A METHOD FOR EVALUATING SUPPLY RESPONSE TO PRICE UNDERWRITING

In this paper a method for evaluating the supply response of individual producers to a price underwriting scheme is presented. The method includes precise formulae to take account of the impact of price underwriting on the producer's uncertain conditions. The Australian Wheat Board's guaranteed minimum price scheme is taken as a specific example of price underwriting in practice. Results show the scheme to lead to only relatively small supply responses. The impact on producer behaviour of an increase in price uncertainty in the presence of an underwriting scheme is also demonstrated in the paper.     

UNDERWRITING AGRICULTURAL COMMODITY PRICES

Underwriting schemes are increasingly being used as a basis for price policy in Australian agricultural industries. These policies simultaneously increase average returns and reduce the risk faced by producers. In this paper, conditions are discussed under which such a combination of policy targets may be desirable. The optimality properties of underwriting schemes in achieving these targets are examined and compared to those of alternative schemes. Aspects of underwriting scheme design are discussed.     

Developing Hedging Strategies for Québec Hog Producers under Revenue Insurance

The paper investigates the optimal hedging strategies of Québec hog producers when they participate in a publicly funded revenue insurance program known as ASRA (Régime d'assurance-stabilisation des revenus agricoles). A forecast model of local cash and futures prices is built and Monte Carlo methods are used to derive the optimal futures and option positions of Québec hog producers. The positive correlation between forecasts of futures and cash spot prices induces positive sales of futures and put options to hedge price risk. ASRA provides put options to hog producers at actuarially advantageous terms. Producers can increase the expected utility of profits by selling back a portion of these put options using financial markets. Options are attractive to manage price risk given the nonlinearity in the profit function induced by the revenue insurance scheme. Speculative incentives to use futures and options are also discussed in the context of ASRA.     

SOME ASPECTS OF INCOME STABILIZATION FOR PRIMARY PRODUCERS

The objectives of this paper are two-fold. The first is to discuss the basic economics of an aggregate industry income stabilization policy for primary producers. The second is to examine post-World War II income instability in Australian wool, wheat, and beef and to apportion it into its price and output components. This analysis provides a basis for discussing income stabilization in the Australian context.     

The financial benefits of forest certification: Case studies of acacia growers and a furniture company in Central Vietnam

The demand for forest products is growing and plantation forests are supplying an increasing proportion of wood to industry. There are also increasing market requirements to demonstrate the sustainability of timber supply. Vietnam has some 3.9 M ha of plantation forests, 44% of which is on short-rotations managed by smallholders. More than 80 percent of the harvested volume from the plantation forests is used for woodchip production to serve domestic and international markets. The Vietnam Government has goals to increase the domestic supply of suitable wood for furniture production to international markets by increasing the supply of larger logs grown in plantations and the supply of certified wood to industry. However, it is not clear that these objectives will necessarily benefit growers and processors. This study compared financial returns from certified and non-certified forest products for: (1) growers with 10-year rotation acacia plantations; and (2) a furniture processing business (battens for chair and table) in Quang Tri Province, Central Vietnam. The data were collected from smallholder tree growers and a sawmilling company, triangulated with and supplemented by formal and informal interviews with other stakeholders. Currently, much of the cost of certification is met by external aid donors. Results showed that net returns from both certified and non-certified timber products are positive for both actors and are higher from certified timber production than non-certified timber production. When the full costs of certification are included, the benefits to growers of certification are much reduced and potentially negative unless the fixed costs can be spread over a large group of growers. A minimum of group with 3000 ha may be required to make certification cost effective. In recent years, the price difference between the certified and non-certified logs is narrowing and this may discourage farmers from attaining certification. For the sawmiller, the benefit of certified timber production is greater. It would be in their interests to increase prices paid to growers for certified logs. Government policy measures to support certification should include consideration of who bears the cost, support for aggregation of smallholder growers and improved communication in timber supply chains.     

Optimal Protein Segregation Strategies for Wheat Growers

A technology that can measure wheat grain protein concentration and then segregate grain based on measurements during harvesting is on the horizon. This new technology provides wheat growers with opportunities to segregate grain that can be directed to premium markets. In this article, we identify an individual grower's optimal segregation and blending strategies under non‐uniformly curved price schedules. When price schedules are three‐step shaped, we show that the optimal segregation and blending strategies can be obtained by solving a specified non‐linear programming problem. Based on cash price and protein distribution data for wheat in the U.S. Pacific Northwest region over 1991–2011, an application of our theoretical model shows that on average a Hard Red Winter (respectively, Hard Red Spring) wheat grower should be willing to pay about 17.7 (respectively, 30.8) cents for segregating one bushel of wheat. We also study how growers’ net returns would be affected were the technology to be adopted.     

