The U.S. federal crop insurance program experienced periodic policy changes over the past three d... more The U.S. federal crop insurance program experienced periodic policy changes over the past three decades that increased premium subsidies. These premium subsidies encourage changes in crop acreage for two reasons. First, holding insurance coverage constant, premium subsidies directly increase the expected return, which may encourage more acreage of the insured crop (profit effect). Second, premium subsidies encourage farms to increase crop insurance coverage. With more insurance coverage, farm revenue, which includes crop revenues and expected crop insurance indemnity payments, becomes less variable and therefore, acreage of the insured crop may increase (coverage effect). By exploiting exogenous policy changes, this study estimates the sum of these two distinct effects of premium subsidies on crop acreage. Using about 180,000 county-crop-year observations for seven major crops over 26 years, we estimate that a 10% increase in the premium subsidy causes a 0.39% increase in crop acrea...
We propose the Grouped Coefficients estimator to reduce the bias of dynamic panels that have a mu... more We propose the Grouped Coefficients estimator to reduce the bias of dynamic panels that have a multilevel structure to the coefficient and factor loading heterogeneity. If groups are chosen such that the within-group heterogeneity is small, then the grouped coefficients estimator can lead to a substantial bias reduction compared to fixed effects and Arellano-Bond estimators. We also compare the magnitude of the bias of panel estimators with individual versus aggregate data and show that the magnitude of the bias also depends on the proportion of the heterogeneity that is within groups. In an application to estimating corn acreage response to price, we find that the grouped coefficients estimator gives reasonable results. Fixed effects and Arellano-Bond estimates of the coefficient on the lagged dependent variable appear to be severely biased with county-level data. In contrast, if we randomly assign the fields to groups and aggregate within the random groups, then pooled OLS of the ...
Tradeable credits are a central component of many market-based regulations. Whenever the market f... more Tradeable credits are a central component of many market-based regulations. Whenever the market for compliance credits is efficient and policies are enforced over time, credit prices should reflect both current and expected future discounted marginal compliance costs, which are a function of both expected future market conditions and policy environments. We study credit prices for a relatively recent policy, the market for Renewable Identification Numbers (RINs) under the Renewable Fuel Standard (RFS2). We provide a comprehensive study of RIN markets. Due to the dynamic nature of the program and the feature that credits can be banked and borrowed over time, we specify the first dynamic model of an industry facing a RFS2 to highlight the importance of expectations in driving current RIN prices. We then provide a test of market efficiency, and study historical cost drivers of prices. We find encouraging signs of a maturing over-the-counter market for RINs. Historically, the largest dr...
We used Monte Carlo simulation to evaluate the probability of the net present value (NPV) being p... more We used Monte Carlo simulation to evaluate the probability of the net present value (NPV) being positive for investing in irrigation for corn production in Tennessee. The probability of NPV>0 ranged from 78-89% for a 200-acre field using 1994-2013 prices, and 87-99% for a 125-acre field using 2006-2013 prices.
Using five monthly revisions to USDA crop forecasts (Jul, Aug, Sep, Oct, & Nov), we estimate own‐... more Using five monthly revisions to USDA crop forecasts (Jul, Aug, Sep, Oct, & Nov), we estimate own‐ and cross‐commodity short‐run demand flexibilities for six domestic agricultural commodities. Our findings indicate that the corn supply influences the expected harvest‐time price of virtually every other major field crop. Moreover, as the share of the corn crop devoted to ethanol production grows, corn and soybean prices become more flexible, while the reverse it true for wheat and oats.
Obesity encapsulates the increased risk of disease and premature death associated with excess fat... more Obesity encapsulates the increased risk of disease and premature death associated with excess fat, but it is usually measured using a simple function of weight and height known as the Body Mass Index (BMI). Economists use the BMI to determine the prevalence of obesity within the population, to estimate the "disease burden" created by obesity, to establish the additional medical spending attributable to obesity, and to measure the current and potential effects of government policy on obesity. Estimates will be biased if the measurement error from using BMI to proxy for obesity is correlated with other covariates. In this paper we use a flexible function of percent body fat and several metabolic factors to construct an obesity index to predict death and disease. We use this index to show that using BMI leads researchers to misattribute obesity-related health outcomes to other factors such as aging, family health history, alcohol consumption, and household income. Moreover, w...
