RISK MODELING AND MANAGEMENT IN AGRICULTURAL PRODUCTION

• Sponsoring Institution: National Institute of Food and Agriculture
• Project Status: COMPLETE
• Funding Source: HATCH
• Reporting Frequency: Annual
• Accession No.: 0232819
• Project Start Date: Jan 1, 2013
• Project End Date: Dec 31, 2018
• Program Code: [(N/A)]- (N/A)

Recipient Organization
MISSISSIPPI STATE UNIV
(N/A)
MISSISSIPPI STATE,MS 39762

Performing Department
Agricultural Economics

Non Technical Summary
Two primary sources of risk in agriculture are production risk and price risk. Tools available to producers and users of agricultural commodities for managing these types of risk include insurance, hedging, forward and futures contracting, etc. In addition, government support programs are available to help agricultural commodity producers managing production or price risk or both. The project would specifically emphasize the use of futures markets as a mean of managing agricultural risk. The project will also emphasize the modeling of risk related to agricultural production, in particular the risk related to the price of inputs. Increased volatility in agricultural commodity prices as well as increased linkages between agricultural and energy markets expose agricultural producers and the agribusiness industry to different types of market price risk. Increased market volatility in recent years can be attributed to various factors including reduced government stockholding, adverse weather events, and government policies. Many countries, especially in the developing world, have moved away from government stockholding. While this has tended to increase overall average prices, ceteris paribus, it has also led to increased variability in prices. Another important factor affecting agricultural commodity prices is recent developments related to biofuels and the resulting effects on demand for agricultural commodities, especially corn and soybeans. Government policy, such as the Renewable Fuel Standard, has been shown to have created strong linkages between agricultural commodity prices and energy prices. Previous research has also found evidence of volatility spillover from energy markets into agricultural markets. The increased integration of agricultural and energy markets likely also has implications for agricultural input markets as well as markets for agricultural commodities. For example, the agricultural sector appears to be importing price variability from the biofuels sector, as corn prices are increasingly tied to biofuel production given the energy policies implemented by the U.S. government. At a secondary level, corn prices influence other crop prices, such as soybeans, as they compete for acres and in other cases, such as wheat, can also act as a substitute in output markets. While many of the market relationships that create transmission of price risk across agricultural commodities are long standing, other relationships are now emerging; as are relationships between agricultural commodity markets and other international markets. Cross-commodity and cross-market correlations have likely changed affecting the efficacy of traditional price risk management strategies. Given the increased linkage of agricultural markets to other markets, it is important to investigate whether new approaches to price risk management need to be implemented by the producers of agricultural commodities. For example, it is important to investigate whether a more appropriate price risk management strategy is to simultaneously manage the price risk of the output and energy-based inputs.

Animal Health Component

100%

Research Effort Categories

Basic

(N/A)

Applied

100%

Developmental

(N/A)

Classification

Knowledge Area (KA)	Subject of Investigation (SOI)	Field of Science (FOS)	Percent
601	6220	3010	40%
603	6220	3010	30%
609	6220	3010	20%
610	6220	3010	10%

Knowledge Area
601 - Economics of Agricultural Production and Farm Management; 603 - Market Economics; 609 - Economic Theory and Methods; 610 - Domestic Policy Analysis;

Subject Of Investigation
6220 - Marketing, processing, and supply firms other than cooperatives;

Field Of Science
3010 - Economics;

Keywords

agricultural commodities

energy markets

futures prices

input prices

price risk

production risk

risk management

Goals / Objectives
The long-term goal of this project is a more complete understanding of the relationships between agricultural input and output prices, the relationships between agricultural input and output prices and prices in other markets, in particular energy markets, and determination of the best risk management strategies to cope with changing risk profiles. To accomplish this goal the specific objectives of this proposal are: 1. Develop and estimate models of the relationships between agricultural input and output prices and prices in other markets to determine the role of external markets in driving price risk in agricultural input and output markets. Such models will be developed for four major agricultural crops, corn, soybeans, cotton, and wheat. 2. Use the models developed in objective #1 to determine optimal risk management alternatives under changing market conditions (in particular, the increasing integration of energy and agricultural commodity markets) and contrast risk management alternatives based on models that simultaneously manage price risk from both output and energy-based input (e.g., fertilizer, diesel fuel) markets with models that manage only output price risk. 3. Estimate the risk reduction benefits (in certainty equivalent terms) obtained from simultaneously managing price risk for both outputs and energy-based inputs relative to managing only output price risk.

