Handbook of Agricultural Economics, Volume 1B: Marketing, Distribution, and Consumers

520 Pages·2001·8.43 MB·English

by  Bruce L. Gardner

INTRODUCTION TO THE SERIES
The aim of the Handbooks in Economics series is to produce Handbooks for various
branches of economics, each of which is a definitive source, reference, and teaching
supplement for use by professional researchers and advanced graduate students. Each
Handbook provides self-contained surveys of the current state of a branch of economics
in the form of chapters prepared by leading specialists on various aspects of this branch
of economics. These surveys summarize not only received results but also newer devel-
opments, from recent journal articles and discussion papers. Some original material is
also included, but the main goal is to provide comprehensive and accessible surveys.
The Handbooks are intended to provide not only useful reference volumes for profes-
sional collections but also possible supplementary readings for advanced courses for
graduate students in economics.
KENNETH J. ARROW and MICHAEL D. INTRILIGATOR
PUBLISHER'S NOTE
For a complete overview of the Handbooks in Economics Series, please refer to the
listing on the last two pages of this volume.
CONTENTS OF THE HANDBOOK
VOLUME 1A
PART - 1 AGRICULTURAL PRODUCTION
Chapter 1
Production and Supply
YAIR MUNDLAK
Chapter 2
Uncertainty, Risk Aversion, and Risk Management for Agricultural Producers
GIANCARLO MOSCHINI and DAVID A. HENNESSY
Chapter 3
Expectations, Information and Dynamics
MARC NERLOVE and DAVID A. BESSLER
Chapter 4
The Agricultural Innovation Process: Research and Technology Adoption in a Changing Agricultural Sector
DAVID SUNDING and DAVID ZILBERMAN
Chapter 5
Structural Change in Agricultural Production: Economics, Technology and Policy
JEAN-PAUL CHAVAS
Chapter 6
Land Institutions and Land Markets
KLAUS DEININGER and GERSHON FEDER
Chapter 7
Human Capital: Education and Agriculture
WALLACE E. HUFFMAN
Chapter 8
Women's Roles in the Agricultural Household: Bargaining and Human Capital Investments
.T PAUL SCHULTZ
Chapter 9
Human Capital: Migration and Rural Population Change
J. EDWARD TAYLOR and PHILIP L. MARTIN
Chapter 10
Agricultural Finance: Credit, Credit Constraints, and Consequences
PETER J. BARRY and LINDON J. ROBISON
vii
viii Contents of the Handbook
Chapter 11
Economic Impacts of Agricultural Research and Extension
ROBERT E. EVENSON
Chapter 21
The Agricultural Producer: Theory and Statistical Measurement
RICHARD E. JUST and RULON D. POPE
VOLUME 1B
PART 2 - MARKETING, DISTRIBUTION AND CONSUMERS
Chapter 31
Commodity Futures and Options
JEFFREY C. WILLIAMS
Chapter 14
Storage and Price Stabilization
BRIAN WRIGHT
Chapter 51
Food Processing and Distribution: An Industrial Organization Approach
RICHARD J. SEXTON and NATHALIE LAVOIE
Chapter 16
Marketing Margins: Empirical Analysis
MICHAEL K. WOHLGENANT
Chapter 17
Spatial Price Analysis
PAUL L. FACKLER and BARRY K. GOODWIN
Chapter 18
Duality fort he Household: Theory and Applications
JEFFREY T. LaFRANCE
Chapter 19
Economic Analysis of Food Safety
JOHN M. ANTLE
Chapter 20
Marketing and Distribution: Theory and Statistical Measurement
JAMES VERCAMMEN and ANDREW SCHMITZ
Chapter 12
Production and Marketing
RACHAEL E. GOODHUE and GORDON C. RAUSSER
INTRODUCTION
The subject matter of agricultural economics has both broadened and deepened in re-
cent years, and the chapters of this Handbook present the most exciting and innovative
work being done today. The field originated early in the twentieth century with a focus
on farm management and commodity markets, but has since moved far into analysis
of issues in food, resources, international trade, and linkages between agriculture and
the rest of the economy. In the process agricultural economists have been pioneering
users of developments in economic theory and econometrics. Moreover, in the process
of intense focus on problems of economic science that are central to agriculture - mar-
ket expectations, behavior under uncertainty, multimarket relationships for both prod-
ucts and factors, the economics of research and technology adoption, and public goods
and property issues associated with issues like nonpoint pollution and innovations in
biotechnology - agricultural economists have developed methods of empirical investi-
gation that have been taken up in other fields.