Wholesale suppliers at fuel terminals blend gasoline with ethanol to create finished gasoline. Un... more Wholesale suppliers at fuel terminals blend gasoline with ethanol to create finished gasoline. Under the US Renewable Fuel Standard (RFS), this blending activity produces a renewable fuel credit, known as a RIN, which blenders can sell to oil refiners who need it for RFS compliance. We estimate whether these suppliers, known as rack sellers, pass through the value of RINS. Based on a population-weighted regression with 20 large cities, we estimate a 63% RIN pass through for branded fuel (95% confidence interval [0.23, 1.03]) and a 92% pass through for unbranded fuel (95% CI [0.70, 1.14]). The confidence intervals on the pooled national regressions are wide and include full pass-through. When we estimate pass-through in regions, we find that suppliers pass through the RIN value in the Midwest – the so-called ethanol belt – and in the Gulf states. The estimates for the Midwest are 0.86 (branded, 95% CI [0.63, 1.09]) and 0.99 (unbranded, 95% CI [0.83, 1.16]). The estimates for the Gulf...
Wholesale suppliers at fuel terminals blend gasoline with ethanol to create finished gasoline. Un... more Wholesale suppliers at fuel terminals blend gasoline with ethanol to create finished gasoline. Under the US Renewable Fuel Standard (RFS), this blending activity produces a renewable fuel credit, known as a RIN, which blenders can sell to oil refiners who need it for RFS compliance. We estimate whether these suppliers, known as rack sellers, pass through the value of RINS. Based on a population-weighted regression with 20 large cities, we estimate a 63% RIN pass through for branded fuel (95% confidence interval [0.23, 1.03]) and a 92% pass through for unbranded fuel (95% CI [0.70, 1.14]). The confidence intervals on the pooled national regressions are wide and include full pass-through. When we estimate pass-through in regions, we find that suppliers pass through the RIN value in the Midwest – the so-called ethanol belt – and in the Gulf states. The estimates for the Midwest are 0.86 (branded, 95% CI [0.63, 1.09]) and 0.99 (unbranded, 95% CI [0.83, 1.16]). The estimates for the Gulf...
During the commodity price boom and bust of 2007-2008, cotton futures prices rose and fell dramat... more During the commodity price boom and bust of 2007-2008, cotton futures prices rose and fell dramatically in spite of high levels of inventory. At the same time, correlation between cotton and other commodity prices reached historically high levels. These two observations underlie concerns that cotton prices during this period were poor signals of cotton market fundamentals and that the cotton market was ’taken along for a ride’ with other commodities. The apparent coincidence of extreme price movement across a broad range of commodities requires an explanation. Were cotton prices driven by the same set of macroeconomic factors as the other commodities? Did cotton markets suffer from supply disruptions at the same time that the other commodities faced disruptions? What was the role of futures market speculators and the rise of commodity index trading? Economists have been writing about excessive or unexplained comovement among commodity prices since at least Pindyck and Rotemberg (199...
In the spring of 2019, U.S. agriculture experienced a record high number of prevented planted acr... more In the spring of 2019, U.S. agriculture experienced a record high number of prevented planted acres primarily due to historic rainfall across large portions of the Corn Belt and Mid-South. Producers of corn, upland cotton, soybean, and wheat were impacted with a substantial loss of revenue due to no crops being produced and marketed. With about 11.4 million acres of corn not planted, foregone gross revenue from crop sales likely exceeded $6 billion alone. Instead of focusing on the loss of producers’ incomes as a result of prevented planted acres, our analysis focuses on the economic impacts, due to lost sales, for firms that provide inputs to farmers. Acres prevented from planting resulted in producers not incurring typical expenditures for planting and post planting inputs such as seed, crop nutrients, and crop protection (herbicides, insecticides, fungicides, etc.). Agricultural input manufacturers, wholesalers, and retailers do not have similar opportunities to insure against fo...
