Search

The Russian invasion of Ukraine disrupted the grain flows from that region and worldwide. These changes are critical due to the war’s influence on logistical costs, routes and capacities. As a result of the invasion, Ukraine has evolved from having some of the lowest logistical costs in the world to having the highest logistical cost. Logistics are critical for international competitiveness in commodities, and due to the invasion, these functions have been severely affected. Essential features for a logistical competition include internal logistical functions and costs, quality, port capacity and ocean shipping costs, each compounded by seasonal demands. This paper’s purpose is to analyze the effects of the Russian invasion on the logistical functions and the costs for corn exports from Ukraine and its competitors using an optimized Monte Carlo simulation model. The findings indicate that before the invasion, Ukraine had logistical advantages for shipments to the European Union (EU) and was highly competitive in Indonesia and China; the United States had a logistical cost advantage over Ukraine to serve China, South Korea (from the U.S. Gulf) and Japan (from the Pacific Northwest (PNW)). The changes due to the invasion are substantial. Most important is the radical increase in shipping costs from Ukraine, reduced port capacity and export supplies. However, concurrent with the invasion were changes in some critical trade and marketing policies, thus influencing the international competition for corn.

Recently, the United States - China trade dispute has emphasized the importance of Brazil as a major export competitor in the global soybean market. In this paper, we examine the time series characteristics of United States and Brazilian soybean basis markets for seasonality, changes in mean level, intermarket information flows, and other time series behavior. We specifically examined basis at 31 origins and 2 export locations in the United States and a primary export market in Brazil. The results strongly support the presence of analog seasonality indicating that seasonal patterns vary greatly from year-to-year at all locations. Time series intervention analysis indicates that the United States - China trade dispute had a significant lasting effect on the basis level in the Brazilian market but not in the United States. Granger causality analysis of information flows between the origin and export basis markets prior to and after the announcement of tariffs in the United States - China trade dispute shows a significant dampening effect upon the information flows between the markets following the announcement of tariffs. These results are useful in that they can provide guidance to market practitioners in modeling basis forecasts and also provide useful information regarding the impact of the recent United States – China dispute upon the behavior of these basis markets.

Grain shipping involves many sources of risk and uncertainty. In response to these dynamic challenges faced by shippers, railroad carriers offer various types of forward contracting and allocation instruments. An important feature of the U.S. grain marketing system is that there are now a number of pricing and allocation mechanisms used by most rail carriers. These have evolved since the late 1980’s and have had important changes in their features over time. The operations and impact of these mechanisms are not well understood, yet are frequently the subject of public criticism and studies and at the same time are revered by (some) market participants. These mechanisms serve several important functions that are critical to the grain marketing system. These include allocating capacity across shippers, allocating shipments temporally and seasonally, as well as geographically, and determine the price or value of the service. The purpose of this study is to provide a comprehensive review, description, and analysis of these mechanisms. The specific objectives are to (1) document the evolution and operations of these mechanisms over time and across carriers; and (2) determine and describe the impacts of these practices on basis, both spatially and temporally, and on trading firms and other market participants. Multiple empirical models were developed and used to analyze two important aspects of this problem. One aspect is the role and relationship of the shipping costs on basis values. These results show that basis is more complicated than previously modeled. Export basis are mostly impacted by export competition and imports. In addition, the export basis is simultaneously dependent on the origin basis. Last, there is an important relation among rail velocity, and the secondary car market, which is simultaneously determined with the export basis. Other models examine the impact of these mechanisms on shipper conduct, specifically, how risks and rail mechanisms impact shipper strategies. The last section provides a discussion of summary and conclusions, and of future issues.