The chapters are organized into five parts, contained in two volumes. Volume 1 con-
tains Part ,1 "Agricultural Production", and Part 2, "Marketing, Distribution and Con-
sumers". These two parts include much of the traditional scope of agricultural eco-
nomics, emphasizing advances in both theory and empirical application of recent years.
Volume 2 consists of three parts: "Agriculture, Natural Resources and the Environment",
"Agriculture in the Macroeconomy", and "Agricultural and Food Policy". Although
agricultural economists have always paid attention to these topics, research devoted
to them has increased substantially in scope as well as depth in recent years.
A large-scale effort to review and assess the state of knowledge in agricultural eco-
nomics was previously undertaken by the American Agricultural Economics Associ-
ation (AAEA), with publication in four volumes from 1977 to 1992.1 Those earlier
survey volumes have strikingly different subject-matter content from that of the present
Handbook, especially considering that they described the same field only 20 years ago.
The AAEA volumes have extensive coverage of farm management issues, costs of pro-
duction in agriculture, and estimates of efficiency of marketing firms. In our judgment
little in any fundamental way has been added to our knowledge in these areas, and
applications have become routine rather than imaginative research. The largest AAEA
volume was devoted entirely to agriculture in economic development. This remains a
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xi
x Introduction
most important topic, but we cover it in only one complete chapter and parts of sev-
eral others. This reflects in part the integration of work on developing countries with
mainstream applied work. For example, our chapters on production economics, expec-
tations, and risk management also encompass applications to agriculture in developing
economies.
That integration points to another gradual but notable change in agricultural
economists' research. The AAEA surveys had most of the chapters of one volume de-
voted to quantitative methods. We do not have any separate methodological chapters.
In contrast, we have several chapters with substantial development of economic theory.
This reflects an evolution in the research priorities of leading agricultural economists
who, following the earlier work of Nerlove on supply and Griliches on technological
change, are working at the theoretical frontiers and simultaneously undertaking empiri-
cal work - not just purveying new theories to their more "applied" colleagues.
As its title indicates, the AAEA volumes were surveys of literature, and aimed at
completeness of coverage within their subject matter. We asked our authors to be se-
lective, to focus on what they saw as the main contributions to the area they covered,
and to assess the state of knowledge and what remains to be learned. This approach
has left some gaps in our coverage, and has given us some chapters that are perhaps
more idiosyncratic than is usual for a survey chapter. In order to pull things together at
a higher level of aggregation, we commissioned five "synthesis" chapters, one for each
of the five parts of the Handbook. And, to provide our own even broader overview, the
editors have written closing syntheses of each volume. Because these syntheses provide
capsule summaries of each Handbook chapter, we will not present further description
of content here.
Although advances in research in agricultural economics are increasingly being made
in many countries, our authors and coverage of applied topics is heavily U.S.-weighted
(only six authors work outside of the U.S.: two in Europe, two in Australia, one in
Canada, and one in Israel). Of those in the U.S., however, six are economists at the
World Bank, an international rather than American institution. Probably in another
twenty years or so one will have to become more international to capture the most
interesting and exciting developments in the field, but that day has not arrived yet.
Among the many debts we have accrued in the preparation of this Handbook, the most
important was Rachael Goodhue. She not only assessed the substance of many chapters,
but she persuaded many reviewers and authors alike to complete their assigned respon-
sibilities. Other critical contributors include the dedicated staff who provided support at
the University of California, Berkeley, and at the University of Maryland. At Maryland,
Liesl Koch served as copy editor and guided the authors' final revisions and preparation
of the manuscript with sure judgment and a firm but diplomatic hand, a job best likened
to driving a herd of cats. Coordination of correspondence with authors and reviewers
was organized and carriedo ut at Berkeley with exemplary efficiencayn d organizational
skill by Jef Samp, Jessica Berkson, and Jennifer Michael, under the direction of Nancy
Lewis.
Introduction xi
We also want to recognize the comments and suggestions received from 54 review-
ers of chapter drafts: Julian Alston, Jock Anderson, Richard Barichello, Eran Beinen-
baum, Michael Boehlje, Dan Bromley, Steve Buccola, Allan Buckwell, David Bul-
lock, Michael Caputo, Jean-Paul Chavas, John Connor, Klaus Deininger, Jeffrey Doff-
man, Marcel Fafchamps, Gershon Feder, Joe Glauber, Dan Gilligan, Rachael Goodhue,
Tom Grennes, Zvi Griliches, Geoff Heal, Eithan Hochman, Matt Holt, Wallace Huff-
man, .D Gale Johnson, Zvi Lerman, Erik Lichtenberg, Ethan Ligon, Alan Love, Jill
McCluskey, Mario Miranda, Arie Oskam, Dick Perrin, Mark Rosegrant, Vern Ruttan,
Ed Schuh, Kathleen Segerson, Larry Sjaastad, Spiro Stefanou, Jo Swinnen, Frans van
der Zee, Finis Welch, Abner Womack, Jacob and Yaron.
