Policies on Managing Risk in Agricultural Markets

Over the past dozen years, policymakers have largely abandonedlong-standing popular approaches for addressing risk in agriculturewithout fully resolving the question of how best to manage thenegative consequences of volatile agricultural markets. Thearticle reviews the transition from past policies and describescurrent approaches that distinguish between the trade-relatedfiscal consequences of commodity market volatility and the consequencesof price and production risks for vulnerable rural householdsand communities. Current policies rely more heavily on markets,even though markets for risk are incomplete in numerous ways.The benefits and limitations of market-based instruments areexamined in the context of risk management strategies, and innovativeapproaches to extend the reach of risk markets are discussed.      

Market Structures for U.S. Water Quality Trading

The use of transferable discharge permits as a water pollution control policy is rapidly increasing in the United States. Drawing on evidence from existing water quality trading programs, this paper provides a taxonomy of the forms that such markets take. Four main structures are identified: exchanges, bilateral negotiations, clearinghouses, and sole-source offsets. Each of these structures has its own strengths and weaknesses; none is optimal for all scenarios. Since market structure is largely determined by a program's rules, policy makers should be aware of the differences between these structures and the conditions under which each comes to be.     

The institutional drivers of sustainable landscapes: a case study of the ‘Mayan Zone’ in Quintana Roo, Mexico

Research on the dynamics of tropical forest land use and cover change (LUCC) has focused on the three scenarios: (1) deforestation/degradation; (2) settled, degraded areas in recovery, and (3) sparsely settled, expansive, intact forest. Through examination of a central Quintana Roo, Mexico case study we propose a fourth scenario of a ‘sustainable landscape’: an inhabited, productively used, forested landscape that nonetheless shows little change or net gains in forest cover over the last 25 years. We use Landsat images to demonstrate a low incidence of net deforestation, 0.01% for the 1984–2000 period, the lowest recorded deforestation rate for southeastern Mexico. Institutional innovations such as an agrarian reform process that established large common property forests for non-timber forest product extraction, and later innovations such as sustainable forest management institutions have driven the outcome of low net deforestation, added to multiple organizational processes that promote sustainable land use.     

BRITISH POTATO STABILISATION POLICY IN A EUROPEAN CONTEXT

This paper presents a simulation model, based on a stochastic spatial equilibrium framework, for the GB potato market, allowing for trade with the Continent and the operation of domestic stabilisation policy. The model is used to explain the operation of the two policy instruments — support buying and area control — and to evaluate policy options and consequences. The notion of a cost-effective support buying programme is introduced and it is found that current policy is in the region of cost-effectiveness. Quota area, subject to the constraint that downside price risk is avoided, is found to lead to a trade-off between the consumer interest and the financial cost of policy. This trade-off is examined in a conventional welfare analysis and in probability terms. Subject to certain caveats, it is concluded that current policy tends to provided price stabilisation rather than price enhancement for producers.     

LIBERALISING OECD AGRICULTURAL POLICIES IN THE URUGUAY ROUND: EFFECTS ON TRADE AND WELFARE

A dynamic, stochastic, multi-commodity model of world food markets is used to estimate the effects of liberalising agricultural policies in industrial countries. The effects on international and domestic prices, on trade volumes and on economic welfare of a phased liberalisation of industrial-country policies between 1988 and 1992 are compared with the effects of a similar hypothetical liberalisation in the early 1980s. The results suggest that, because of the dramatic increase in agricultural protection during the 1980s, the effects of a liberalisation under the Uruguay Round would be, in real terms, more than double those that would have resulted from a similar liberalisation a decade earlier. Major gainers are consumers in Western Europe and Japan and farmers in developing countries. But the cost to tax-payers in Western Europe is also escalating, not to mention the burden on non-agricultural producers in those countries whose competitiveness is reduced by farm policies. These domestic pressures from treasuries and from producers of non-farm products, together with greater international pressure for reform from agricultural-exporting countries, have raised the probability of at least some liberalisation during the Uruguay Round of multilateral trade negotiations.     

Cheap talk, fraud, and adverse selection in financial markets: some experimental evidence

We examine communication in laboratory games with asymmetricinformation. Sellers know true asset qualities. Potential buyersonly know the quality distribution. Prohibiting communication,we document the degree of adverse selection. Then we examinetwo alternative communication mechanisms. Under 'cheap talk',each seller can announce any subset of qualities. Under 'antifraud',the subset must include the true quality. Both mechanisms improvemarket efficiency, but very differently. Relying on sellers'frequently exaggerated claims, buyers often overpay under cheaptalk. Efficiency gains come at the buyer's expense. The antifraudrule improves efficiency further and eliminates the wealth transferfrom buyers to sellers.     

OVER-REACTIONS IN US AGRICULTURAL COMMODITY PRICES

The purpose of this paper is to test rationality in agricultural commodity markets. We investigate the price-adjustment process after significant events using abnormally large cash commodity price changes as proxies for the arrivals of significant events in the markets. The evidence suggests that market rationality is violated. Generally, agricultural commodity prices tend to reverse after significant events. This is consistent with the over-reaction hypothesis which maintains that traders in spot commodity markets over-weight more recent information and under-weight prior information in their expectations.     

Ex ante assessment of the returns to livestock disease control in Indonesia

Agriculture's importance in the process of economic growth highlights the role of sustained advances in farm production practices by improving the quantity and quality of farm products. In this context, investment in improved agricultural technology continues to be an important avenue of assistance to the developing countries. However, the increased resource pressures facing both aid donors and recipients have emphasised the need for the prior assessment of the potential benefits of aid projects to assist effective aid planning and management. Here, the main requirements are to establish viable project goals for translation into effective programmes, to predict the likely project impacts, and to evaluate the potential benefits and costs of adopting the project's outcomes. An ex ante assessment of assistance in controlling a major livestock disease in Indonesia's eastern islands is described in this paper. The annual net benefits from controlling this disease ranged between $A0.45 and $A2.5 million according to the mortality rate reduction achieved. The benefits were shared between beef producers and consumers according to the market elasticity conditions assumed.     

Perks and the informativeness of stock prices in the Chinese market

While the literature shows that perks can affect firm values positively or negatively, we argue that firms with higher perks are more likely to be associated with a lower quality of financial reporting, which, in turn, can affect the informativeness of stock prices. Based on hand-collected data on perks from Chinese listed firms, we find that firms with lower perks are associated with higher informativeness of stock prices (or lower R-square). Moreover, the positive association between perks and R-square is shown to be weaker for firms with higher financial reporting quality through audit and earnings quality measures.