Correct estimates of import demand elasticities are essential for measuring the gains from trade ... more Correct estimates of import demand elasticities are essential for measuring the gains from trade and predicting the impact of trade policies. We show that estimates of import demand elasticities hinge critically on whether they are derived using trade quantities or trade values, and this difference is due to properties of the estimators. Using partial identification methods, we show theoretically that the upper bound on the set of plausible estimates is lower when using traded quantities, compared to the standard approach using trade values. Our theoretical predictions are confirmed using detailed product-level data on U.S. imports for the years 1993-2006. Our proposed method using traded quantities leads to smaller point estimates of the import demand elasticities for many goods and imply larger gains from trade compared to estimates based on trade values.
Journal of Agricultural and Applied Economics, 2019
Prevented planting provision in crop insurance protects producers from failure to plant attributa... more Prevented planting provision in crop insurance protects producers from failure to plant attributable to natural causes. We determined the impact of this provision at various crop insurance coverage levels on prevented planting claims and ex post moral hazard. The moral hazard incentive in the prevented planting provision is stronger for corn than soybeans. Reducing the prevented planting coverage factor for corn could likely reduce moral hazard, but the degree of the reduction will likely depend on the revenue protection coverage level. Conversely, we found moral hazard is unlikely to occur for soybean production regardless of the revenue protection coverage level.
Grain shippers and political figures in North Dakota and nearby states have voiced concern that t... more Grain shippers and political figures in North Dakota and nearby states have voiced concern that the dramatic increases in shipments of crude oil by rail have caused service delays and higher costs. We investigate the potential impact of crude shipments on grain markets accounting for harvest effects and other potential sources of rail congestion. Increased crude oil shipments are associated with substantially larger spreads between wheat prices at regional elevators and in Minneapolis, the market hub. The effect on corn and soybean spreads are an order of magnitude smaller. Increased oil traffic is associated with small increases in rail rates but large increases in rail car auction prices. We document increases in wheat carry (storage) costs and decreases in shipment quantities. Surprisingly, little of the spread increase is due to lower prices paid to farmers, suggesting consumers rather than producers paid the cost of increased rail congestion. * The authors are grateful for research support from the Sloan Foundation. The authors thank Ken Boyers, Karen Clay and seminar participants at the National Bureau of Economic Research conference on Transporting Hydrocarbons for helpful comments. The statements, findings, conclusions, views, and opinions contained and expressed herein are not necessarily those of Genscape.
This study estimates the impact of carbon offset payments on land use choices, net producer retur... more This study estimates the impact of carbon offset payments on land use choices, net producer returns, and carbon sequestration. Loblolly pine is added to traditional cropping choices as a designated carbon-sequestering crop. With a carbon offset price of $15 per ton, pine enters land use on 10 percent of pasture acres. At $30, loblolly pine significantly increases in acreage in areas traditionally planted in row crops. The analysis suggests that the addition of pine as a carbon-sequestering crop can affect land use, add to producer returns, and sequester additional carbon relative to producer choice sets that exclude pine.
Journal of Environmental Economics and Management, 2014
High corn prices cause farmers to plant more corn on fields that were planted to corn in the prev... more High corn prices cause farmers to plant more corn on fields that were planted to corn in the previous year, rather than alternating between corn and soybeans. Cultivating corn after corn requires greater nitrogen fertilizer and some of this nitrogen flows into waterways and causes environmental damage. We estimate the effect of crop prices on nitrogen losses for most fields in Iowa, Illinois, and Indiana using crop data from satellite imagery. Spatial variation in these high-resolution estimates highlights the fact that the environmental effects of agriculture depend not only on what is grown, but also on where and in what sequence it is grown. Our results suggest that the change in corn and soybean prices due to a billion gallons of ethanol production expands the size of the hypoxic zone in the Gulf of Mexico by roughly 30 square miles on average, although there is considerable uncertainty in this estimate.
Periodically, the global economy experiences great commodity booms and busts, characterized by a ... more Periodically, the global economy experiences great commodity booms and busts, characterized by a broad and sharp comovement of commodity prices. There have been two such episodes since the Korean War. The first event peaked in 1974 and the second in 2008, 34 years apart. Both created major economic and political shocks, including fallen governments and human suffering due to high food prices. Each occurrence raised serious concerns over food and energy security and led to more government intervention in the commodity markets. Although there is no simple explanation for what causes such complex events, they do share similar characteristics. We find at the core of these cycles a set of contemporaneous supply and demand surprises that coincided with low inventories and that were magnified by macroeconomic shocks and policy responses. In the next few decades, the world faces the prospect of continued increases in the demand for commodities and greater uncertainty about supply. However, ...
