Kuwornu, J.K.M., W.E. Kuiper and J.M.E. Pennings. (2004) “Time Series Analysis of a Principal-Agent Model to Assess Risk Shifting in Agricultural Marketing Channels: An Application to the Dutch Ware Potato Marketing Channel.” in Role of Institutions in Rural Policies and Agricultural Markets. Van Huylenbroeck, G., L. Lauwers, and W. Verbeke. Eds. New York: Elsevier, pp. 255-271.
Pennings, J.M.E., O. Isengildina, S.H. Irwin and D. Good. (2004) “The Impact of Market Advisory Service Recommendations on Producers’ Marketing Decisions.” Journal of Agricultural and Resource Economics. 29, 2:308-27.
A conceptual framework is developed which provides insight into the factor affecting the impact of market advisory service (MAS) recommendations on producer pricing decisions. Data from a survey of 656 U.S. producers reveal that the perceived performance of the MAS, the way in which MAS recommendations are delivered, as well as the match between MAS and producers’ marketing philosophy, are important factors explaining the impact of MAS recommendations. Risk attitude does not affect the impact of MAS recommendations on producers’ decisions, suggesting producers are more interested in the price-enhancing characteristics of MAS advice than in its risk-reducing features.
Pennings, J.M.E. and P. Garcia. (2004) “Unobserved Heterogeneity: Evidence and Implications for SMEs’ Hedging Behavior.” Journal of Banking & Finance. 28:951-978.
We investigate factors that drive derivative usage in small and medium-sized enterprises (SMEs). The influence of these factors on hedging behavior cannot a priori be assumed equal for all SMEs. To address this heterogeneity, a generalized mixture regression model is used which classifies firms into segments, so that the hedging response to the determinants of derivative usage is the same in each segment. Using a unique data set of 415 SMEs, containing both accounting and experimental data, we find that factors like risk exposure, risk perceptions, risk attitude, and the decision-making unit, among others are useful in explaining hedging behavior. However, the effects of these factors are not homogeneous across all managers, and the roots of the heterogeneity can partially be traced to differences in attitudes, perceptions, and to differences in ownership structure.
Garcia, P. and R.M. Leuthold. (2004) "A Selected Review of Agricultural Commodity Futures and Options Markets.” European Review of Agricultural Economics. 31, 3:235-272.
This paper provides a selected review of the research literature on commodity futures and options markets, focusing primarily on empirical studies. The topics featured include the development of intertemporal price relationships, hedging and basis relationships, price behaviour, and discussion of the markets’ institutional issues. In each case the recent contributions are recognized. Using this base of information as background, we focus on identifying and motivating future research challenges for agricultural commodity futures and options markets.
Mahul, O. and J.M.E. Pennings. (2004) “Introduction to the Special Issue on Risk Behaviour of Market Participants.” European Review of Agricultural Economics. 31, 3:233-234.
Pennings, J.M.E. and B. Wansink. (2004) “Channel Contract Behavior: The Role of Risk Attitude, Risk Perceptions, and Channel Members’ Market Structures.” Journal of Business. 77, 4:697-723.
By integrating elements of both marketing and finance, we should how risk influences channel contract behavior. We model risk behavior as the interaction between risk attitude and risk perception (IRAP). An analysis of the joint channel decisions of 208 producers, wholesalers and processors provides three results. First, risk attitudes significantly vary across different levels of channel members. Second, IRAP—in combination with the channel member’s market structure on the buying and selling side—is a strong predictor of contractor behavior. Third, increases in channel power strengthen the impact of IRAP on channel behavior.
Bullock, D.S., P. Garcia and K. Shinn. (2005) “Towards Measuring Producer Welfare Under Output Price Uncertainty and Risk Non-Neutrality.” Australian Journal of Agricultural Economics. 49:1-21.
Procedures to measure the producer welfare effects of changes in an output price distribution under uncertainty are reviewed. Theory and numerical integration methods are combined to show how for any Marshallian risk-responsive supply, compensating variation of a change in higher moments of an output price distribution can be derived numerically. The numerical procedures enables measurement of producer welfare effects in many circumstances in whish risk and uncertainty are important elements. The practical ease and potential usefulness of the procedure is illustrated by measuring the producer welfare effects of USA rice policy.
Pennings, J.M.E., P. Garcia and E. Hendrix. (2005) “Towards a Theory of Revealed Economic Behavior: The Economic-Nuerosciences Interface.” Journal of Bioeconomics. 7, 2:113-127.
Based on recent findings from economics and the neurosciences, we present a conceptual decision-making model that provides insight into human decision making and illustrates how behavioral outcomes are transformed into phenomena. The model may be viewed as a bridge between the seemingly disparate disciplines of neuroscience and economics that may facilitate more integrative research efforts and provide a framework for developing research agendas for scientists interested in human behavior and economic phenomena.
Pennings, J.M.E. and P. Garcia. (2005) “The Poverty Challenge: How Individual Decision-Making Behavior Influences Poverty.” Economic Letters. 88:115-119.
What drives poverty? We propose a research approach to study poverty by focusing on individual decision-making behavior in which the interaction between individual’s innovativeness and time preference rate is crucial to begin understanding poverty. The approach enable policy makers to formulate efficient and effect policy and provides economists with an alternative research tool to study poverty.
Pennings, J.M.E., S.H. Irwin, D. Good, and O. Isengildina. (2005) “Heterogeneity in the Likelihood of Market Advisory Service Use by U.S. Crop Producers.” Agribusiness: An International Journal. 21, 1:109-128.