A real options analysis of coffee planting in Vietnam

Vietnam grew from an insignificant to the world's second largest coffee producer during the 1990s. To understand this growth, this article examines Vietnamese coffee growers' investment decisions using real options theory. The study finds that producers, with variable costs of 19 cents/lb and total cost of 29.3 cents/lb, would enter coffee production at a coffee price of 47 cents/lb and exit at a coffee price of 14 cents/lb. Most Vietnamese growers appear to be sufficiently efficient to continue producing coffee even at relatively depressed price levels.     

SUPPLY RESPONSE OF AUSTRALIAN WHEAT GROWERS

Alternative specifications of models of the supply response of Australian wheat growers and their economic implications are considered in terms of the existence and nature of production lags, and the choice between expected prices and expected gross returns as the preferred explanator of producers' response to changing economic conditions. The analysis indicates that there are lags which are due primarily to the difficulties and costs of rapid adjustment rather than to the time required to revise expectations. The statistical results were similar for the alternative specifications of gross margins and prices as the economic decision variables. However, the price elasticities derived using the gross margins specification were about a third of those using the prices specification. The gross margins specification yielded additional information in the form of yield and input cost elasticities.     

RATIONAL EXPECTATIONS IN THE AUSTRALIAN WOOL INDUSTRY

The process by which producers form expectations has implications for model building and policy analysis. An econometric model of the Australian wool market is estimated. It is shown that the rational expectations hypothesis is not inconsistent with the data for both the period before the floor price scheme was implemented and since that date. This finding has important implications, since it has been shown that the welfare gains from stabilisation are small if producers form rational expectations.     

How much do farmers value their independence?

A farmer's decision to contract or produce independently depends on the distribution of income and the nonpecuniary attributes associated with both business arrangements. The benefits to growers from contracting (such as risk reduction) may be overestimated if the nonpecuniary benefits enjoyed by independent producers (such as the right to make management decisions and own the commodity produced) are not accounted for. This study uses data from a U.S. national survey of hog producers to estimate (1) the difference in expected net returns between contracting and independent production, (2) the premium a representative farmer would pay for the risk reduction provided by a contract, and (3) the premium a farmer would pay for the nonpecuniary benefits associated with independent production. Results indicate that growers have a strong preference for autonomy—with moderately risk‐averse growers being willing to pay more for the attributes of independent production than they would for the risk‐reducing benefits of a contract.     

MARKETING AGENCIES AND THE ECONOMICS OF MARKET SEGMENTATION*

Increasing importance is being attached to market segmentation strategies as a means of increasing producer returns. In this paper, a generalised model of price discrimination without supply control is developed to analyse the implications of optimal segmentation strategies for non-homogeneous products. It is shown that the magnitude of producer returns is dependent on demand and supply conditions, with increases in returns falling as price elasticities of demand and supply increase. The model is applied to the New Zealand sheep meats industry to reveal that returns to producers from market segmentation strategies could be quite low in the long run.     

THE IMPACT OF FARM AND PROCESSING RESEARCH ON THE AUSTRALIAN WOOL INDUSTRY*

An equilibrium displacement model of the world wool top industry is used to estimate the returns to the Australian wool industry from productivity improvements in farm production, in top making and in textile manufacturing. The returns to the industry from these different types of research and development are sensitive to the extent of substitution possibilities between Australian wool and other inputs used by the wool processing and textile industries but it appears that research resources have to be much more efficient in off-farm activities for the Australian wool industry to receive benefits similar to those from farm research activities.     

Impact of the 2014 Suspension Agreement on sugar between the United States and Mexico

In December 2014, the U.S. and Mexico agreed to a suspension agreement that set a $22.25/cwt import price floor on U.S. sugar imports from Mexico. A partial equilibrium trade model was developed to estimate the economic impact the agreement would have had if it had been in effect from 2008 to 2014. In years when the price floor would have been binding, on average, U.S. producers would have gained $138 million and Mexican producers would have lost $218 million. However, total Mexican welfare would have actually increased by $11.5 million. Furthermore, the average price floor that would have maximized total Mexican welfare over that period is $22.76/cwt. Also, under certain supply and demand elasticity conditions, the average price floor that would have maximized joint U.S. and Mexican producer welfare over that period is $21.91/cwt. The latter two estimates are both close to the actual price floor agreed to in the 2014 Suspension Agreement.     

Who gains from Australian generic wine promotion and R&D?

The present paper estimates the distributions of aggregate returns from different types of research and promotion investments by the Australian grape and wine industry among grapegrowers, winemakers, domestic and foreign consumers, and the tax office. The results show that most of the gains from cost-reducing R&D in grape and wine production go to producers and that producers get a far larger share of the benefit from export promotion than that from domestic promotion. Foreign consumers of Australian wine also enjoy a significant share of the benefits from Australian R&D. Sensitivity analysis shows that the key results hold for a wide range of parameter values.     

THE RETURNS TO INVESTMENT IN RESEARCH ON AUSTRALIAN WOOL PRODUCTION*

A production function approach is used to estimate growth in farm productivity in the Australian wool industry from an estimated level of expenditure on wool production R & D. A market equilibrium model of the wool industry is then used to measure the share of total benefits from this productivity growth accruing to Australia and its wool growers. A net return is estimated after allowing for lags in the development and adoption of technology.     