In a well-functioning futures market, the futures price at expiration equals the price of the und... more In a well-functioning futures market, the futures price at expiration equals the price of the underlying asset. This condition failed to hold in grain markets for most of 2005-10, calling into question the ability of these markets to perform their price discovery and risk management functions. During this period, futures contracts expired up to 35% above the cash grain price. We develop a dynamic rational expectations model of commodity storage that explains how these recent convergence failures were generated by the institutional structure of the delivery system. When delivery occurs on a grain futures contract the firm on the short side of the market provides a delivery instrument (a warehouse receipt or shipping certificate) to the firm on the long side of the market. The firm taking delivery may hold the delivery instrument indefinitely providing it pays a daily storage rate. The futures exchange sets the maximum allowable storage rate at a fixed value. We show that non-convergence arises in equilibrium when the market price of physical grain storage exceeds the maximum storage rate on delivery instruments. We call the difference between the price of carrying physical grain and the maximum storage rate the wedge, and demonstrate theoretically and empirically that the magnitude of the non-convergence equals the expected present discounted value of a function of future wedges.
Genetic modification of crops has revolutionized food production, but it remains controversial du... more Genetic modification of crops has revolutionized food production, but it remains controversial due to food safety and environmental concerns. A recent food safety scare provides a natural experiment on the corn market's willingness to accept unapproved genetically modified organisms. In 2000, a genetically modified corn variety called StarLink was discovered in the food-corn supply, even though it was not approved for human consumption. To estimate the price impact of this event, we develop the relative price of a substitute method, which applies not only to the StarLink event but also to rare events in other markets. We apply this method to measure the price impact of the StarLink contamination on the U.S. corn market. We find that the contamination led to a 7 percent suppression of corn prices that lasted for at least a year.
The U.S. federal crop insurance program experienced periodic policy changes over the past three d... more The U.S. federal crop insurance program experienced periodic policy changes over the past three decades that increased premium subsidies. These premium subsidies encourage changes in crop acreage for two reasons. First, holding insurance coverage constant, premium subsidies directly increase the expected return, which may encourage more acreage of the insured crop (profit effect). Second, premium subsidies encourage farms to increase crop insurance coverage. With more insurance coverage, farm revenue, which includes crop revenues and expected crop insurance indemnity payments, becomes less variable and therefore, acreage of the insured crop may increase (coverage effect). By exploiting exogenous policy changes, this study estimates the sum of these two distinct effects of premium subsidies on crop acreage. Using about 180,000 county-crop-year observations for seven major crops over 26 years, we estimate that a 10% increase in the premium subsidy causes a 0.39% increase in crop acrea...
We propose the Grouped Coefficients estimator to reduce the bias of dynamic panels that have a mu... more We propose the Grouped Coefficients estimator to reduce the bias of dynamic panels that have a multilevel structure to the coefficient and factor loading heterogeneity. If groups are chosen such that the within-group heterogeneity is small, then the grouped coefficients estimator can lead to a substantial bias reduction compared to fixed effects and Arellano-Bond estimators. We also compare the magnitude of the bias of panel estimators with individual versus aggregate data and show that the magnitude of the bias also depends on the proportion of the heterogeneity that is within groups. In an application to estimating corn acreage response to price, we find that the grouped coefficients estimator gives reasonable results. Fixed effects and Arellano-Bond estimates of the coefficient on the lagged dependent variable appear to be severely biased with county-level data. In contrast, if we randomly assign the fields to groups and aggregate within the random groups, then pooled OLS of the ...
