Progress 09/01/99 to 08/31/04
Outputs
This project focused on developing and applying methods for measurement of price and quality risk, estimation and forecasting of price volatility, explanation of price volatility, and management of the economic implications of price and quality risk and volatility. Independent enterprise strategies for risk management were developed, as were collaborative strategies to manage risk exposure within a value chain or network of enterprises. New methods for estimation of price volatility included extension of univariate and multivariate GARCH and other heteroskedastic error approaches to allow for joint specification of first- and second-moments. Multiple frequency data methods were also considered. Management of risk was considered through traditional market approaches where the firm buys or sells derivatives in a competitive market. Alternatives available within a value chain or network for managing price and quality risk were also developed including contracting and
bargaining methods. Finally, the role of government policy within this context was re-examined.
Impacts
The work delivered new methods for estimation of price risk and volatility, methods for design of contracts to manage quality and price risks, as well as frameworks for analysis of the implications of procurement contracting for market structural features, product characteristics, and for price levels and volatility. The approaches and methods are generally applicable across a variety of product settings. Given contracting and bargaining offer important means of private market coordination, the frameworks provide important tools for determination of need for and appropriate forms of public sector intervention to enhance associated price performance.
Publications
- Kim, T. 2002. Quality Management: Technical efficiency, benchmarking, and contracts. Ph.D. Dissertation. Pennsylvania State University, University Park, PA. 217 pgs.
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Progress 01/01/03 to 12/31/03
Outputs
Project effort focused on signaling of quality within a vertical supply chain considering three objectives: 1) analysis of price performance (level and volatility) for markets segmented by procurement contracting, 2) sensitivity of price performance to contract characteristics, and 3) sensitivity of price performance to market structure. The approach taken was one of stochastic simulation. Market segmentation followed from contracting that leaves a residual, open market segment. Market structure is described by market shares in each of these segments and is endogenously determined by supplier choice of market segment for planned sales. Actual supply is specified as price dependent and stochastic. Commodity pricing is specified as determined in one of two ways: 1) competitive equilibrium in the residual market, or 2) an oligoposony game among a small number of contractor/procurers that fixes both contract price and sales. Contract specifications considered will include
re-contracting with and without penalty. For each pricing specification, Monte Carlo simulation was used to generate a series of prices from which inferences are drawn concerning price levels and volatility associated with the scenario. Structural features of the underlying agent and market supply and demand were drawn from the raw milk market to allow consideration of the potential implications of contracting on milk prices. Sensitivity of results to specification was explored to ensure that the scope of inferences that can be drawn from the results is understood.
Impacts
The work delivered an analytic framework for analysis of the implications of procurement contracting for market structural features, product characteristics, and for price levels and volatility. The approach is generally applicable across a variety of product settings. Given contracting offers an important means of private market coordination, the framework provides an important tool for determination of need for and appropriate forms of public sector intervention to enhance associated price performance.
Publications
- Weaver, R.D. and Wesseler, J. 2003. Restricted Monopoly R&D Pricing: Uncertainty, Irreversibility, and Non-market Effects. Proceedings of 7th International Conference International Consortium on Agricultural Biotechnology Research (ICABR ) on Public Goods and Public Policy for Agricultural Biotechnology. Ravello (Italy ) June 29 - 3. http://www.economia.uniroma2.it/conferenze/icabr2003/papers/index.htm
- Weaver, R.D. 2003. Ex Post Evidence on Adoption of Transgenic Crops: U.S. Soybeans, in Proceedings of Environmental Costs and Benefits of Transgenic Crops in Europe. Frontis Workshop. June 1-4. Wageningen University, Wageningen, N.L. http://www.sls.wau.nl/enr/frontisworkshop/main.html
- Weaver, R.D. and Wesseler, J. 2003. Food System Value Chains: Implications for Agricultural Policy. Proceedings of 80th EAAE Seminar New Policies and Institutions for European Agriculture Ghent September. http://allserv.rug.ac.be/~jfbuysse/eaae/?programme.shtml
- Weaver R.D. 2003. Technical Change in Information and Transactions Technologies: Implications for Agriculture, Presented at IAMO TAGE 2003, International Workshop (Managing Large-scale Agricultural Enterprises) November, 26 - 28. Halle (Saale). http://www.iamo.de/management/program_e.htm
- Wesseler, J., Weikard, H., and Weaver, R.D. 2003. Risk and Uncertainty in Environmental and Natural Resource Economics, Edward Elgar, Cheltenham, UK Northampton, MA, USA. http://www.e-elgar.co.uk
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Progress 01/01/02 to 12/31/02
Outputs
Project effort focused on two fronts: 1. extension of econometric methods for estimation of price volatility as a second moment that instantaneously changes over time and 2. development of a simulation approach to evaluating the implications of contracting on price volatility. On the first front, methods were developed to allow the conditional variance to be estimated simultaneously with the conditional first moment of a price series. The approach is consistent with the view that price volatility is not indicated by the "wingle" of realized prices over time measured by price variation over a finite, and often, arbitrary time series. Further, the approach goes beyond the traditional approach of GARCH modeling where the conditional variance model is added to a conditional mean model to fix-up heteroskedasticity. The approach was implemented for daily, weekly, and monthly price series for key agricultural commodities. The second thrust of project effort has been to
develop capacity to understand the relationship between cash price volatility and forward contracting. The model developed views forward contracting as occurring to procure higher quality product than available in the cash market. As contracting expands, higher quality product is shifted into the forward market thinning the cash market. The model has been implemented for a beef market setting and results illustrate that the conditions under which forward contracting can increase cash price volatility.
