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Intertemporal Risk Management in Agriculture

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Author Info

  • Jesse Tack
  • Rulon Pope
  • Jeffrey LaFrance
  • Timothy Graciano
  • Scott Colby

Abstract

Agricultural production is subject to supply risk. Expected and realized farm outputs and output prices are unknown and unobservable when inputs are chosen. Crop and livestock production decisions are linked over time. Producers’ expectations are particularly difficult to model. This paper presents the necessary and sufficient condition to allow input demands to be specified as functions of input prices, technology, quasi-fixed inputs, and cost in place of planned/expected outputs. These are all observable when inputs are committed to production. Next we derive a flexible, exactly aggregable, economically regular econometric model of input demands. This model is consistent with any dynamic von Newman – Morgenstern expected utility function. We combine this framework with a model of the life-cycle production, investment and savings, and consumption decisions of owner/operators who face output and output price risk, and who have opportunities to invest in a conditionally risk free asset, other risky financial assets, and farm assets. The econometric framework allows for location specific technological change and production processes, cross-equation, interspatial, and intertemporal correlation among the error terms, and structural simultaneity between inputs and outputs, input and output prices, investment in durable goods used in agriculture, consumption, savings, and wealth. The result is a consistent dynamic structural model of inputs, outputs, savings, investment, and consumption under risk. We apply this model at the national-level to crop and livestock production for the years 1960-1999.

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Bibliographic Info

Paper provided by Monash University, Department of Economics in its series Monash Economics Working Papers with number 16-12.

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Length: 63 pages
Date of creation: Sep 2012
Date of revision:
Handle: RePEc:mos:moswps:2012-16

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Postal: Department of Economics, Monash University, Victoria 3800, Australia
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Web page: http://www.buseco.monash.edu.au/eco/
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Keywords: Aggregation; consumption; ex ante cost; expected utility; functional form; investment;

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References

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  1. von Haefen, Roger H., 2002. "A Complete Characterization Of The Linear, Log-Linear, And Semi-Log Incomplete Demand System Models," Journal of Agricultural and Resource Economics, Western Agricultural Economics Association, vol. 27(02), December.
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  5. Babcock, Bruce A. & Hennessy, David A., 1996. "Input Demand Under Yield and Revenue Insurance," Staff General Research Papers 794, Iowa State University, Department of Economics.
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  7. Jeffrey LaFrance & Rulon Pope & Richard Just, 2008. "Agricultural Arbitrage and Risk Preferences," Working Papers 2009-01, School of Economic Sciences, Washington State University.
  8. Rulon D. Pope & Jeffrey T. LaFrance & Richard E. Just, 2007. "Imperfect Price Deflation in Production Systems," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 89(3), pages 738-754.
  9. Michael Jerison, 1993. "Russell on Gorman's Engel Curves: A Correction," Discussion Papers 93-05, University at Albany, SUNY, Department of Economics.
  10. LaFrance, Jeffrey T & Pope, Rulon D., 2007. "Homogeneity and Supply," Department of Agricultural & Resource Economics, UC Berkeley, Working Paper Series qt9kw967kf, Department of Agricultural & Resource Economics, UC Berkeley.
  11. LaFrance, Jeffrey T. & Shimshack, J. P. & Wu, S. Y., 2001. "The Environmental Impacts of Subsidized Crop Insurance," Department of Agricultural & Resource Economics, UC Berkeley, Working Paper Series qt8m43210k, Department of Agricultural & Resource Economics, UC Berkeley.
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  13. LaFrance, Jeffrey T., 2008. "The structure of US food demand," Journal of Econometrics, Elsevier, vol. 147(2), pages 336-349, December.
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  15. Howe, Howard & Pollak, Robert A & Wales, Terence J, 1979. "Theory and Time Series Estimation of the Quadratic Expenditure System," Econometrica, Econometric Society, vol. 47(5), pages 1231-47, September.
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  19. Jeffrey T. LaFrance & Timothy K. Beatty & Rulon D. Pope, 2006. "Gorman Engel Curves for Incomplete Demand Systems," Development Research Unit Working Paper Series archive-23, Monash University, Department of Economics.
  20. V. Eldon Ball & Charles Hallahan & Richard Nehring, 2004. "Convergence of Productivity: An Analysis of the Catch-up Hypothesis within a Panel of States," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 86(5), pages 1315-1321.
  21. Jeffrey LaFrance & Rulon Pope, 2008. "The Generalized Quadratic Expenditure System," Working Papers 2008-27, School of Economic Sciences, Washington State University.
  22. Vincent H. Smith & Barry K. Goodwin, 1996. "Crop Insurance, Moral Hazard, and Agricultural Chemical Use," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 78(2), pages 428-438.
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  24. J. K. Horowitz & E. Lichtenberg, 1994. "Risk-Reducing And Risk-Increasing Effects Of Pesticides," Journal of Agricultural Economics, Wiley Blackwell, vol. 45(1), pages 82-89.
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  26. Eldon V. Ball & Ricardo Cavazos & Jeffrey T. LaFrance & Rulon Pope & Jesse Tack, 2010. "Aggregation and Arbitrage in Joint Production," Development Research Unit Working Paper Series archive-22, Monash University, Department of Economics.
  27. Lopez, Ramon E, 1985. "Structural Implications of a Class of Flexible Functional Forms for Profit Functions," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 26(3), pages 593-601, October.
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