Commodity Price and Income Risk Issues

 In much of the world, and partly due to trade agreement issues, there has been a shift from income support to other means of support for agriculture. These include payments for ecological services provided and also support for crop insurance. This transition was only beginning during the 1990s. The paper

  • Hennessy, D.A. “The Production Effects of Agricultural Income Support Policies Under Uncertainty.” American Journal of Agricultural Economics, 80(February 1998):46-57. Link

was intended to explain how different forms of state-conditional support affect production. Ron Mittelhammer and I tried to publish a development to this paper but with no success. The book

  • Moschini, G., and D.A. Hennessy. "Uncertainty, Risk Aversion, and Risk Management for Agricultural Producers." In Handbook of Agricultural Economics, Bruce L. Gardner and Gordon C. Rausser eds., Elsevier, Amsterdam, Volume 1, 2001, Chapter 2, pp. 88-153. Link

provides a comprehensive review (within the expected utility framework) of risk management for agriculture producers. In,

  • Hennessy, D.A., and H.E. Lapan. “A Definition of ‘More Systematic Risk’ with Some Welfare Implications.” Economica, 70(August, 2003):493-507. Link
  • Hennessy, D.A., and H.E. Lapan. “On the Nature of Certainty Equivalent Functionals.” Journal of Mathematical Economics, 43(December, 2006):1-10. Link

and other papers, the emphasis had shifted to multivariate sources of risk and portfolio choices.

Three papers deal with commodity prices, the planting decision and how the choice environment affects commodity market outcomes. In,

  • Hennessy, D.A., and T.I. Wahl. “The Effects of Decisionmaking on Futures Price Volatility.” American Journal of Agricultural Economics, 78(August 1996):591-603. Link

a LeChatelier principle type argument is employed. Commodity prices should be more volatile after an irreversible decision is made than before, where the planting decision is a very concrete example of an irreversible decision. Arbitrage relations and planting decisions are looked at in,

  • Saak, A.E., and D.A. Hennessy. “Planting Decisions and Uncertain Consumer Acceptance of Genetically Modified Crop Varieties.” American Journal of Agricultural Economics, 84(May, 2002):308-319. Link

where conventional commodities are perfect substitutes for genetically modified commodities but the reverse is not the case. As argued in,

  • Du, X., and D.A. Hennessy. “Planting Real Option in Cash Rent Valuation.” Applied Economics, 44(6, 2012):765-776. Link

the planting decision has a very separate effect on cash rents. Whenever there are very real choices to be made about which crop to plant then cropland cash rents should be higher as a result.

Some work on agricultural contracting and futures contracts -might be viewed from a risk management perspective, as in

  • Hueth, B., and D.A. Hennessy. "Contracts and Risk in Agriculture: Conceptual and Empirical Foundations." In A Comprehensive Assessment of the Role of Risk in U.S. Agriculture, Richard E. Just and Rulon D. Pope eds., Kluwer Academic Publishers, Dordrecht, Netherlands, 2002, Chapter 9, pp. 167-189. Link
  • Hennessy, D.A. “Substitution Between Revenue Futures and Price Futures Contracts.” Journal of Futures Markets, 22(4, 2002):387-391. Link
  • Lien, D., and D.A. Hennessy. “A Note on Price Futures versus Revenue Futures Contracts.” Journal of Futures Markets, 24(May, 2004):503-512. Link

Don Lien and I took a derivatives analysis style ‘follow the cashflow’ approach to risk management dimensions of agricultural contracts in,

  • Hennessy, D.A., and D. Lien. “Ledger Provision in Hog Marketing Contracts.” Agricultural Finance Review, 66(Spring, 2006):77-89. Link
  • Lien, D., and D.A. Hennessy. “Evaluating the Saskatchewan Short-Term Hog Loan Programs.” Canadian Journal of Agricultural Economics, 55(March, 2007):83-96. Link

Current ERS chair’s interests and activities in income support and income risk matters now largely have to do with crop insurance and to a lesser extent with farm exits.