Project Methods
Econometric analysis will be used to examine the dynamics and the strength of the relations between agricultural output prices, crude oil price and exchange rates over time. Both the price level and price volatility dynamics and relationships will be modeled. The existence of structural breaks and whether casual relationships exist between variances of agricultural input and commodity prices and the variances of crude oil prices and exchange rates will also be investigated. Econometric analysis will be used to examine potential changes in hedging effectiveness of the available tools (futures contracts) for managing price risk. Traditional hedging strategies that are based only on the relationship between cash and futures prices of a certain agricultural commodity with hedging strategies that incorporate the new dynamics between agricultural commodity prices and energy (crude oil) prices and exchange rates will be compared.

Progress 01/01/13 to 12/31/18

Outputs
Target Audience:Results of three research projects were presented in two academic conferences. The audience consisted of researchers and graduate students from different academic institutions, experts from industry organizations and government agencies. Changes/Problems: Nothing Reported What opportunities for training and professional development has the project provided?One graduate student used the research to successfully complete the research requirements of an MS program. The graduate student presented the findings of the research in two academic conferences. How have the results been disseminated to communities of interest?The results were published in academic journals and presented in academic conferences. What do you plan to do during the next reporting period to accomplish the goals? Nothing Reported

Impacts
What was accomplished under these goals? Two manuscripts were published in academic journals. Additionally, three other manuscripts were produced that addressed goals 2 and 3. Both manuscripts are currently under review for publication. The results of this research were also presented in four academic conferences.

Publications

• Type: Journal Articles Status: Accepted Year Published: 2018 Citation: Park, E., W. Brorsen, and A. Harri. ⿿Using Bayesian Spatial Smoothing and Extreme Value Theory to Develop Area-Yield Crop Insurance Rating.⿝ American Journal of Agricultural Economics. Forthcoming 2018.
• Type: Journal Articles Status: Accepted Year Published: 2018 Citation: Tack J., K. H. Coble, R. Johansson, A. Harri, and B. J. Barnett. ⿿The Potential Implications of ⿿Big Ag Data⿿ for USDA Forecasts.⿝ Applied Economic Perspectives and Policy. Forthcoming 2018.

Progress 10/01/16 to 09/30/17

Outputs
Target Audience:Results of two research projects were presented in two academic conferences. The audience consisted of researchers and graduate students from different academic institutions, experts from industry organizations and government agencies. Changes/Problems: Nothing Reported What opportunities for training and professional development has the project provided?One graduate student is using the research to successfully complete the research requirements of an MS program. The graduate student will also have the opportunity to present the findings of the research in three academic conferences. How have the results been disseminated to communities of interest?The results were presented in academic conferences. What do you plan to do during the next reporting period to accomplish the goals?Publish the two developed manuscripts in academic journals.

Impacts
What was accomplished under these goals? Two manuscripts were produced that addressed goals 2 and 3. Both manuscripts are currently under review for publication. The results of this research were also presented in two academic conferences.

Publications

• Type: Journal Articles Status: Accepted Year Published: 2017 Citation: Rodgers, A. D., A. Harri, K. Morgan, and J. B. Tack. 2017. Technology Adoption and Risk Preferences: The Case of Machine Harvesting by Southeastern Blueberry Producers. Journal of Food Distribution Research, July 2017
• Type: Journal Articles Status: Accepted Year Published: 2017 Citation: Krah K., D. R. Petrolia, A. Williams, K. H. Coble, A. Harri, R. M. Rejesus. "Producer Preferences for Contracts on a Risky Bioenergy Crop". Applied Economic Perspectives and Policy, Sep 2017.
• Type: Journal Articles Status: Accepted Year Published: 2017 Citation: Yehouenou L., B. Barnett, K. H. Coble, A. Harri. "STAX Appeal?". Applied Economic Perspectives and Policy, forthcoming 2017.
• Type: Journal Articles Status: Accepted Year Published: 2017 Citation: B. K. Goodwin, A. Harri, R. M. Rejesus, and K. H. Coble. "Measuring Price Risk in Rating Revenue Coverage: BS OR NO BS?" American Journal of Agricultural Economics, forthcoming, 2017.

