nep-agr New Economics Papers
on Agricultural Economics
Issue of 2006‒08‒26
fifteen papers chosen by
Angelo Zago
Universita degli Studi di Verona

  1. Agricultural Protection in Rich Countries: How Did We Get Here By Kimberly Ann Elliott
  2. Agriculture and Pro-Poor Growth: An Asian Perspective By Peter Timmer
  3. Does On-Farm quality Assurance Pay? A Cost-Benefit Analysis of the GrainSafe Program By Umit Karaca; Dirk Maier; Corinne Alexander
  4. Effects of Farmers' Risk Attitudes and Personality Types on Production and Marketing Decisions By Pei Xu; Corinne Alexander; George Patrick; Wesley Musser
  5. New Technologies, Marketing Strategies and Public Policy for Traditional Food Crops: Millet in Niger By Tahirou Abdoulaye; John Sanders
  6. The Shadow Wage of Child Labour: An Application to Nepal By M. Menon; F. Perali; F. Rosati
  7. Food Security in Indonesia: Current Challenges and the Long-Run Outlook By Peter Timmer
  8. On Modelling Variety in Consumption Expenditure on Food By Raghbendra Jha; Raghav Gaiha; Anurag Sharma
  9. Inset Resistance Management Plans: The Farmer's Perspective By Corinne Alexander
  10. Water Quality Modeling for the Raccoon River Watershed Using SWAT By Manoj Jha; Jeff G. Arnold; Philip W. Gassman
  11. Efficiency analysis in the presence of uncertainty By Chris OÕDonnell; Robert G. Chambers; John Quiggin
  13. Strategic Positioning in Agribusiness: Analysis and Options By Allan Gray; Michael Boehlje; Jay Akridge
  14. Valuing Limited Information in Decision Making Under Uncertainty By Allan W. Gray; Joshua D. Detre; Brian C. Briggeman
  15. Utility-based Pricing of the Weather Derivatives By Hélène Hamisultane

  1. By: Kimberly Ann Elliott
    Abstract: After a half century of multilateral bargaining to reduce trade barriers, agriculture stands out for the degree of protection and government support that it still enjoys in most rich countries. This makes agricultural protection a natural focus of the current Doha Round of trade negotiations: in addition to offering the juiciest targets for liberalization, this round is supposed to address the needs of developing countries, where the vast majority of the world’s farmers, most of them poor, reside. But is there any reason to think trade negotiations are more likely now than in the past to encourage substantial reform of rich countries’ farm policies? This paper looks at the evolution of and current approaches to agricultural policies in rich countries to see if there are lessons from the past that might improve chances for reform this time around.
    Keywords: trade barriers, agriculture, Doha, poverty
    JEL: F13 O24 Q17 Q18
  2. By: Peter Timmer
    Abstract: No country has been able to sustain a rapid transition out of poverty without raising productivity in its agricultural sector. Despite this historical role of agriculture in economic development, both the academic and donor communities lost interest in the sector, starting in the mid-1980s. This was mostly because of low prices in world markets for basic agricultural commodities, caused largely by the success of the Green Revolution in Asia. After two decades of neglect, interest in agriculture is returning. This paper explores the reasons why agriculture is back on the policy agenda for donors and poor countries alike. The most important reason is new understanding that economic growth is the main vehicle for reducing poverty and that growth in the agricultural sector plays a major role in that overall growth as well as in connecting the poor to growth. There is a sharp debate, however, between “optimists” and “pessimists” over the potential for small-scale agriculture to continue to play these historic roles. In a world of open trade, ready availability of cheap food in world markets, continued agricultural protection in rich countries, and economies of scale in access to food supply chains that are increasingly dominated by supermarkets and export buyers, large-scale farms with state-of-the-art technology and access to efficient infrastructure can push smallholders out of commercial markets. Consequently, the paper concludes, geographic coverage and operational efficiency of rural infrastructure, coupled to effective investment in modern agricultural research and extension, will determine the future role for agriculture in poverty reduction.
    Keywords: agriculture, economic development, economic growth, poverty,
    JEL: Q1 O13 O4 F35
  3. By: Umit Karaca (Department of Agricultural and Biological Enginering, College of Agriculture, Purdue University); Dirk Maier (Department of Agricultural and Biological Enginering, College of Agriculture, Purdue University); Corinne Alexander (Department of Agricultural Economics, College of Agriculture, Purdue University)
    Abstract: Since the introduction of genetically modified (GM) crops, the commodity grain system has been under pressure to segregate GM and non-GM crops. Starting at the level of the grain handler, members of the grain supply chain have successfully used quality assurance and identity preservation programs to segregate non-GM crops. Producers delivering high value, identity preserved crops have become interested in implementing these quality management systems at the farm level. We conduct a cost-benefit analysis that shows that quality assurance program may be profitable for producers, depending on their farm size and equipment management strategy.