BRUCE GARDNER
GORDON RAUSSER
Chapter 13
COMMODITY FUTURES AND OPTIONS
JEFFREY C. WILLIAMS
Department of Agricultural and Resource Economics, University of California, Davis, CA
Contents
Abstract 746
Keywords 746
.1 Introduction 747
2. The nature of futures markets 748
3. Participants in futures markets 760
4. Trading in the presence of risk aversion 769
5. Trading in the presence of transaction costs 782
6. Futures prices as forecasts 791
7. Conclusion 808
References 810
Handbook of Agricultural Economics, Volume ,1 Edited by B. Gardner an d. G Rausser
© 2001 Elsevier Science B.V. All rights reserved
647 ~ .C Williams
Abstract
Organized exchanges have evolved methods for enforcing contracts, which allow the
contracts themselves to be traded at low cost. Theorists have modeled futures contracts
as tools for risk management, despite an extensive empirical literature that does not
support predictions about bias in prices or speculators' behavior. Another perspective
models commercial firms as using futures contracts to arbitrage, to minimize transaction
costs, to substitute temporarily for merchandising contracts. Because commercial finns
tie their processing and storage decisions to the constellation of futures prices, futures
prices have major allocative effects, even if their forecasting power is inevitably poor.
Keywords
futures, speculation, hedging, forecasting, exchanges
JEL classification: Q13
.hC :31 ytidommoC serutuF dna snoitpO 747
1. Introduction
To economists, futures markets, along with the options markets associated with them,
present many interesting features. First is the nature of organized exchanges, tradition-
ally run as not-for-profit cooperatives by their members, whose individual purpose is
profits pure and simple. Second is the range of participants and their motivesf or trading.
Alongside commercial firms focused on storing, transporting, or processing a commod-
ity are traders who hold their positions for a matter of minutes and traders who seem
to enjoy the speculation itself. No law of nature compels either giant grain-exporting
firms or amateur speculators - proverbially, dentists from Des Moines - to participate
in futures markets, but they do. Third are the patterns in the prices that emerge from the
trading. In the most active futures and options markets, prices move second by second,
and moreover, tend to lead the price changes in related markets: Futures markets are
said to "discover" prices. Yet these very attributes raise many issues about how futures
and options markets incorporate information about, say, planting prospects. Somehow,
option prices reflect the cycle of uncertainty through a crop year and the year-to-year
risks of, say, a freeze. Somehow, the futures prices for various periods into the future
prevailing at any one moment have a sensible structure, which is closely associatedw ith
inventories held not just in exchange-approved warehouses but worldwide. Fourth are
the inherent complexities of any economic analysis of futures markets and commod-
ity markets more generally. Economists must consider what heterogeneous price-taking
firms do, yet place as central in their analysis the industry-level interactions. Economists
must abstract from the particulars of a single commodity during a short stretch of time,
yet must recognize that those particulars determine individual traders' strategies.
Futures markets are interesting for a fifth reason, although one that does not concern
the markets themselves as much as the approach to models and evidence as practiced
among economists. For at least sixty years, two perspectives onf utures markets have ex-
isted in parallel. One of these perspectives, which might be styled the risk-management
perspective, posits that some market participants, called "hedgers", use futures markets
out of risk aversion while other participants in the market earn a "risk premium". The
other perspective, which might be styled either the transaction-cost or the arbitrage
perspective, posits that commercial firms, cognizant of transaction costs, involve them-
selves in arbitrage-like trades in which they temporarily hold futures positions, while
the other participants contribute to the market's liquidity or forecasting ability. Judged
by the large number of papers published on the theory of "optimal hedging", the more
commonly held perspective among economists is the risk-management one. The em-
pirical evidence, however, supports this perspective poorly. Commercial firms do not
use futures contracts in the proportions or timing suggested by the theories of optimal
hedging; and speculators, far from earning a risk premium on average, usually break
even at best. Moreover, these basic facts have been reconfirmed over the years. Yet the
business of writing theoretical papers goes on, with no mention of the evidence. The
transaction costs perspective, for its part, has pointed to the general seasonal movement
in the use of futures markets for empirical support. But it has not offered evidence of