IDEAS home Printed from https://ideas.repec.org/a/eme/afrpps/v74y2014i2p271-286.html
   My bibliography  Save this article

Financial engineering for the farm problem

Author

Listed:
  • Calum G. Turvey
  • Joshua Woodard
  • Edith Liu

Abstract

Purpose - – The purpose of this paper is to provide a general discussion of how techniques from financial engineering can be used to investigate the economic costs of farm programs and to aid in the design of new financial products to implement margin protection for dairy farmers. Specifically the paper investigates the Milk Income Loss Contract (MILC) and the Dairy Margin Protection (DMP) program. In addition the paper introduces the concept of the Milk to Corn Price ratio to protect margins. Design/methodology/approach - – The paper introduces and reviews the tools of financial engineering. These include the stochastic calculus and Itô's Lemma. The empirical tool is Monte Carlo simulations. The approach is part pedagogy and part practice. Findings - – In this paper the authors illustrate how financial engineering can be used to price complex price stabilization formula in the USA and to illustrate its use in the design of new products. Practical implications - – In this paper the authors illustrate how financial engineering can be used to price complex price stabilization formula in the USA and to illustrate its use in the design of new products. Social implications - – Farm programs designed to protect dairy farmers margins are designed in a seemingly ad hoc fashion. Assessments of programs such as MILC or DMP are conducted on an ex-post basis using historical data. The financial engineering approach presented in this paper provides the means to add significant depth to the assessment of such programs which can be used in conjunction with Monte Carlo simulation to identify alternative model structures before they are written into law. Originality/value - – This paper builds upon an existing literature. Its originality is in the application of financial engineering techniques to farm dairy policy.

Suggested Citation

  • Calum G. Turvey & Joshua Woodard & Edith Liu, 2014. "Financial engineering for the farm problem," Agricultural Finance Review, Emerald Group Publishing, vol. 74(2), pages 271-286, July.
  • Handle: RePEc:eme:afrpps:v:74:y:2014:i:2:p:271-286
    as

    Download full text from publisher

    File URL: http://www.emeraldinsight.com/10.1108/AFR-05-2014-0010?utm_campaign=RePEc&WT.mc_id=RePEc
    Download Restriction: Access to full text is restricted to subscribers
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Ho, Shuay-Tsyr & Ifft, Jennifer E. & Rickard, Bradley J. & Turvey, Calum G., 2018. "Alternative Strategies to Manage Weather Risk in Perennial Fruit Crop Production," Agricultural and Resource Economics Review, Cambridge University Press, vol. 47(3), pages 452-476, December.
    2. Soliwoda, Michał, 2016. "How to Improve a Farm Financial Management? The Lesson from Poland," Rural Areas and Development, European Rural Development Network (ERDN), vol. 13, pages 1-12.
    3. Joshua D. Woodard & Leslie Verteramo Chiu & Gabriel Power & Dmitry Vedenov & Steven Klose, 2017. "Factors Affecting Changes in Managerial Decisions," Agribusiness, John Wiley & Sons, Ltd., vol. 33(3), pages 443-465, June.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eme:afrpps:v:74:y:2014:i:2:p:271-286. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: . General contact details of provider: http://www.emerald.com .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Virginia Chapman (email available below). General contact details of provider: http://www.emerald.com .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.