Tradeable credits are a central component of many market-based regulations. Whenever the market f... more Tradeable credits are a central component of many market-based regulations. Whenever the market for compliance credits is efficient and policies are enforced over time, credit prices should reflect both current and expected future discounted marginal compliance costs, which are a function of both expected future market conditions and policy environments. We study credit prices for a relatively recent policy, the market for Renewable Identification Numbers (RINs) under the Renewable Fuel Standard (RFS2). We provide a comprehensive study of RIN markets. Due to the dynamic nature of the program and the feature that credits can be banked and borrowed over time, we specify the first dynamic model of an industry facing a RFS2 to highlight the importance of expectations in driving current RIN prices. We then provide a test of market efficiency, and study historical cost drivers of prices. We find encouraging signs of a maturing over-the-counter market for RINs. Historically, the largest dr...
We used Monte Carlo simulation to evaluate the probability of the net present value (NPV) being p... more We used Monte Carlo simulation to evaluate the probability of the net present value (NPV) being positive for investing in irrigation for corn production in Tennessee. The probability of NPV>0 ranged from 78-89% for a 200-acre field using 1994-2013 prices, and 87-99% for a 125-acre field using 2006-2013 prices.
Using five monthly revisions to USDA crop forecasts (Jul, Aug, Sep, Oct, & Nov), we estimate own‐... more Using five monthly revisions to USDA crop forecasts (Jul, Aug, Sep, Oct, & Nov), we estimate own‐ and cross‐commodity short‐run demand flexibilities for six domestic agricultural commodities. Our findings indicate that the corn supply influences the expected harvest‐time price of virtually every other major field crop. Moreover, as the share of the corn crop devoted to ethanol production grows, corn and soybean prices become more flexible, while the reverse it true for wheat and oats.
Obesity encapsulates the increased risk of disease and premature death associated with excess fat... more Obesity encapsulates the increased risk of disease and premature death associated with excess fat, but it is usually measured using a simple function of weight and height known as the Body Mass Index (BMI). Economists use the BMI to determine the prevalence of obesity within the population, to estimate the "disease burden" created by obesity, to establish the additional medical spending attributable to obesity, and to measure the current and potential effects of government policy on obesity. Estimates will be biased if the measurement error from using BMI to proxy for obesity is correlated with other covariates. In this paper we use a flexible function of percent body fat and several metabolic factors to construct an obesity index to predict death and disease. We use this index to show that using BMI leads researchers to misattribute obesity-related health outcomes to other factors such as aging, family health history, alcohol consumption, and household income. Moreover, w...
Wholesale suppliers at fuel terminals blend gasoline with ethanol to create finished gasoline. Un... more Wholesale suppliers at fuel terminals blend gasoline with ethanol to create finished gasoline. Under the US Renewable Fuel Standard (RFS), this blending activity produces a renewable fuel credit, known as a RIN, which blenders can sell to oil refiners who need it for RFS compliance. We estimate whether these suppliers, known as rack sellers, pass through the value of RINS. Based on a population-weighted regression with 20 large cities, we estimate a 63% RIN pass through for branded fuel (95% confidence interval [0.23, 1.03]) and a 92% pass through for unbranded fuel (95% CI [0.70, 1.14]). The confidence intervals on the pooled national regressions are wide and include full pass-through. When we estimate pass-through in regions, we find that suppliers pass through the RIN value in the Midwest – the so-called ethanol belt – and in the Gulf states. The estimates for the Midwest are 0.86 (branded, 95% CI [0.63, 1.09]) and 0.99 (unbranded, 95% CI [0.83, 1.16]). The estimates for the Gulf...
Wholesale suppliers at fuel terminals blend gasoline with ethanol to create finished gasoline. Un... more Wholesale suppliers at fuel terminals blend gasoline with ethanol to create finished gasoline. Under the US Renewable Fuel Standard (RFS), this blending activity produces a renewable fuel credit, known as a RIN, which blenders can sell to oil refiners who need it for RFS compliance. We estimate whether these suppliers, known as rack sellers, pass through the value of RINS. Based on a population-weighted regression with 20 large cities, we estimate a 63% RIN pass through for branded fuel (95% confidence interval [0.23, 1.03]) and a 92% pass through for unbranded fuel (95% CI [0.70, 1.14]). The confidence intervals on the pooled national regressions are wide and include full pass-through. When we estimate pass-through in regions, we find that suppliers pass through the RIN value in the Midwest – the so-called ethanol belt – and in the Gulf states. The estimates for the Midwest are 0.86 (branded, 95% CI [0.63, 1.09]) and 0.99 (unbranded, 95% CI [0.83, 1.16]). The estimates for the Gulf...
