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Intertemporal Risk Management in Agriculture

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

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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File URL: http://www.buseco.monash.edu.au/eco/research/papers/2012/1612intertemporalrisktackpopelafrance.pdf
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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
Contact details of provider: Postal: Department of Economics, Monash University, Victoria 3800, Australia
Phone: +61-3-9905-2493
Fax: +61-3-9905-5476
Web page: http://www.buseco.monash.edu.au/eco/
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  1. JunJie Wu, 1999. "Crop Insurance, Acreage Decisions, and Nonpoint-Source Pollution," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 81(2), pages 305-320.
  2. Keith R. McLaren & K.K. Gary Wong, 2009. "Effective global regularity and empirical modelling of direct, inverse, and mixed demand systems," Canadian Journal of Economics, Canadian Economics Association, vol. 42(2), pages 749-770, May.
  3. LaFrance, Jeffrey T. & Pope, Rulon D, 2007. "Homogeneity and supply," CUDARE Working Paper Series 1043, University of California at Berkeley, Department of Agricultural and Resource Economics and Policy.
  4. Quiggin, John, 1992. "Some observations on insurance, bankruptcy and input demand," Journal of Economic Behavior & Organization, Elsevier, vol. 18(1), pages 101-110, June.
  5. 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.
  6. Bruce A. Babcock & David A. Hennessy, 1996. "Input Demand under Yield and Revenue Insurance," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 78(2), pages 416-427.
  7. 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.
  8. 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.
  9. 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.
  10. Jeffrey T. LaFrance & Rulon D. Pope, 2010. "Duality Theory for Variable Costs in Joint Production," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 92(3), pages 755-762.
  11. Pope, Rulon D. & LaFrance, Jeffrey T. & Just, Richard E., 2011. "Agricultural arbitrage and risk preferences," Journal of Econometrics, Elsevier, vol. 162(1), pages 35-43, May.
  12. Pope, Rulon D. & Just, Richard E., 1996. "Empirical implementation of ex ante cost functions," Journal of Econometrics, Elsevier, vol. 72(1-2), pages 231-249.
  13. Jeffrey LaFrance & Rulon Pope, 2008. "The Generalized Quadratic Expenditure System," Working Papers 2008-27, School of Economic Sciences, Washington State University.
  14. LaFrance, Jeffrey T. & Shimshack, Jay P. & Wu, Steven Yu-Ping, 2000. "The environmental impacts of subsidized crop insurance," CUDARE Working Paper Series 912R, University of California at Berkeley, Department of Agricultural and Resource Economics and Policy.
  15. Jerison,Michael, 1993. "Russel on Gorman`s Engel curves: A correction," Discussion Paper Serie A 412, University of Bonn, Germany.
  16. Eldon V. Ball & Ricardo Cavazos & Jeffrey T. LaFrance & Rulon Pope & Jesse Tack, 2010. "Aggregation and Arbitrage in Joint Production," Monash Economics Working Papers archive-22, Monash University, Department of Economics.
  17. Jeffrey T. LaFrance & Timothy K. Beatty & Rulon D. Pope, 2006. "Gorman Engel Curves for Incomplete Demand Systems," Monash Economics Working Papers archive-23, Monash University, Department of Economics.
  18. 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.
  19. Richard E. Just & Linda Calvin & John Quiggin, 1999. "Adverse Selection in Crop Insurance: Actuarial and Asymmetric Information Incentives," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 81(4), pages 834-849.
  20. Wales, T. J. & Woodland, A. D., 1983. "Estimation of consumer demand systems with binding non-negativity constraints," Journal of Econometrics, Elsevier, vol. 21(3), pages 263-285, April.
  21. LaFrance, Jeffrey T., 2004. "Integrability of the linear approximate almost ideal demand system," Economics Letters, Elsevier, vol. 84(3), pages 297-303, September.
  22. LaFrance, Jeffrey T., 2008. "The structure of US food demand," Journal of Econometrics, Elsevier, vol. 147(2), pages 336-349, December.
  23. 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.
  24. LaFrance, J. T. & Beatty, T. K. M. & Pope, R. D. & Agnew, G. K., 2002. "Information theoretic measures of the income distribution in food demand," Journal of Econometrics, Elsevier, vol. 107(1-2), pages 235-257, March.
  25. Harwood, Joy L. & Heifner, Richard G. & Coble, Keith H. & Perry, Janet E. & Somwaru, Agapi, 1999. "Managing Risk in Farming: Concepts, Research, and Analysis," Agricultural Economics Reports 34081, United States Department of Agriculture, Economic Research Service.
  26. 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.
  27. Jean-Paul Chavas, 2008. "A Cost Approach to Economic Analysis Under State-Contingent Production Uncertainty," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 90(2), pages 435-466.
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