Growth in the export marketing of soybeans has drawn attention to the basis volatility in these market channels. Indeed, there has been greater growth in soybean exports compared to other commodities and this is due in part to the growth of exports to China. Concurrently, there has been substantial volatility in the basis at the primary U.S. export locations: the U.S. Gulf and the Pacific Northwest (PNW). This variability is caused by traditional variables affecting the basis but is also influenced by shipping costs, international competition, and inter-port relationships. Further, there seems to be distinct seasonal patterns that vary across marketing years. The purpose of this study is to examine the impact of supply/demand, export competition and logistical variables on both the average level and seasonality of U.S. export basis values for the 2004/05 through 2015/16 marketing years (September through August for U.S. soybeans). This study examines the impact of a wide range of supply, demand, transportation, and other market variables upon both the average level and seasonality (by marketing year) of the basis at the two major U.S. export locations, Gulf and Pacific Northwest (PNW). The explanatory dataset contains more variables (27) than observations (12 marketing years from 1994/95 through 2015/16); therefore, it presents challenges from both a sparsity and a multicollinearity perspective. To address these issues, a statistical regression technique, called partial least squares (PLS) is utilized. This technique has advantages over using principal components regression (PCR) since derivation of the components is directed towards maximizing the covariance between the dependent (Y) and explanatory (X) variable sets rather than just explaining the variance of X. Seasonality is investigated in this study utilizing agglomerative hierarchal clustering (AHC) to group similar marketing years by seasonal pattern called seasonal analogs. These seasonal analogs were then related to the explanatory variable set using a two-sample statistical test (Lebart, Morineau and Piron 2000) that compares the means of a subset and its parent set to explain the impact of the explanatory variables. The results indicate that the average market year level of the basis is primarily influenced by export competition from Brazil and export demand – particularly from China; however, domestic demand (soybean crush) also has some influence. Rail transportation costs to both the Gulf and PNW have an influence on the basis level; however, barge and ocean freight rates appear to not have a significant influence on the level of the basis. Application of AHC resulted in the identification of 5 and 4 distinct analogs (over the 12 marketing years in the dataset) for the Gulf and PNW respectively. Application of the two-sample mean difference tests to the analogs indicate that the seasonal pattern of the export basis is more heavily influenced by internal logistical conditions (late railcar placement and secondary railcar values), pace of farmer marketings, transportation cost differentials (between ports), and individual port export activity (ships in port and export inspections) rather than international and domestic demand.

Genetic editing (GE) offers an additional tool to traditional crop breeding and genetic modification (GM) for developing new traits in agricultural crops. Surveys of leading crop technology companies and a review of the literature indicate that GE may offer considerable economies of scale when compared to GM crop development. These economies are generally attributed to lower R&D costs, higher probability of R&D success (particularly in the initial discovery phase), and the fact that GE crops do not require an extra regulatory approval step (at least in most countries outside the EU) that adds considerable cost and uncertainty to the GM development process. This study examines the economics of GE versus GM crop development from the perspective of the minimum required market size (in terms of potential crop area) of a potential crop in order for the technology firm to expect to break even in terms of the real option value (ROV) of the project. The valuation model is unique in that it combines a decision tree with a binomial lattice in the valuation of an abandonment real option on the new crop technology. The decision tree is used to model the R&D process (which is non-market driven) while the binomial lattice is used to value the market-driven commercialization of the candidate crop variety. A survey of industry experts provided a range of values with regards to the time and cost of each R&D phase for both GE and GM crop development, so stochastic simulation was incorporated into the ROV model. A primary result from the empirical model is that across a wide range of trait values, the required cropping area for breaking even on a GE crop variety was consistently 96.3% less than the area required for a GM crop with the identical trait value and commercialization profile. Sensitivity analysis indicated that the GM (and GE to a lesser extent) required area was highly sensitive to the probability of success in the discovery phase. Somewhat surprising, the results for GM and GE were not sensitive to the abandonment option parameters – an indication that this type of real option adds little value to projects primarily due to the low volatility of returns during the commercialization phase.

This paper analyzes spatial arbitrage and vertical integration of a U.S. soybean-trading firm. A risk-constrained optimization model using Monte Carlo simulation and copula joint distributions is specified. Results show that spatial-arbitrage payoffs vary regionally. Sensitivity results indicate that payoffs and risks increase as firms become more vertically integrated.

