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Risk Response in Agriculture

  • Jeffrey LaFrance
  • Rulon Pope
  • Jesse Tack

Crop production is subject to supply shocks, and both expected and realized outputs as well as output prices are unknown when inputs are chosen. The process by which producers form expectations is difficult to model, especially when working with aggregate data. We present a necessary and sufficient condition on cost and technology to allow variable input demand equations to be specified as functions of input prices, quasi-fixed inputs, and total variable cost. These all are observable when inputs are committed to production, so that ex ante demands can be estimated with observable data. A flexible, exactly aggregable, and economically regular model of variable input demands is derived and applied to aggregate U.S. agricultural data for the period 1960-1999. We use the empirical results of this model to aid in the specification of a dynamic life-cycle model for agricultural producers facing output and output price risk, with investment in an off-farm, conditionally risk free asset, risky financial assets, savings, consumption, and agricultural production opportunities. This framework admits a coherent, structural, econometric model of input use, output production, savings, investment, and consumption for agricul-ture. We apply this model to U.S. data for the period 1960-1999. Ongoing work focuses on updating the data set to the 21st century and applying both components of the model at the state-level.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 16716.

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Date of creation: Jan 2011
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Publication status: published as Risk Response in Agriculture , Jeffrey LaFrance, Rulon Pope, Jesse Tack. in The Intended and Unintended Effects of U.S. Agricultural and Biotechnology Policies , Graff Zivin and Perloff. 2012
Handle: RePEc:nbr:nberwo:16716
Note: AP PR TWP
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  17. 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.
  18. 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.
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  21. Keith R. McLaren & K.K. Gary Wong, 2007. "Effective global regularity and empirical modeling of direct, inverse and mixed demand systems," Monash Econometrics and Business Statistics Working Papers 2/07, Monash University, Department of Econometrics and Business Statistics.
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  26. Jorgenson, Dale W & Lau, Lawrence J & Stoker, Thomas M, 1980. "Welfare Comparison under Exact Aggregation," American Economic Review, American Economic Association, vol. 70(2), pages 268-72, May.
  27. 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.
  28. Huizinga, John, 1993. "Inflation Uncertainty, Relative Price Uncertainty, and Investment in U.S. Manufacturing," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 25(3), pages 521-49, August.
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  32. 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.
  33. Hausman, Jerry A, 1981. "Exact Consumer's Surplus and Deadweight Loss," American Economic Review, American Economic Association, vol. 71(4), pages 662-76, September.
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  38. 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.
  39. 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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