During the commodity price boom and bust of 2007-2008, cotton futures prices rose and fell dramat... more During the commodity price boom and bust of 2007-2008, cotton futures prices rose and fell dramatically in spite of high levels of inventory. At the same time, correlation between cotton and other commodity prices reached historically high levels. These two observations underlie concerns that cotton prices during this period were poor signals of cotton market fundamentals and that the cotton market was ’taken along for a ride’ with other commodities. The apparent coincidence of extreme price movement across a broad range of commodities requires an explanation. Were cotton prices driven by the same set of macroeconomic factors as the other commodities? Did cotton markets suffer from supply disruptions at the same time that the other commodities faced disruptions? What was the role of futures market speculators and the rise of commodity index trading? Economists have been writing about excessive or unexplained comovement among commodity prices since at least Pindyck and Rotemberg (199...
In the spring of 2019, U.S. agriculture experienced a record high number of prevented planted acr... more In the spring of 2019, U.S. agriculture experienced a record high number of prevented planted acres primarily due to historic rainfall across large portions of the Corn Belt and Mid-South. Producers of corn, upland cotton, soybean, and wheat were impacted with a substantial loss of revenue due to no crops being produced and marketed. With about 11.4 million acres of corn not planted, foregone gross revenue from crop sales likely exceeded $6 billion alone. Instead of focusing on the loss of producers’ incomes as a result of prevented planted acres, our analysis focuses on the economic impacts, due to lost sales, for firms that provide inputs to farmers. Acres prevented from planting resulted in producers not incurring typical expenditures for planting and post planting inputs such as seed, crop nutrients, and crop protection (herbicides, insecticides, fungicides, etc.). Agricultural input manufacturers, wholesalers, and retailers do not have similar opportunities to insure against fo...
Correct estimates of import demand elasticities are essential for measuring the gains from trade ... more Correct estimates of import demand elasticities are essential for measuring the gains from trade and predicting the impact of trade policies. We show that estimates of import demand elasticities hinge critically on whether they are derived using trade quantities or trade values, and this difference is due to properties of the estimators. Using partial identification methods, we show theoretically that the upper bound on the set of plausible estimates is lower when using traded quantities, compared to the standard approach using trade values. Our theoretical predictions are confirmed using detailed product-level data on U.S. imports for the years 1993-2006. Our proposed method using traded quantities leads to smaller point estimates of the import demand elasticities for many goods and imply larger gains from trade compared to estimates based on trade values.
Journal of Agricultural and Applied Economics, 2019
Prevented planting provision in crop insurance protects producers from failure to plant attributa... more Prevented planting provision in crop insurance protects producers from failure to plant attributable to natural causes. We determined the impact of this provision at various crop insurance coverage levels on prevented planting claims and ex post moral hazard. The moral hazard incentive in the prevented planting provision is stronger for corn than soybeans. Reducing the prevented planting coverage factor for corn could likely reduce moral hazard, but the degree of the reduction will likely depend on the revenue protection coverage level. Conversely, we found moral hazard is unlikely to occur for soybean production regardless of the revenue protection coverage level.
Grain shippers and political figures in North Dakota and nearby states have voiced concern that t... more Grain shippers and political figures in North Dakota and nearby states have voiced concern that the dramatic increases in shipments of crude oil by rail have caused service delays and higher costs. We investigate the potential impact of crude shipments on grain markets accounting for harvest effects and other potential sources of rail congestion. Increased crude oil shipments are associated with substantially larger spreads between wheat prices at regional elevators and in Minneapolis, the market hub. The effect on corn and soybean spreads are an order of magnitude smaller. Increased oil traffic is associated with small increases in rail rates but large increases in rail car auction prices. We document increases in wheat carry (storage) costs and decreases in shipment quantities. Surprisingly, little of the spread increase is due to lower prices paid to farmers, suggesting consumers rather than producers paid the cost of increased rail congestion. * The authors are grateful for research support from the Sloan Foundation. The authors thank Ken Boyers, Karen Clay and seminar participants at the National Bureau of Economic Research conference on Transporting Hydrocarbons for helpful comments. The statements, findings, conclusions, views, and opinions contained and expressed herein are not necessarily those of Genscape.