Impacts
Outcomes of project effort will provide an improved method for estimation of price volatility that will be widely applicable. Second, the simulation model for consideration of the relationship between contracting features and price volatility will provide an improved understanding of the potential impacts of contracting.
Publications
- Chin M.C. and Weaver, R.D. 2002. Contracting, Captive Supply, and Price Behavior. Proceedings. NCR-134 Conference on Applied Commodity Price Analysis, Forecasting, and Market Risk Management. St. Louis, Missouri. 16 pp.
- Chin M.C. and Weaver, R.D. 2002. Contracting, Signaling of Uncertain Quality, and Price Volatility. Proceedings. Document 174-300. 2002 Congress EAAE X th World Congress Exploring Diversity in the European Agri-Food System. Zaragoza, Spain. 17 pp.
- Weaver, R.D. and Kim, T. 2002. Moral Hazard: The Achilles Heal of Insurance for Managing Ag and Food System Performance Risks. Risk and Uncertainty in Environmental and Resource Economics. Wageningen. Pp. 4.1-13.
- Weaver, R.D. and Kim, T. 2002. Designing Crop Insurance to Manage Moral Hazard Costs. Proceedings. Document 008-301 2002 Congress EAAE X World Congress Exploring Diversity in the European Agri-Food System. Zaragoza, Spain. 11 pp.
- Weaver, R.D. and Natcher, W. 2002. Two Moment Estimation of Prices and Price Volatility. Proceedings. 8th Forecasting Financial Markets Conference, London. 26 pp.
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Progress 01/01/01 to 12/31/01
Outputs
Economic theory of management of price risk in a supply chain by forward contracts was extended to incorporate futures contracts, insurance, and vertical integration. Simulation studies were implemented based as sequential stack of software functions. Next, effort was devoted to extension of the contracting problem to incorporate price risk associated with stochastic quality. Prototype simulations were completed and optimal contract incentives were designed for simple, numerical examples. Next, the software functions were reviewed to evaluate the potential for their integration into a single platform. Based on this assessment, JAVA language is under development to integrate the software functions to provide for stream-lined implementation across user specified settings. The stochastic simulation studies generate multiple time series of data indicating the economic performance of alternative risk management approaches. To evaluate these outcomes, C++ code was developed
to implement a series of stochastic dominance assessments. Typically, stochastic dominance is implemented according to a specific criteria, e.g. first or second-degree, generalized, BRAC. The code developed in this project automates the assessment, allowing the user to quickly compare outcomes and to determine the appropriate criteria given the nonparametric character of the outcomes. This code will be integrated with the JAVA package for risk management assessment. A Ph.D. dissertation was completed on the question of estimation of price volatility. This research will directly contribute to the estimation of price risk faced by decision-makers. The approach developed included available GARCH methods, though extended these methods to simultaneously estimate both the first- and second-moments. This "two-moment" method departs from traditional GARCH methods that focus on fitting the conditional mean subject to the constraint that the conditional variance follows a GARCH process. Methods
were evaluated using monthly and weekly prices for the U.S. dairy, feeds, and beef subsectors. Based on these results, the project will incorporate these methods as a basis for estimation of price risk.
Impacts
The software integration will allow implementation of simulation models developed for user specified problem settings. Implementation will be time and cost-effective providing producers or processors with new capacity to evaluate the economic benefits of a range of risk management strategies.