Fusarium Head Blight (FHB) has led to major economic losses for wheat and barley producers. Deoxynivalenol (DON) is a mycotoxin associated with FHB. Grain products and feed grain contaminated with DON (commonly known as vomitoxin) are subject to FDA advisory limits and as a result, end-users place restrictions on their use. This has led to steep price discounts, as well as higher risks for producers and grain merchandisers. Varietal research has led to the development of varieties that are resistant to moderately resistant to FHB. Also, studies indicate combinations of genetic resistance, fungicides, and some management practices (combine settings, tillage practices, etc.) can be used to decrease losses due to FHB. These approaches were developed beginning in 1997, with the introduction of the United States Wheat and Barley Scab Initiative (USWBSI). However, the detailed economic impact of the initiative (combined genetic resistance, fungicide uses, and some management practices) are yet to be estimated. The purpose of this study was to estimate the economic impact of reducing FHB on cereal producers, traders and handlers, and processors. To do so we developed a number of economic models, analyzed extensive data, and conducted surveys of wheat flour millers, barley maltsters, and grain handlers. Taken together these procedures allow us to make an assessment of 1) the cost to these industries of FHB; 2) the impact of mitigating strategies on yields and DON levels; 3) the marketing practices of the supply chain; 4) the impact of the Scab Initiative on reducing yield losses; 5) the return on investment of the Scab Initiative; and 6) the secondary impact of the initiative. In general, the results indicate some important findings regarding the Scab Initiative can be deduced from this study. One is that the DON problem has improved. However, it has not been eliminated and remains a temporally and spatially sporadic problem. Second, while there are a number of risk mitigation tools, and all of these prospectively have impacts of reducing the impact of DON, two are particularly important. One is fungicide use, which has increased from virtually nil in the 1990s’ to being applied to 70-80% of the cereals planted. This is substantial, and at a high cost, but, also is effective though not perfect. The second is the development and adoption of resistant varieties. The statistical analysis reported here documents the importance of these, though the effect varies across classes. 1 Funding source for this project was the USDA/ARS SCAB Initiative, and titled Economic Impact of USWBI’s Impact on Reducing FHB. 2 Authorship is shared viii This study estimates the return on investment to the research expenditures of the Scab Initiative which has spent $76 million over its life, including in-kind contributions. For both wheat and barley, the NPV of net savings from reduced production loss ranges from $5.3 - 5.4 billion over the period 1993-2014. For every $1 invested, plus in-kind and fungicide costs, there are $71 in benefits. This is significant and compares very favorably to other studies on agriculture research. The return on investment for expenditures on the Scab Initiative (including in-kind costs) was approximately 34%, which is substantial. DON has a devastating impact on producers and the supply chain. It imposes substantial costs throughout the marketing system and increases risk to all participants. The returns and net savings from funding the Scab Initiative have been substantial and have contributed to reducing the impacts of the disease. There are a number of further challenges and several technologies are showing further prospects toward mitigating these problems.

Contract strategies can resolve some of the challenges that exist for property rights conformance of genetically modified (GM) crops. The purpose of this research is to determine how contract terms impact adoption decisions related to GM grain production and marketing. A simulation model was developed for prospective GM introduction in hard red spring (HRS) wheat, and distributions of net returns for growers were analyzed using stochastic dominance and stochastic efficiency. Results illustrate that contracts can be designed to induce desired behavior. Technology fees, probabilities of detection, and the level of non-GM premiums were the most notable factors influencing adoption decisions. In addition, point-of-delivery pricing and premiums for non-GM production impact adoption decisions.

Changes are evolving that are impacting the U.S. nitrogen fertilizer industry. Changes in crops, increased demand, reductions in natural gas prices, and spatial competition among producers and imports are affecting the nitrogen fertilizer industry. A spatial competition model of the United States fertilizer sector was developed to determine the likely future spatial distribution of production and flows for nitrogen fertilizer. The model minimizes production and shipping costs from plants and imports to demand areas. A base model of 2010-12 was developed and a future case was modeled representative of 2018. The most valuable (lowest cost) origins for US processing are primarily in Louisiana, followed by others states with low natural gas prices. Shadow prices indicate several locations in Wyoming, Iowa, Georgia, Louisiana, Nebraska, Kansas, and North Dakota would be positive. Not all of proposed plants would be viable and if forced to operate at 75% of capacity or more only a few of the new plants including those located in Louisiana, Iowa and North Dakota would be viable.