Analysis of a unique data set of 1,400 U.S. crop producers using a mixture-modeling framework shows that the likelihood of Marketing Advistory Services (MAS) use is, among others, driven by the perceived performance of MAS in terms of return and risk reduction, the match between the MAS and the crop producer’s marketing philosophy, and the interaction between them. The influence of these factors on crop producers’ MAS usage is not homogeneous across crop producers’ risk attitudes.
Kuwornu, J.K.M., W.E. Kuiper, J.M.E. Pennings and M.T.G. Meulenberg. (2005) “Time-Varying Hedge Ratios: A Principal-Agent Approach.” Journal of Agricultural Economics. 56, 3:417-432.
We use the classic agency model to derive a time-varying optimal hedge ratio for low-frequency time-series data—the type of data used by crop farmers when deciding about production and about their hedging strategy. Rooted in the classic agency framework, the proposed hedge ratio reflects the context of both the crop farmer's decision and the crop farmer's contractual relationships in the marketing channel. An empirical illustration of the Dutch ware potato sector and its futures market in Amsterdam over the period 1971–2003 reveals that the time-varying optimal hedge ratio decreased from 0.34 in 1971 to 0.24 in 2003. The hedging effectiveness, according to this ratio, is 39%. These estimates conform better with farmers' interest in using futures contracts for hedging purposes than the much higher estimates obtained when price risk minimization is the only objective considered.
Mattos, F. and P. Garcia. (2006) “Identifying Price Discovery and Risk Transfer in Thinly Traded Markets: Evidence from Brazilian Agricultural Futures Markets.” The Review of Futures Markets. 14, 4:469-480.
The paper investigates price discovery and risk transfer of Brazilian agricultural futures contracts. Cash and futures markets are strongly cointegrated but demonstrate different price transmission, and ability to transfer risk. Findings indicate that price discovery is performed even in thin markets, but contrasting with previous research suggest that co-movement in prices does not imply arbitrage and favorable hedging. Different trading thresholds are required to perform these functions. Risk transfer requires more trading to establish basis patterns than price discovery. Implications for emerging markets are clear — futures facilitate the transmission of information even when trading is insufficient to warrant systematic hedging.
Egelkraut, T.M. and P. Garcia (2006). “Intermediate Volatility Forecasts using Implied Forward Volatility: The Performance of Selected Agricultural Commodity Options.” Journal of Agricultural and Resource Economics. 31, 3 (December):508-528.
Options with different maturities can be used to generate an implied forward volatility, a volatility forecast for non-overlapping future time intervals. Using five commodities with varying characteristics, we find that the implied forward volatility dominates forecasts based on historical volatility information, but that the predictive accuracy is affected by the commodity’s characteristics. Unbiased and efficient corn and soybeans market forecasts are attributable to the well-established volatility during crucial growing periods. For soybean meal, wheat, and hogs, volatility is less predictable and investors appear to demand a risk premium for bearing volatility risk.
Marsh, J.W., J.M.E. Pennings and P. Garcia. (2006) “Perceptions of Futures Market Liquidity: An Empirical Study of CBOT and CME Traders.” in Debt, Risk, and Liquidity in Futures Markets. Barry A. Goss, Ed. London & New York: Routledge.
Traders’ perceptions drive their market behavior, and can influence the dynamics of liquidity. This study surveyed 420 traders on their perceptions of the price path during an order imbalance to better understand the dynamics of liquidity. While most liquidity models assume a linear price path, only 12% of traders perceive such a path. This raises questions on the validity of such models. There is considerable heterogeneity in the perceptions of the price path. While trader characteristics are often used to classify traders, trader characteristics do not explain the heterogeneity in perceptions. On the other hand, traders of a specific contract are associated with particular perceptions of the price path. This indicates that market microstructure may be the primary driver of traders’ perceptions of the price path.
Garcia, P., R.M. Leuthold and T.M. Egelkraut. (2006) “Issues and Research Opportunities in Agricultural Futures Markets.” in Debt, Risk, and Liquidity in Futures Markets. Barry A. Goss, Ed. London & New York: Routledge.
Research directions must be based on a vision of the future as well as an understanding of the past literature. At the present, agricultural commodity markets are in transition. Producer numbers continue to decline, while producers grow in size, and economic and managerial sophistication. Cash markets are declining in importance, while cash contracting, vertical coordination and insurance programs are expanding. Governments are stepping back from agricultural markets, and global markets with the level of competition they imply are a reality. Demand and supply shocks in these global markets produce a volatile and risky environment in which producers and firms must make daily decisions. Agricultural firms are consolidating and searching for ways to expand their operations to insure their survival. Futures exchanges are also adapting to this new environment, changing their structure and services. This paper provides a discussion of selected issues and research opportunities in agricultural commodity futures markets. The discussion focuses primarily on the recent empirical literature aimed at resolving the most current issues, and identifies future research challenges in the light of emerging patterns in markets.
Egelkraut, T.M. P. Garcia and B.J. Sherrick (2007) “Options-Based Forecasts of Futures Prices in the Presence of Limit Moves.” Applied Economics. 39: 145-152.
The analysis examines a simultaneous estimation option-based approach to forecast futures prices in the presence of daily price limit moves. The procedure explicitly allows for changing implied volatilities by estimating the implied futures price and the implied volatility simultaneously. Using futures and futures options data for three agricultural commodities, we find that the simultaneous estimation approach accounts for the abrupt changes in implied volatility associated with limit moves and generates more accurate price forecasts than conventional methods that rely on only one implied variable.