy of marketing advisory services as they assist producers in marketing their corn and soybeans. The results of this research indicate: 1) that services as a group have not provided advice that resulted in an average corn price above the average market price, 2) that services as a group provided advice that resulted in an average soybean price marginally above the average market price, 3) performance of an individual advisory service from year to year is not predictable, 4) for the 1995-96 through 1998-99 marketing years, no service has provided advice that resulted in higher gross revenue and less risk than the market benchmark average, 5) 10 services provided advice that resulted in gross revenue that exceeded the market benchmark, but all had higher risk, and 6) the marketing style of services varies considerably, but is somewhat consistent from year to year. These results tend to support the efficient market hypothesis.

Impacts
Agricultural firms can use the Value-at-Risk technique to effectively assess risk exposure and determine which instruments of risk management to use. Procedures are available to determine optimal hedge ratios for the cattle feeding margin. Market advisory services as a group do not seem to provide marketing advice that consistently results in a price better than the market average.

Publications

MANFREDO, M.R. and LEUTHOLD, R.M. 1999. Value-at-risk analysis: A review and the potential for agricultural applications. Rev. Agr. Econ. 21: 99-111.
NOUSSINOV, M.A. and LEUTHOLD, R.M. 1999. Optimal hedging strategies for the U.S. cattle feeder. J. Agribus. 17:1-19.
MANFREDO, M.R., LEUTHOLD, R.M., and IRWIN, S.H. 1999. Forecasting fed cattle, feeder cattle, and corn cash price volatility: Time series, implied volatility, and composite approaches. Proceedings of NCR-134 Conf. on Applied Commodity Price Analysis, Forecasting, and Market Risk Management, Chicago, pp. 159-175.
PENNINGS, J.M.E. and LEUTHOLD, R.M. 1999. Commodity futures contract viability: A multidisciplinary approach. Proceedings of NCR-134 Conf. on Applied Commodity Price Analysis, Forecasting, and Market Risk Management, Chicago, pp. 273-288.
MANFREDO, M.R., LEUTHOLD, R.M., and IRWIN, S.H. 1999. Forecasting cash price volatility of fed cattle, feeder cattle, and corn: Time series, implied volatility and composite approaches. U. of IL, Office for Futures and Options Research Working Paper 99-08, December, 37 pp.
MANFREDO, M.R. and LEUTHOLD, R.M. 1999. Market risk measurement and the cattle feeding margin: An application of value-at-risk. U. of IL, Office for Futures and Options Research Working Paper 99-04, August, 29 pp.
PENNINGS, J.M.E. and LEUTHOLD, R.M. 1999. Futures exchange innovations: reinforcement versus cannibalism. U. of IL, Office for Futures and Options Research Working Paper 99-03, May, 31 pp.
PENNINGS, J.M.E. and LEUTHOLD, R.M. 1999. Commodity futures contract viability: A multidisciplinary approach. U. of IL, Office for Futures and Options Research Working Paper 99-02, May, 36 pp.
JACKSON, T.E., IRWIN, S.H., and GOOD, D.L. 1999. 1997 pricing performance of market advisory services for corn and soybeans. U. of IL, AgMAS Report 1999-01, February, 33 pp.
BERTOLI, R., ZULAUF, C.R., IRWIN, S.H., JACKSON, T.E., and GOOD, D.L. 1999. The marketing style of advisory services for corn and soybeans in 1995. U. of IL, AgMAS Report 1999-02, August, 63 pp.
IRWIN, S.H., JACKSON, T.E., and GOOD, D.L. 1999. Do agricultural market advisory services beat the market? Evidence from the corn and soybean markets over 1995-1997. U. of IL, AgMAS Report 1999-03, October, 45 pp.
PENNINGS, J.M.E., IRWIN, S.H., and GOOD, D.L. 1999. Surveying farmers: A research note. U. of IL, AgMAS Report 1999-04, October, 14 pp.
GOOD, D.L., IRWIN, S.H., and JACKSON, T.E. 1998. Development of a market benchmark price for AgMAS performance evaluations. U. of IL, AgMAS Report 1998-02, December, 26 pp.