Numerous genetically modified (GM) traits are currently under development. Those currently being developed for corn include traits for drought tolerance, cold tolerance, and nitrogen use efficiency, among others. The value of these traits is random and sporadic, creating challenges in assessing its ex ante value. This study estimates the ex ante value of a GM trait in corn with random characteristics. A real option model is developed to capture risks and returns associated with the traits, and estimates are derived for drought tolerant corn. Base case results indicate a slight chance that the option value would be out-of-the-money during the discovery phase. In all other phases, the expected value is in-the-money. The results are highly sensitive with respect to trait efficiency and regarding assumptions of randomness in some of the other important variables, particularly trait values.

There has been an increase in support for developing genetic modification (GM) technology in wheat. The purpose of this paper was to develop an analytical model to analyze the value of GM traits at different phases of development. To do so we developed a stochastic binomial model of real options. The results indicate that the value of drought tolerant wheat using GM technology is in-the-money at each phase of development. The greatest value would accrue to the Prairie Gateway and northern Great Plains regions in the United States.

Canola has become an important crop in the last decade in the U.S. Production of canola is risky and competes with other crops which have a range of risk reduction mechanisms. Alternative contracting strategies were evaluated by comparing returns to labor and management for growers and gross margins for processors. Alternative contracting strategies included no contract, fixed price with and without act of god provisions, and an oil premium contract. Grower returns and processor gross margins were simulated and resulting distributions were evaluated using stochastic efficiency with respect to a function. We estimated certainty equivalents and ranked contract preferences for both growers and processors by region in North Dakota. Grower and processor risk preferences varied by region. Producers and processors preferences differed for contract alternatives in the Northwest, Northeast and Eastcentral regions and were in agreement in the Northcentral region. This suggests that development of a single contract that would be widely adopted across the state would likely have to be altered by region to be acceptable to growers and processors.

There are important challenges to the grain handling and shipping industries. The study evaluated changes in marketing costs for the primary grain marketing functions and quantified measures of risk. The results indicate that 1) basis risk has increased; 2) all marketing costs have increased; 3) the increase in rail tariffs were less than those for the other modes; 4) car values, on average declined; 5) FSC’s had moderate changes in absolute terms; 6) handling margins have had fairly substantial increases, particularly at port; and 7) the riskiness in rail shipping costs are less than those of competing modes and functions. The regression model indicated the following variables had significant impacts on origin basis values: shipping costs, ocean rate spreads, outstanding export sales, handling industry concentration, measures of rail cars late, the ratio of supplies to storage capacity, futures prices and spreads (in addition to a few other minor impacts).

The purpose of this paper is to analyze the dynamics of R&D investments, and the structure of the seed distribution sector using novel data sets that have not been used before to describe competition in these industries. The results describe four sets of issues of particular importance. One is that while all agbiotechology firms have increased their R&D expenditures, there have been sharp differences in the scope of this spending. Most important is that this has spawned the growth in what is now referred as “seeds and traits.” Second, a large number of future traits will be commercialized in the coming years. A third set of results indicates that one firm grew its market share by 14% and a portion of this growth has been through acquisition. The other three majors lost market share, but the ISC (independent seed companies) grew by 10%. At the crop reporting district level, the industry concentration ratios for the four largest firms (CR4) in most regions are .5‐.7. Finally, farmers purchased corn and soybean seed from 4‐7 different companies in most crop reporting districts (CRD) and up to 20 or more companies in the larger producing regions.

One of the impacts of higher prices along with greater volatility in futures, basis and spreads is that there is pressure for greater use of cash contracts for grain. There is a wide array of cash contracts with varying terms that pose major strategic alternatives for buyers and the marketing system, particularly as buyers seek to use contracting as an element of risk mitigation. Durum is a crop where many of these issues and challenges are apparent. Durum is more risky than competing crops with greater price, yield and quality risk. And in contrast to competing crops, futures do not exist, cross hedging is poor and forward contracting has been used minimally. There are three purposes of this article: Provide a survey of contract terms used in grain contracting with growers, illustrate some issues in contracting of some of the specialty grains (durum) in the upper Midwest, and develop a model to analyze alternative contracting strategies in the case of durum. We introduce alternative pricing features, and explore other alternatives and analyze them in terms of risk and return to growers.