    Keywords: on-farm quality assurance, identity preservation, cost-benefit analysis, @Risk
    Date: 2006–02
  4. By: Pei Xu; Corinne Alexander; George Patrick (Department of Agricultural Economics, College of Agriculture, Purdue University); Wesley Musser (Agricultural and Resource Economics Department, University of Maryland)
    Abstract: Producers’ risk perceptions, as well as their empirical measurement, have been an ongoing concern for agricultural economists. Identification and categorization of producers’ risk attitudes is important in both research and extension contexts. This study explores some alternative measures of farmers’ attitudes and their relationships with observed producer behavior. The effect of farmers’ personality types, as derived from the Myers-Briggs personality type indicator test, on marketing behavior is also explored. There were positive and statistically significant correlations of producers’ risk attitudes in various areas of the farm business. However, there are also some differences in producers’ willingness to risk, especially in the finance area. Although a number of variables were statistically significant, farm operator characteristics, characteristics of the farm operation and risk attitudes of the farm operator had little effect on measures of behavior thought to involve risk/return trade-offs. The Myers-Briggs personality types were used in an analysis of marketing behavior that focused on marketing tools other than the spot (cash) market. Although some of the personality types had significant effects, there were often differences between the marketing behavior associated with corn and soybeans.
    Keywords: Risk attitudes, risk perceptions, economic behavior, production, marketing, and Myers-Briggs type indicator
    Date: 2005–08
  5. By: Tahirou Abdoulaye (INRAN/DECOR); John Sanders (Department of Agricultural Economics, College of Agriculture, Purdue University)
    Abstract: New technology introduction in this semiarid region of the Sahel is hypothesized to be made more difficult by three price problems in the region. First, staple prices collapse annually at harvest. Secondly, there is a between year price collapse in good and very good years due to the inelastic demand for the principal staple, millet, and the large changes in supply from weather and other stochastic factors. Thirdly, government and NGOs intervene in adverse rainfall years to drive down the price increases. Marketing strategies were proposed for the first two price problems and a public policy change for the third. To analyze this question at the firm level a farm programming model was constructed. Based upon surveying in four countries, including Niger, farmers state that they have two primary objectives in agricultural production, first achieving a harvest income target and secondly achieving their family subsistence objective with production and purchases later in the year. Farmers are observed selling their millet at harvest and rebuying millet later in the year. So the first objective takes precedence over the second. A lexicographic utility function was used in which these primary objectives of the farmer are first satisfied and then profits are maximized. According to the model new technology would be introduced even without the marketing strategies. However, the marketing strategies accelerated the technology introduction process and further increased farmers’ incomes. Of the three marketing-policy changes only a change in public policy with a reduction of the cereal imports substantially increases farmers’ incomes in the adverse years. In developed countries crop insurance and disaster assistance is used to protect farmers in semiarid regions during bad and very bad (disaster) rainfall years. In developing countries finding alternatives to the povertynutritional problems of urban residents and poor farmers to substitute for driving down food prices in adverse years could perform the same function as crop insurance in developed countries of facilitating technological introduction by increasing incomes in adverse rainfall years.
    Keywords: inventory credit, marketing strategy, inorganic fertilizers, fertility depletion, farm level programming, micro-fertilization, sidedressing
    Date: 2005–08
  6. By: M. Menon; F. Perali; F. Rosati
    Abstract: This paper estimates the contribution of child labour to the formation of household farm income in rural enterprises. The contribution to household income from the employment of children comes either from the employment on-farm at a shadow wage or off-farm in the agricultural or other sectors. The paper uses a cost function with household labour as a quasifixed factor in order to estimate the shadow wage for each component of the household labour force. The study also provides an estimate of contribution of child labour to household income in the rural sector, both at the household and national level. A set of simulation also highlight the role that child labour plays in insuring household subsistence and how it does affects income distribution.