This study estimates the impact of carbon offset payments on land use choices, net producer retur... more This study estimates the impact of carbon offset payments on land use choices, net producer returns, and carbon sequestration. Loblolly pine is added to traditional cropping choices as a designated carbon-sequestering crop. With a carbon offset price of $15 per ton, pine enters land use on 10 percent of pasture acres. At $30, loblolly pine significantly increases in acreage in areas traditionally planted in row crops. The analysis suggests that the addition of pine as a carbon-sequestering crop can affect land use, add to producer returns, and sequester additional carbon relative to producer choice sets that exclude pine.
Journal of Environmental Economics and Management, 2014
High corn prices cause farmers to plant more corn on fields that were planted to corn in the prev... more High corn prices cause farmers to plant more corn on fields that were planted to corn in the previous year, rather than alternating between corn and soybeans. Cultivating corn after corn requires greater nitrogen fertilizer and some of this nitrogen flows into waterways and causes environmental damage. We estimate the effect of crop prices on nitrogen losses for most fields in Iowa, Illinois, and Indiana using crop data from satellite imagery. Spatial variation in these high-resolution estimates highlights the fact that the environmental effects of agriculture depend not only on what is grown, but also on where and in what sequence it is grown. Our results suggest that the change in corn and soybean prices due to a billion gallons of ethanol production expands the size of the hypoxic zone in the Gulf of Mexico by roughly 30 square miles on average, although there is considerable uncertainty in this estimate.
Periodically, the global economy experiences great commodity booms and busts, characterized by a ... more Periodically, the global economy experiences great commodity booms and busts, characterized by a broad and sharp comovement of commodity prices. There have been two such episodes since the Korean War. The first event peaked in 1974 and the second in 2008, 34 years apart. Both created major economic and political shocks, including fallen governments and human suffering due to high food prices. Each occurrence raised serious concerns over food and energy security and led to more government intervention in the commodity markets. Although there is no simple explanation for what causes such complex events, they do share similar characteristics. We find at the core of these cycles a set of contemporaneous supply and demand surprises that coincided with low inventories and that were magnified by macroeconomic shocks and policy responses. In the next few decades, the world faces the prospect of continued increases in the demand for commodities and greater uncertainty about supply. However, ...
In a well-functioning futures market, the futures price at expiration equals the price of the und... more In a well-functioning futures market, the futures price at expiration equals the price of the underlying asset. This condition failed to hold in grain markets for most of 2005-10, calling into question the ability of these markets to perform their price discovery and risk management functions. During this period, futures contracts expired up to 35% above the cash grain price. We develop a dynamic rational expectations model of commodity storage that explains how these recent convergence failures were generated by the institutional structure of the delivery system. When delivery occurs on a grain futures contract the firm on the short side of the market provides a delivery instrument (a warehouse receipt or shipping certificate) to the firm on the long side of the market. The firm taking delivery may hold the delivery instrument indefinitely providing it pays a daily storage rate. The futures exchange sets the maximum allowable storage rate at a fixed value. We show that non-convergence arises in equilibrium when the market price of physical grain storage exceeds the maximum storage rate on delivery instruments. We call the difference between the price of carrying physical grain and the maximum storage rate the wedge, and demonstrate theoretically and empirically that the magnitude of the non-convergence equals the expected present discounted value of a function of future wedges.
Genetic modification of crops has revolutionized food production, but it remains controversial du... more Genetic modification of crops has revolutionized food production, but it remains controversial due to food safety and environmental concerns. A recent food safety scare provides a natural experiment on the corn market's willingness to accept unapproved genetically modified organisms. In 2000, a genetically modified corn variety called StarLink was discovered in the food-corn supply, even though it was not approved for human consumption. To estimate the price impact of this event, we develop the relative price of a substitute method, which applies not only to the StarLink event but also to rare events in other markets. We apply this method to measure the price impact of the StarLink contamination on the U.S. corn market. We find that the contamination led to a 7 percent suppression of corn prices that lasted for at least a year.
Uploads
Papers by Aaron Smith