One of the impacts of higher prices along with greater volatility in futures, basis and spreads is that there is pressure for greater use of cash contracts for grain. Indeed there has been growth in contracting for a number of competing crops in recent years. There is a wide array of cash contracts with varying terms that pose major strategic alternatives for buyers and the marketing system, particularly as buyers seek to use contracting as an element of risk mitigation. Durum is a crop where many of these issues and challenges are apparent. Durum is more risky than competing crops. There is greater price and yield risk as well as quality risk, and in contrast to competing crops, futures do not exist, cross hedging is poor and forward contracting has been used minimally. There are three purposes of this paper : First, we provide a survey of contract terms used in grain contracting with growers. Second, we illustrate some issues in contracting of some of the specialty grains (durum) in the upper Midwest. Finally, we develop a model to analyze alternative contracting strategies in the case of durum. We introduce alternative pricing features, as well as explore other alternatives and analyze them in terms of risk and return to growers.

One of the impacts of higher prices along with greater volatility in futures and basis is that there is pressure for an escalation in cash contracting for grain. This volatility has resulted in an unprecedented level of contracting with growers in recent years. There is a wide array of cash contracts with varying terms. There is also a growing realization of growers not delivering on contracts, in part due to escalation in postcontract prices. These are evolving as major strategic issues for buyers and the marketing system, particularly as buyers seek to use such contracting strategies as an element of risk mitigation. There are three purposes of this article. First is to provide a broad survey of contract terms used in grain contracting with growers. Second, we illustrate some issues in contracting of some of the grains (durum, malting barley) in the upper Midwest. Third, we show some of the common contract clauses being adapted in these contracts. Finally, we summarize these issues with respect to industry implications.

Wheat protein is one of the most important specifications used in domestic and import purchase contracts and is used partly as a proxy for functional quality. The purpose of this article is to analyse the demand for wheat delineated by protein class. A choice-based econometric model is specified and estimated using a novel dataset of pooled wheat shipments to individual importing countries. Buyers are importing countries that make purchase decisions among different protein levels. The model frames the choice in terms of attributes of the choice and of the importing countries. Results indicate that there have been shifts over time, and purchase probabilities are highly price elastic and vary across importing regions. Functional characteristics including wet gluten content and extraction rates have significant impacts on purchase probabilities. These results have implications for breeders as it clearly illustrates the role of protein and functional characteristics on demand. The results also have implications for analysts modelling wheat trade in that there are many factors impacting market segments that would not be captured in conventional demand specifications.

Commercialization of genetically modified (GM) traits leads to interesting strategic questions for agbiotechnology and seed firms. The purpose of the study is to evaluate equilibrium strategies of agbiotechnology and seed firms regarding commercialization of GM traits. Two game theory models were developed to examine equilibrium strategies. In the first, both agbiotechnology firms have commercialization strategies of licensing or not. In the second, the agbiotechnology firm also has the strategic option to purchase a seed form as a commercialization strategy. Results indicate that the equilibrium strategy would be for each of the agbiotechnology firms to license their traits, and the seed firm would release a stacked trait. However, order of play matters and impacts the equilibrium. Finally, in the second game, the equilibrium is for the agbiotechnology company to purchase a seed firm. Each of these decisions is highly strategic and reflects the current strategic challenges in the agbiotechnology industry.

Consistency of functional characteristics in wheat is a concern confronting buyers and sellers. This research analyzes the cost and risk of different procurement strategies for importers. A stochastic simulation model is used to determine the probability of functional characteristics being satisfied subject to quality targets and costs for alternative purchase strategies. Stochastic efficiency was employed to identify purchase strategies that dominate others and to determine the extent of preference. As more specific characteristics are incorporated into a contract, results indicate that the probabilities of meeting end-use requirements increase

Consistency of functional characteristics in wheat is a concern confronting buyers and sellers. This research analyzes the cost and risk of different procurement strategies for importers. A stochastic simulation model is used to determine the probability of a functional characteristic being satisfied subject to quality targets and costs for alternative purchase strategies (purchase by protein only, variety, location, variety by location, or functional tests). Joint probabilities of meeting specifications and costs were determined for the alternative purchase strategies. Stochastic dominance was used to determine which purchase strategies dominate others, and stochastic efficiency was utilized to determine the degree of preference. Results indicate that, as more specific characteristics are incorporated into a contract, the probabilities of meeting end-use requirements increase. Requirements of specific characteristics come with a higher cost, due to increased testing costs related to identity preservation. Risk premiums for alternative strategies were derived.