    Date: 2005–09
  7. By: Peter Timmer
    Abstract: In the long run-- over the past four decades--improvements in food security in Indonesia have generally been driven by pro-poor economic growth and a successful Green Revolution, led by high-yielding rice varieties, massive investments in rural infrastructure, including irrigation, and ready availability of fertilizer. In the short run, food security in the country has been intimately connected to rice prices. After more than two decades of stabilizing domestic rice prices around the long-run trend of prices in the world market, Indonesia emerged from the devastating financial crisis in 1998 with domestic rice prices much higher than world prices and much higher than long-run trends of real prices in rupiahs. Although the current political rhetoric pushing for even higher prices uses food security as the rationale (i.e., they will cause greater self-sufficiency in rice), in fact few productivity gains are now available to rice farmers, so their gains will be consumers’ loses. High rice prices have a major impact on the number of individuals living below the poverty line and on the quality of their diet. The paper reviews research on the impact of rice prices on the poor, on real wages in rural and urban areas, and on the broader macroeconomic consequences for investments in labor-intensive manufacturing. Discussion then focuses on how political and economic circumstances have changed since price stabilization, implemented by the national food agency (Bulog), balanced the needs of producers and consumers as Indonesia’s approach to food security. The most important current challenge for the country’s future food security is re-starting rapid, pro-poor growth. An additional challenge on the horizon is the “supermarket revolution,” which is rapidly changing the basic structure of Indonesia’s food marketing system. Within a decade well over half of Indonesia’s rice is likely to be sold in supermarkets, thus transferring to the private sector a supply-management role that had historically been a public sector activity.
    Keywords: food security, Indonesia, agriculture, rice, poverty
    JEL: Q18 I31 R0 J31 J43 D40 E22
    Date: 2004–11
  8. By: Raghbendra Jha; Raghav Gaiha; Anurag Sharma
    Keywords: In this paper we compute nutrient-expenditure elasticities for two macro nutrients (calories and protein) and five micro nutrients (calcium, thiamine, riboflavin, calcium and iron) using an all India sample of rural households for 1994. We show that in each case the respective elasticities are positive and significant. This lends support to our hypothesis that an increase in income would increase nutrient intake by varying amounts, contrary to some assertions. We then compute differences in the elasticity of substitution for rich and poor across commodity groups and show that these differences, while significant, are small. This further corroborates our conclusion that increases in income of the poor would lead to greater increases in their nutrient intake as compared to the non-poor, although the magnitudes will be small.
    JEL: C34 I32 J21 J43
    Date: 2006
  9. By: Corinne Alexander (Department of Agricultural Economics, College of Agriculture, Purdue University)
    Abstract: One of the most successful genetically modified crops is Bt corn, which has been modified to produce proteins from the soil bacterium Bacillus thuringiensis (Bt). These proteins are toxic to specific pests such as the European Corn Borer (ECB) and the corn rootworm (CRW). These Bt crops are highly effective at preventing insect damage, and as a result have been rapidly adopted since the release of Bt corn resistant to ECB in 1996 and Bt corn resistant to CRW in 2003. In 2005, Bt corn accounted for 35 percent of the corn acreage in the US either as a single trait or stack trait (NASS, 2005). The rapid adoption of Bt corn, particularly in specific regions of the US, has raised concerns about the development of insect resistance to Bt. Insect resistance to Bt poses a major risk to the producers currently benefiting from the technology and to other producers who depend on Bt as a pesticide, such as organic producers. In order reduce the risk of insect resistance to Bt, the Environmental Protection Agency (EPA) issued insect resistance management (IRM) guidelines in 2001 (EPA, 2001). Registrants of Bt crops are responsible for overseeing IRM plans and they implement them by having producers sign legally binding agreements. Under the IRM guidelines, producers in the primary corn growing regions are required to plant at least 20 percent of their corn to a refuge, i.e. non-Bt corn. Currently, there are four approved refuge configurations: the border of the field, a block within the field, splitting the planter so that there are strips through the field, or an adjacent field which is required to be across a ditch or road for CRW corn and within half a mile for ECB corn. Producers are permitted to treat the refuge corn with a non-Bt insecticide. The effectiveness of refuges at preventing insect resistance depends in part on producers’ compliance with the IRM plan regulations. Producers who are found to be not incompliance with the IRM plans for two years will face the penalty of no longer being allowed to purchase Bt crops (Wright and Hunt, 2004). IRM guidelines have been in effect for about 5 years. The EPA will review the IRM regulations related to CRW corn in 2006 when the registration of CRW corn needs to be renewed. In anticipation of these policy discussions about IRM plans, the purpose of this paper is to present survey and focus group results that describe farmers’ thoughts on and reactions to IRM plans.