Progress 10/01/15 to 09/30/16

Outputs
Target Audience:Results of a research project were presented in two academic conferences. The audience consisted of researchers and graduate students from different academic institutions, experts from industry organizations and government agencies. Changes/Problems: Nothing Reported What opportunities for training and professional development has the project provided?One graduate student used the research to successfully complete the research requirements of an MS program. The graduate student also had the opportunity to present the findings of the research in two academic conferences. How have the results been disseminated to communities of interest?The results of this research were presented in two academic conferences to an audience of researchers and graduate students from different academic institutions, experts from industry organizations and government agencies. What do you plan to do during the next reporting period to accomplish the goals?Develop a manuscript for publication.

Impacts
What was accomplished under these goals? A MS thesis was produced that addressed goals 1 and 3. The results of this research were presented in two academic conferences.

Publications

Progress 10/01/14 to 09/30/15

Outputs
Target Audience:Research findings on producer preferences for contracts on a risky bioenergy crop were presented at the Southern Agricultural and Economics Association Annual Meeting, Atlanta, GA. Changes/Problems: Nothing Reported What opportunities for training and professional development has the project provided? Nothing Reported How have the results been disseminated to communities of interest?The results are submitted to be considered for presentation to academic meetings. What do you plan to do during the next reporting period to accomplish the goals?The aim for the next reporting period is to complete the research related to goal #3 and: Develop a MS thesis; Present the results in academic meetings; Develop a manusacript for publication.

Impacts
What was accomplished under these goals? Date are collected and a graduate student is conducting thesis research related to goal #3.

Publications

• Type: Conference Papers and Presentations Status: Accepted Year Published: 2015 Citation: Krah, K., D. Petrolia, K. Coble, A. Harri, and A. Williams. 2015. Producer Preferences for Contracts on a Risky Bioenergy Crop. Selected paper presented at the Southern Agricultural and Economics Association Annual Meeting, Atlanta, GA, Feb., 2015.

Progress 10/01/13 to 09/30/14

Outputs
Target Audience: Nothing Reported Changes/Problems: Nothing Reported What opportunities for training and professional development has the project provided? Nothing Reported How have the results been disseminated to communities of interest? Nothing Reported What do you plan to do during the next reporting period to accomplish the goals? Nothing Reported

Impacts
What was accomplished under these goals? Exploratory work was conducted regarding objective #1. Preliminary work was conducted regarding objective #2 by looking at the possibility of using available financial instruments to manage input price risk.

Publications

• Type: Journal Articles Status: Published Year Published: 2014 Citation: Annan F., J. B. Tack, A. Harri, and K. H. Coble. 2014. Spatial Patterns of Yield Distributions: Implications for Crop Insurance. American Journal of Agricultural Economics 96(1): 253-268.
• Type: Conference Papers and Presentations Status: Accepted Year Published: 2014 Citation: Rodgers, A. D., A. Harri, K. Morgan, J. B. Tack, K. Hood, and K Coble. 2014. Determining Willingness to Adopt Mechanical Harvesters among Southeastern Blueberry Producers. Selected paper presented at the Southern Agricultural and Economics Association Annual Meeting, Dallas, TX, Feb., 2014.

Progress 01/01/13 to 09/30/13

Outputs
Target Audience: Results form the project were presented at the Agricultural and Applied Economics Association annual meeting in Washington DC, August 2013. Changes/Problems: Project change was submitted to change the Project Number from MIS-HARRI to MIS-622050. The change was approved, but it is not showing up in system. It is still showing the Project Number to be MIS-HARRI. What opportunities for training and professional development has the project provided? Nothing Reported How have the results been disseminated to communities of interest? Results have been disseminted through preseantions in research meetings. What do you plan to do during the next reporting period to accomplish the goals? Work in developing model to address objective one.

Impacts
What was accomplished under these goals? Empirical models were used to estimate the role of input price uncertainty on production decisions.

Publications