Profitability of incremental generic promotion of Australian dairy products

The motivation for this study rests on two factors. First, Australian dairy farmers spend around $20 million annually on generic promotion and estimates of the returns from this expenditure are required to facilitate efficient investment decisions. Second, while the Australian dairy industry has been highly regulated, there has been a substantial reduction in assistance over the past decade and farm‐gate milk prices were deregulated on 1 July 2000. The profit potential of promotion may vary with the degree of regulation, so past estimates of the returns from promotion may not hold in the competitive environment of the future. Hence, the aim of this study is to examine the effects of government intervention on the profitability for dairy farmers of incremental changes in generic dairy promotion expenditure using a perfectly competitive market as a reference point. Competitive market price and quantity outcomes for the Australian dairy industry are estimated. The impacts of increments in dairy product and competing product generic promotion expenditures on dairy farmers’ profits are assessed using equilibrium displacement modelling. Finally, graphical procedures are used to examine the effects of dairy industry regulation on the profitability of dairy promotion.     

Spillover Effects of International Agricultural Research: CIMMYT-based Semi-Dwarf Wheats in Australia

The spillover effects of agricultural research are of interest because research-induced supply shifts in non-target regions can reduce the benefits for producers in the target regions. The introduction of semi-dwarfing genes in wheat into Australia provides an example of spillover from the CIMMYT program. Australia's wheat-growing environments were not those for which the CIMMYT material was specifically targeted. However, some of these lines were introduced into Australia and used in breeding programs to produce important supply shifts in Australia. An examination is made of the effects that the spillover had in Australia. Using an index of varietal improvement, with its attendant qualifications, an estimate of the extent of that shift resulting from the CIMMYT-based varieties was obtained. While the extent varied widely between states, the shift was found to be between 0.2 and 7.7%, with an overall average for Australia of 3.5% by 1983. On the basis of an assumption of perfectly elastic export demand for Australian wheat, the estimated total cost savings to Australian producers were US$747 million (in 1983-84 dollars) for the period 1974 to 1983, or an average of US$75 million per year. The annual contribution of Australia to CIMMYT has averaged approximately US$340,000 in recent years, while the average annual expenditure on wheat breeding in Australia has been US$4 to 5 million. On the basis of pedigrees, approximately two-thirds of the cost savings of CIMMYT-based varieties could be attributed to CIMMYT per se, with the remaining one-third attributable to the inputs of the Australian wheat breeders.     

Rice mountain: assessment of the Thai rice pledging program

The Thai Government introduced a generous price support program for paddy rice in 2011. The policy terminated in mid 2014 with the dismissal of the democratically elected Prime Minister, Ms Yingluck Shinawatra. There is an interest in understanding the welfare effects of the policy given the ongoing civil suit put against the former Prime Minister and the large stocks that remain. This study therefore analyses the welfare effects of various Thai rice policy options using a 10‐region, dynamic, stochastic, partial equilibrium model of world rice trade. It finds that while the Thai policy was effective in supporting the incomes of rice producers in the short run, the burden imposed on taxpayers and consumers seems difficult to justify.     

THE VALUE OF A FUNGICIDE ADVISORY PROGRAMME FOR CEREALS

An estimate is made of the benefits resulting from the implementation of a proposed fungicide advisory programme for Kent wheat farmers. The programme has a value by providing information which enables improved spraying decisions to be made by farmers. The expected annual value for Kent is found to be £106,000. A closer examination is made of both the returns and costs of one component of the scheme, viz, the training of farmers to recognise the disease (caused by Septoria spp.) in their fields. An average benefit/cost ratio of 8/1 is calculated to result from the provision of farmer training programmes. However, if the decision by farmers to attend courses is made upon the criteria of expected gain to themselves, then initial courses would have a much higher benefit/cost ratio. There would be diminishing returns to additional courses, but only those Kentish wheat growers with the smallest areas of crop would lack the financial incentive to attend.     

The Impact of Cereal Prices and Policy on Crop Rotations and Supply Response

The impact of cereal prices on rotational decisions and farm‐level and industry cereal supply is considered. It is argued that with the voluntary 50 per cent set‐aside option for cereal producers, there is a large financial incentive to adopt a 50 per cent set‐aside cropping plan as cereal prices fall below an individual producer's ‘indifference’price. For a typical 210‐hectare UK combinable crop farm, adopting a 50 per cent set‐aside cropping plan is optimal when the price of cereals is below £62/tonne (98.50/tonne). If widely adopted, 50 per cent set‐aside will lead to a substantial fall in the supply of cereals and would lead the industry supply curve for cereals to move leftward and become more elastic over a certain price range. The level of reduced cereal supply will be greater than would be predicted from an estimate of industry level supply response that ignored rotational and farm‐level financial incentives.