    Keywords: insect resistance, BT corn, ECB, CRW, IRM guidelines
    Date: 2006–01
  10. By: Manoj Jha (Center for Agricultural and Rural Development (CARD)); Jeff G. Arnold; Philip W. Gassman (Center for Agricultural and Rural Development (CARD))
    Abstract: The Raccoon River Watershed (RRW) in West-Central Iowa has been recognized as exporting some of the highest nitrate-nitrogen loadings in the United States and is a major source of sediment and other nutrient loadings. An integrated modeling framework has been constructed for the RRW that consists of the Soil and Water Assessment Tool (SWAT) model, the interactive SWAT (i_SWAT) software package, Load Estimator (LOADEST) computer program, and other supporting software and databases. The simulation framework includes detailed land use and management data such as different crop rotations and an array of nutrient and tillage management schemes, derived from the U.S. Department of Agriculture's National Resources Inventory databases and other sources. This paper presents the calibration and validation of SWAT for the streamflow, sediment losses, and nutrient loadings in the watershed and an assessment of land use and management practice shifts in controlling pollution. Streamflow, sediment yield, and nitrate loadings were calibrated for the 1981-1992 period and validated for the 1993-2003 period. Limited field data on organic nitrogen, organic phosphorus, and mineral phosphorus allowed model validation for the 2001-2003 period. Model predictions generally performed very well on both an annual and monthly basis during the calibration and validation periods, as indicated by coefficient of determination (R2) and Nash-Sutcliffe simulation efficiency (E) values that exceeded 0.7 in most cases. A set of land use change scenarios based on taking cropland out of production indicated a significant benefit in reducing sediment yield at the watershed outlet. A second scenario set found that relatively small reductions in nutrient applications resulted in significant reductions in nitrate loadings at the watershed outlet, without affecting crop yields significantly.
    Keywords: calibration, management practices, Raccoon River Watershed, SWAT.
    Date: 2006–08
  11. By: Chris OÕDonnell (University of Queensland); Robert G. Chambers (Dept of Agricultural and Resource Economics, University of Maryland, College Park); John Quiggin (Department of Economics, University of Queensland)
    Abstract: In a stochastic decision environment, differences in information can lead rational decision makers facing the same stochastic technology and the same markets to make different production choices. Efficiency and productivity measurement in such a setting can be seriously and systematically biased by the manner in which the stochastic technology is represented. For example, conventional production frontiers implicitly impose the restriction that information differences have no effect on the way risk-neutral decision makers utilize the same input bundle. The result is that rational and efficient ex ante production choices can be mistakenly characterized as inefficient -- informational differences are mistaken for differences in technical efficiency. This paper uses simulation methods to illustrate the type and magnitude of empirical errors that can emerge in efficiency analysis as a result of overly restrictive representations of production technologies.
    JEL: D81
  12. By: Rhys T. Dale; Wallace E. Tyner (Department of Agricultural Economics, College of Agriculture, Purdue University)
    Abstract: Ethanol, the common name for ethyl alcohol, is fuel grade alcohol that is predominately produced through the fermentation of simple carbohydrates by yeasts. In the United States, the carbohydrate feedstock most commonly used in the commercial production of ethanol is yellow dent corn (YDC). The use of ethanol in combustion engines emits less greenhouse gasses than its petroleum equivalent, and it is widely hoped that the increased substitution of petroleum by ethanol will reduce US dependence on imported oil and decrease greenhouse gas emissions. Production of ethanol within the United States is expected to double, from 3.4 billion gallons in 2004, to about seven billion gallons in the next five years. Two processes currently being utilized to produce ethanol from YDC are dry milling and wet milling. The wet mill process is more versatile than the dry mill process in that it produces a greater variety of products; starch, corn syrup, ethanol, Splenda, etc., which allows for the wet mill to better react to market conditions. However, the costs of construction and operation of a wet mill are much greater than those of a dry mill. If ethanol is the target product, then it can be produced at a lower cost and more efficiently in a dry mill plant than in a wet mill plant, under current economic conditions. Of the more than 70 US ethanol plants currently in production, only a few are of the wet mill variety. A descriptive engineering spreadsheet model (DM model) was developed to model the dry mill ethanol production process. This model was created to better understand the economics of the ethanol dry mill production process and how the profitability of dry mill plants is affected under different conditions. It was also developed to determine the economic and environmental costs and benefits of utilizing new and different technologies in the dry mill process. Specifically, this model was constructed to conduct an economic analysis for novel processes of obtaining greater alcohol yields in the dry mill process by conducting a secondary fermentation of sugars converted from lignocellulosics found in the dry mill co-product, distiller’s grains. This research is being conducted at Purdue University, Michigan State, Iowa State, USDA, and NCAUR under a grant from the US Department of Energy. The DM model is more technically precise, and more transparent, than other