Malt barley is an important specialty crop in the Northern Plains and growers mitigate risk with federally subsidized crop insurance and production contracts. However, growers face considerable risk due to "coverage gaps" in crop insurance that result in uncertain indemnity payments due to uncertainty of their crop meeting contract specifications. A stochastic dominance model is developed to evaluate alternative risk efficient strategies for growers with differing risk attitudes and production practices (irrigation vs. dryland). Results show that efficient choices are highly dependent on risk attitudes for dryland growers, but not irrigated growers. Sensitivities with respect to acceptance risk and level of crop insurance subsidization are presented. Increased specialization of agricultural crops with greater emphasis on quality characteristics will limit dryland producer interest in federal crop insurance.

Release of a genetically modified (GM) crop variety would lower prices of competing pesticides used on conventional varieties. This causes an increase in surplus for those farmers who adopt the GM variety, as well as for those who plant the conventional variety. A Cournot model was developed to determine the equilibrium quantities of conventional pesticides. A market with conventional wheat was compared to a market with both conventional and GM wheat varieties to identify price decreases of the conventional pesticide as a result of the GM trait introduction.

Development of genetically modified (GM) and specialty crops has had a great impact on the grain handling industry during recent years. Added costs associated with handling these crops have become an important issue for grain handlers. For this study, data were collected from a survey of elevators in the Upper Midwest. The information focused on segregation practices, time requirements, and costs. This study shows the different costs (grading and handling) associated with segregation practices at the grain-handler level. The results revealed that the cost of modifying systems to handle GM is of major importance. A stochastic simulation model of an engineering cost function is developed to analyze costs for segregation and testing using results from the survey. Assuming no modification is required, the total cost of segregation is about 10 cents per bushel. The volume of grain tested also impacts the total segregation cost per bushel. Finally, the gross elevator margin and the premium for quality seem to be large enough to offset the increase in handling costs due to these new segregation practices.

In hard red spring (HRS) wheat, the two GM traits nearest to commercialization are fusarium resistant wheat (FRW) from Syngenta and Roundup Ready® wheat (RRW). Monsanto announced that it has deferred the commercialization of RRW until issues of market acceptance are alleviated. Monsanto acknowledged that it might reconsider its position if another agbiotechnology firm enters the GM wheat market. A Cournot quantity competition model was developed to determine the equilibrium quantities of conventional pesticide and agbiotechnology firms. The Cournot model was used because firms that must make production decisions ahead of the selling period, and firms with extensive research and development costs are not able to aggressively set prices. Rather, the conventional and agbiotechnology firms determine Nash equilibrium quantities and then determine a market clearing price for their respective products. The agbiotechnology firm determined a profit maximizing technology fee ($/acre) for its GM trait. The market with conventional wheat only was compared to the market with conventional and GM wheat varieties to determine the price decreases of the conventional pesticide as a result of the GM trait introduction. Changes in farmer surplus, tech firm payoffs, and sector welfare were also analyzed. Using the actual number of firms with conventional herbicides labeled for use on HRS wheat in North Dakota and marginal production costs ranging from one to three dollars, introduction of RRW would cause a 20-25% price decrease for conventional herbicides. Similarly, four firms produce conventional fungicides labeled for the suppression of FHB in HRS wheat. This value, combined with per acre marginal production costs ranging from one to three dollars, would likely cause a 19-22% price decrease for conventional fungicides, post introduction of GM FRW. Several implications arise from these results. First, adoption of a new GM wheat variety may not be as high as expected due to likely concurrent price decreases of conventional pesticides. The price decrease leads to a lower production cost of conventional varieties, and some farmers who would likely adopt the GM variety, if there were no price decrease, do not adopt because of the lower cost of conventional production. This price decrease must be included in the determination of potential adoption rates by agbiotechnology firms in their pricing decisions. Second, the release of a GM wheat variety results in an increase in surplus for all types of wheat farmers (GM adopters, conventional pesticide adopters, and no technology adopters). GM adopters benefit because of the release of the GM variety. Conventional pesticide adopters benefit due to the price decreases of the conventional pesticides. Farmers who did not adopt any technology prior to the release of GM wheat may adopt the conventional pesticide because of the lower cost. Third, the release of a GM wheat variety would result in slightly lower payoffs for conventional pesticide producing firms but higher payoffs for agbiotechnology firms. Overall, surplus to farmers and conventional and agbiotechnology firms increases due to the release of a GM wheat variety.

