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Optimal On-Farm Grain Storage by Risk-Averse Farmers

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Author Info

  • Lai, Jing-Yi
  • Myers, Robert J.
  • Hanson, Steven D.

Abstract

Most previous research on post-harvest grain storage by farmers has assumed risk-neutral behavior and/or made restrictive assumptions about underlying price probability distributions. In this study, we solve the optimal on-farm storage problem for a risk-averse farmer under more general assumptions about underlying price distributions. The resulting model is applied to Michigan corn farmers and findings show, contrary to the "sell all or nothing" risk-neutral rule, risk-averse farmers will spread sales out over the storage season. As farmers become more risk averse, the optimal strategy is to sell more grain at harvest and spread sales over the storage season, even though this practice reduces expected return. This result is more consistent with observed farmer behavior than the "sell all or nothing" risk-neutral rule.

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File URL: http://purl.umn.edu/31063
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Bibliographic Info

Article provided by Western Agricultural Economics Association in its journal Journal of Agricultural and Resource Economics.

Volume (Year): 28 (2003)
Issue (Month): 03 (December)
Pages:

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Handle: RePEc:ags:jlaare:31063

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Web page: http://waeaonline.org/
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Related research

Keywords: grain storage; risk aversion; stochastic dynamic programming; Agribusiness;

References

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  1. Steven D. Hanson & Robert J. Myers & J. Roy Black, 1998. "The Effects of Crop Yield Insurance Designs on Farmer Participation and Welfare," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 80(4), pages 806-820.
  2. Lence, Sergio H., 1995. "On the Optimal Hedge Under Unbiased Futures Prices," Staff General Research Papers 5115, Iowa State University, Department of Economics.
  3. Lence, Sergio H. & Kimle, Kevin & Hayenga, Marvin L., 1993. "A Dynamic Minimum Variance Hedge," Staff General Research Papers 10833, Iowa State University, Department of Economics.
  4. Carl R. Zulauf & Scott H. Irwin, 1997. "Market Efficiency and Marketing to Enhance Income of Crop Producers," Finance 9711004, EconWPA.
  5. Robert J. Myers & Steven D. Hanson, 1996. "Optimal Dynamic Hedging in Unbiased Futures Markets," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 78(1), pages 13-20.
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Cited by:
  1. Tokovenko, Oleksiy & Gunter, Lewell F., 2008. "Quarterly Storage Model of U.S. Cotton Market: Estimation of the Basis under Rational Expectations," 2008 Annual Meeting, July 27-29, 2008, Orlando, Florida 6435, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
  2. World Bank, 2005. "Managing Food Price Risks and Instability in an Environment of Market Liberalization," World Bank Other Operational Studies 8264, The World Bank.

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