models of the dry mill process that have been constructed for similar purposes. The Tiffany and Eidman model (TE model) uses broad generalities of the dry mill process, based on the current state of production, to approximate the sensitivities of the process to changes in variables. The TE model parameters were well researched, but the model suffers from several drawbacks. The main limitations of this model are that the results are very sensitive to the input values chosen by the user. Unlike the DM model, complex manipulations, such as determining the effect of new technologies would require accurate parameter estimates using the TE model. The McAloon model [11].uses highly technical engineering software (ASPEN) that acts essentially as a “black box” in the dry mill production process. This very exact model does not allow for a more general examination of the dry mill process. Changes in the production process would necessitate precise engineering plans. Similar to the TE and McAloon models, the DM model is a spreadsheet model, but unlike the McAloon model it is completely self-contained. The DM model is a feed backward model, input requirements (corn, enzymes, chemicals, utilities, etc) are calculated based on the user entered values for annual production and process parameters. The mass flow rates, in pounds per hour were then calculated and used in estimating the size, in dimension or power, of each major piece of equipment. The cost associated with each piece of major equipment was then calculated as an exponential function of its corresponding size. Total capital costs associated with a dry mill plant were then estimated using the percentage of equipment costs method [13]. It was found that the DM model estimates of the total capital costs associated with medium to large dry mill plants (those with the capacity to produce between 10 and 100 million gallons of ethanol a year) were within 5% of total fixed costs estimated by BBI [2]. Operating costs were compared with the 2002 USDA survey results and also found to be very close [15]. A companion document, “Economic and Technical Analysis of Dry Milling: Model User’s Manual,” staff paper no 06-05, explains how the model is used to conduct analysis of dry milling alternatives.
    Keywords: Ethanol, DDGS, Dry Milling, Biochemical Process Engineering, Economic Modeling, Financing, Fermentation Process Modeling
    Date: 2006–04
  13. By: Allan Gray; Michael Boehlje; Jay Akridge (Department of Agricultural Economics, College of Agriculture, Purdue University)
    Abstract: The planning process presented in the paper outlines several methods of analysis that farm business managers can use to choose among three business position options. The five forces model is an effective tool for scanning the external business environment and assessing a business’s internal resources and capabilities. The value plate will assist managers in identifying the activities upon which a business may build a competitive advantage. Once these are assesses, managers must select a strategic position from three options: operational excellence/cost leadership, product or service innovation, and customer intimacy.
    Keywords: strategic planning, five forces model, value plate model, strategic options
    JEL: L11 L12 L13 L14 L15 L21 L22 L23 L24
    Date: 2004–09
  14. By: Allan W. Gray; Joshua D. Detre; Brian C. Briggeman (Department of Agricultural Economics, College of Agriculture, Purdue University)
    Abstract: Fresh Juice Inc. (FJI) is in the process of determining whether they should launch a new fruit juice in a market that has been relatively stagnant for the last 15 years. Management of FJI is faced with uncertainty surrounding market share, market size, price, and competitor entry. In addition, FJI has the ability to chose between alternative production processes; this choice directly affects the likelihood the investment will return a positive Net Present Value. This case teaches students how to develop a stochastic simulation models given limited information to analyze risk investment decisions.
    Keywords: : simulation, uncertainty, strategic management, flexibility, limited information, investment analysis
    JEL: C15 D24 D81 D83 D84
    Date: 2005–04
  15. By: Hélène Hamisultane (EconomiX - [CNRS : UMR7166] - [Université de Paris X - Nanterre])
    Abstract: Since the underlying of the weather derivatives is not a traded asset, these contracts cannot be evaluated by the traditional financial theory. Cao and Wei (2004) price them by using the consumption-based asset pricing of Lucas (1978) and by assuming different values for the constant relative risk aversion coefficient. Instead of taking this coefficient as given, we suggest in this paper to estimate it by using the consumption data and the quotations of one of the most transacted weather contracts which is the New York weather futures on the Chicago Mercantile Exchange (CME). We will apply the well-known generalized method of moments (GMM) introduced by Hansen (1982) to estimate it as well as the simulated method of moments (SMM) attributed to Lee and Ingram (1991) and Duffie and Singleton (1993). This last method is studied since we think that it can give satisfactory results in the case of the weather derivatives for which the prices are simulated. We find that the estimated coefficient from the SMM approach must have improbably high values in order to have the calculated weather futures prices matching the observations. This finding is in accordance with the results of the prior works which have shown the empirical failures of the consumption-based asset pricing model.
    Keywords: weather derivatives; consumption-based asset pricing model; constant relative risk aversion utility function; generalized method of moments; simulated method of moments; HAC matrix; Monte-Carlo simulations; periodic variance; GARCH
    Date: 2006–08–03

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