Recipient Organization
UNIV OF IDAHO
875 PERIMETER DRIVE
MOSCOW,ID 83844-9803
Performing Department
Agri Economics & Rural Sociol
Non Technical Summary
Given the changing environment for agriculture (including globalization and revised farm policy programs), marketing and risk management at the producer level have taken on an increasing level of importance. Assessments of risk management strategies need to include the new risk management tools (examples include new and modified crop insurance products and new futures market instruments) as they become available. The assessment of marketing and associated management tools for Idaho and PNW grain producers needs to involve three broad areas. The first area involves determining how new risk management tools fit into existing marketing programs for producers of traditional agricultural commodities, especially the grains complex. Grain producers have historically relied heavily on government programs and market-based instruments (forward contracts, futures markets, etc.) for price risk management. The second area relates to a better understanding of basis behavior for the PNW region. The third area of focus is to assess the needs and role of grain merchants and their activities for enhancing the ability of producers to market grain more effectively. Preliminary work by the US Department of Agriculture provides a strong indication that significant regional variation exists regarding the effectiveness and utilization rates of alternative marketing strategies. Research needs to have a regional orientation to recognize differences in commodity emphasis and risk exposure. Thus, it is important to recognize that strategy evaluation needs to focus specifically on producers in Idaho and the Pacific Northwest region.
Animal Health Component
100%
Research Effort Categories
Basic
(N/A)
Applied
100%
Developmental
(N/A)
Goals / Objectives
The overall objective of this research project is to assess cash price and basis behavior in the Pacific Northwest (PNW) region for the major grains produced in the region, with a focus on pricing strategy impacts. Specific research objectives are: 1. Identify and evaluate cash price and basis behavior for major classes of wheat (soft white - SW; Hard Red Winter - HRW; and Dark Northern Spring - DNS) in the PNW region. Feed grain prices (corn and barley) may be included if deemed a valuable priority for PNW producers. 2. Determine the impact of basis behavior on the viability of alternative grain marketing strategies, focusing on forward pricing arrangements. These forward pricing alternatives include futures-based marketing alternatives, combining revenue-based insurance products with other available forward pricing tools, and forward pricing arrangements offered by grain merchants. 3. Conduct commodity outlook analyses necessary to enhance the effectiveness of risk management strategies identified as appropriate for grain producers in the PNW region.
Project Methods
Objective 1: A data set of cash prices and corresponding futures prices is currently being maintained by the principal investigator. The data currently include Portland cash prices as reported by the AMS Market News Service in Portland, OR for soft white wheat - SW, Hard Red Winter - HRW (ordinary protein), and Dark Northern Spring - DNS (13% protein). Futures prices include closing bids for Chicago, Kansas City, and Minneapolis. Basis is calculated as: (cash price - future price). This current data set will be continuously updated and expanded to include alternative protein levels for DNS wheat. Thus, the primary focus for analyzing basis behavior will be based on moving average models, although other techniques such as VAR and ARMA models may be employed to improve basis forecasts or better understand basis behavior. Objective 2: A variety of procedures have been used to evaluate marketing alternatives used by agricultural producers, including benchmark comparisons, value-at-risk, and expected utility maximization. Stochastic dynamic programming has also been used to incorporate both dynamic and discrete factors that may have a financial impact for hedging and storage decisions. The procedure to be utilized in this study is to recognize the importance of enhancing producer understanding regarding marketing alternatives that include available revenue insurance products combined with futures-based strategies. Alternatives will be analyzed using procedures that recognize the importance of return variability, appropriate costs, and provide clarity for producer decision-making. Appropriate procedures likely include the benchmark approach and value-at-risk. Objective 3: Significant controversy exists about the accuracy and appropriate source of commodity outlook. However, there is also evidence that agricultural producers desire, expect, and value commodity outlook information. Using US Department of Agriculture forecasts, futures markets, extension economists' forecasts, and advisory service forecasts in some combination appears relevant. Given the current technology for accessing information from various electronic sources, composite forecast using information from several other price forecasting entities can be developed much easier and faster. Commodity outlook efforts focused on grains in Idaho and the PNW will be continuously refined using a composite approach. Rather than specific price forecasts, the emphasis of this price forecasting effort will be on how alternative market forecasts impact the selection of marketing tools.