Publications
- Frechette, D. L. and Weaver, R. D. 2001. Heterogeneous expectations of traders in speculative markets. Journal of Futures Markets (21)5:429-446.
- Weaver, R.D. and Natcher, W. C. 2001. Price volatility: a bitter pill of trade liberalization in agriculture. Lynn Kennedy and Won Koo. (eds.) Agricultural Trade Policies in the New Millennium. pp 301-312.
- Duvalieux, S. 2001. Alternative Risk Management Strategies for Cooperatives. M.S. Thesis. Pennsylvania State University, University Park, PA. 125 pp.
- Natcher, W. 2001. Transmission of Volatility through Commodity Markets. Ph.D. dissertation. Pennsylvania State University, University Park, PA. 219 pp.
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Progress 01/01/00 to 12/31/00
Outputs
Economic theory of optimal contracts to manage price risk was developed. Initial studies were completed to simulate the economic performance of the supply chain based on forward contracting. An M.S. thesis on this subject was completed. An application of forward contracting to manage price was developed. Stochastic simulation studies were completed based on financial models for agents at two points in the supply chain: producer level and processor level. Models were developed in traditional spreadsheet formats, linked dynamically with a stochastic simulator. Scenarios were defined over price and yield distributions and outcomes were simulated. The project is currently seeking IT support to develop JAVA or C++ user friendly interfaces. Further, real time estimation of price distributions will be developed. Over the past decade, farmers and agribusinesses have faced more price variation. This increased variation has accompanied a shift away from government programs that
impacted price levels and variation. Given this new market environment, dairy cooperatives have been challenged to develop approaches to manage price risk that affects the stochastic properties of their financial performance. This research examines possible risk management strategies for dairy cooperatives faced with price risk with respect to the price of raw milk. There are three objectives. First, the microeconomic theory of cooperatives is presented and extended to incorporate uncertainty. The results from this theory motivate the construction of a financial model of a dairy cooperative as well as the specification of risk management strategies. The resulting simulation model is capable of analyzing a variety of alternative risk management strategies. Finally, to illustrate the use of the financial model, forward contract strategies are simulated and the resulting financial performance outcomes associated with these strategies are evaluated using mean-variance and stochastic
dominance criteria. While unambiguous predictions were not available from the theoretical analysis, the simulations prove more fruitful. Three major findings are illustrated. The use of forward contracting strategies is found to allow the dairy cooperative to increase its average profits as well as to reduce the variation of profits over time. However, marketing agreements are found to constrain the benefits of forward contracting strategies. While such agreements are crucial within the dairy sector to ensure timely access to markets, the results obtained clarify the costs of such agreements. Further, the results indicate that marketing agreements do not reduce the variation in the cooperative's profits over time. At a theoretical and intuitive level, it is clear that the performance of any risk management strategy is conditional on the accuracy of estimates of the first and second moments of future, uncertain prices. To illustrate this crucial aspect of effective risk management,
simulation results are reported for alternative approaches to forecasting these characteristics of future prices.
Impacts
The simulation models developed to date provide a cost-effective means for producers or processors to evaluate the economic benefits of forward contracting to manage price risk and its economic implications.
Publications
- Weaver, R.D. and Kim, T. 2000. Inducing efficient quality supply through contracting mechanisms: Contracting for total quality management effort that pays. INFORMS Proceedings. p. 84.
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Progress 01/01/99 to 12/31/99
Outputs
An economic theory of supply chain management was developed to analyze the impact on supply chain net economic value of alternative methods of coordination across the chain. At this initial phase, coordination via integration, processor dominant procurement, and producer dominant supply were evaluated. The implications of restrictions on price will be considered. Alternative hedging models were reviewed. Data for dairy prices of raw and processed products was developed and initial univariate time series models were estimated to provide a basis for simulation of price risk at various levels in the dairy supply chain. Multivariate time series and structural modeling was initiated for dairy prices. A farm level simulation model was developed as one element in the supply chain simulation model. Approaches to comparison of stochastic outcomes associated with alternative scenarios were reviewed and the approach of stochastic dominance was selected. An analytical approach to
implementing stochastic dominance analysis was developed and tested on a prototype pair of scenarios.
Impacts
The farm level simulation model will allow producers to evaluate the financial performance implications of alternative approaches to managing price risk. This model will be deliverable to interested producers as an automated spreadsheet.
Publications
- No publications reported this period
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