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Valuing Target Price Support Programs with Average Option Pricing

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  • Taehoon Kang
  • B. Wade Brorsen

Abstract

The U.S. government deficiency payment program supplements farm income by transferring income from taxpayers to farmers. When revenue lost due to the acreage restriction exceeds revenue gained from participating in the program, farmers lose money by participating. Therefore, measuring expected revenue from the government program is important so that farmers can decide whether to participate in the program. This study uses a GARCH average-option pricing model and the Black average-option pricing model to predict the implicit premium of the U.S. government deficiency payment program. The average-option pricing model considers the average price of the underlying asset over a fixed period. A regression model based on the simulation results is provided so that the average-option models can be easily used to project deficiency payments. The results can be used by extension economists to help producers decide whether to participate in the program.

Suggested Citation

  • Taehoon Kang & B. Wade Brorsen, 1995. "Valuing Target Price Support Programs with Average Option Pricing," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 77(1), pages 106-118.
    • Handle: RePEc:oup:ajagec:v:77:y:1995:i:1:p:106-118.
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    File URL: http://hdl.handle.net/10.2307/1243893
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    Cited by:

    1. Calum G. Turvey & Shihong Yin, 2002. "On the Pricing of Cross Currency Futures Options for Canadian Grains and Livestock," Canadian Journal of Agricultural Economics/Revue canadienne d'agroeconomie, Canadian Agricultural Economics Society/Societe canadienne d'agroeconomie, vol. 50(3), pages 317-332, November.
    2. Stinson, Thomas F. & Coggins, Jay S. & Ramezani, Cyrus A., 1998. "Was Fair Fair To U.S. Corn Growers? An Analysis Of The Payments Offered To Corn Growers Under The 1996 Federal Agricultural Improvement And Reform Act," 1998 Annual meeting, August 2-5, Salt Lake City, UT 20984, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
    3. Lim, Terence & Lo, Andrew W. & Merton, Robert C. & Scholes, Myron S., 2006. "The Derivatives Sourcebook," Foundations and Trends(R) in Finance, now publishers, vol. 1(5–6), pages 365-572, April.
    4. Odening, Martin & Musshoff, Oliver, 2001. "Reale Optionen und Landwirtschaftliche Betriebslehre – oder: Kann man mit der Optionspreistheorie arbitrieren?," German Journal of Agricultural Economics, Humboldt-Universitaet zu Berlin, Department for Agricultural Economics, vol. 50(08), pages 1-10.
    5. Yang, Min-Hsien & Lu, Richard & Lin, Matt & Yao, Nian-Zu, 2021. "Pricing The Revenue Insurance Of Sugar Apple And Banana In Taiwan: An Actuarial Approach," International Journal of Food and Agricultural Economics (IJFAEC), Alanya Alaaddin Keykubat University, Department of Economics and Finance, vol. 9(2), April.

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