Stochastic simulation was used to determine the marginal cost and optimal testing strategy (location and intensity) for an integrator conforming to proposed European Union traceability requirements for imported hard red spring wheat. Cost, risks and premiums were determined for exports of non-genetically modified (non-GM) wheat from the U.S. to the EU. Cost components include certified seed, certification and auditing, testing, traceability, quality loss, and a risk premium for the added risk of a dual traceability system over a single non-traceability system. The optimal strategy is the one that maximizes the integrator's utility (minimizes disutility of integrator's additional costs). Adventitious commingling is defined stochastically. Results indicate that traceability requirements can be met with specified buyer and seller risk at a total cost of approximately 50 c/non-GM bushel. The risk premium for traceability along the vertically-integrated supply chain (farmer, integrator, and importer) is 21 c/non-GM bushel.

Wheat protein is one of the most important specifications used in domestic and import purchase contracts. It is used as a proxy for functional quality that is important in domestic markets and to importers. Large differences exist in functional characteristics amongst wheat that vary by protein level and class. The purpose of this paper is to analyze the demand for wheat protein across importing countries and through time. A choice based econometric model is specified and estimated using a pooled data set of wheat shipments. Results indicate that there have been shifts over time, purchase probabilities are highly price elastic and vary across importing regions. In addition, income, traded goods, urbanization, females in the work force, and domestic wheat production all impact purchase probabilities. Finally, wet gluten content and extraction rates have significant impacts on purchase probabilities.

The prospective commercialization of GM traits leads to several strategic questions for agbiotechnology and seed firms. Important issues addressed in this study include the method of trait commercialization by agbiotechnology firms and variety production decisions by seed firms. Specifically, agbiotechnology firms must decide whether to license their traits to seed firms, to purchase a seed firm, or to not license or release their traits. These issues are highly strategic. The purpose of this study was to determine equilibrium strategies of agbiotechnology and seed firms regarding the prospective commercialization of two GM traits. Two game theory models were developed to examine equilibrium strategies in two different scenarios. In the first model, both agbiotechnology firms had commercialization strategies of licensing and not licensing. In the second model, the first moving agbiotechnology firm was allowed to have a strategic option to purchase a seed firm as a commercialization strategy. The second agbiotechnology firm remained with two strategies, licensing and not licensing. These models were applied to the case of Roundup Ready® (RR) and fusarium resistant (FR) HRS wheat, although the general structure of the models could be used to analyze other crops and traits. Studies on trait commercialization and stacking are lacking the public literature. This study uses game theory models to develop likely situations that may occur regarding the prospective commercialization of GM traits.

In hard red spring (HRS) wheat, the two GM traits nearest to commercialization are fusarium resistant wheat (FRW) from Syngenta and Roundup Ready® wheat (RRW). Monsanto announced that it has deferred the commercialization of RRW until issues of market acceptance are alleviated. Monsanto acknowledged that it might reconsider its position if another agbiotechnology firm enters the GM wheat market. A Cournot quantity competition model was developed to determine the equilibrium quantities of conventional pesticide and agbiotechnology firms. The Cournot model was used because firms that must make production decisions ahead of the selling period, and firms with extensive research and development costs are not able to aggressively set prices. Rather, the conventional and agbiotechnology firms determine Nash equilibrium quantities and then determine a market clearing price for their respective products. The agbiotechnology firm determined a profit maximizing technology fee ($/acre) for its GM trait. The market with conventional wheat only was compared to the market with conventional and GM wheat varieties to determine the price decreases of the conventional pesticide as a result of the GM trait introduction. Changes in farmer surplus, tech firm payoffs, and sector welfare were also analyzed. Using the actual number of firms with conventional herbicides labeled for use on HRS wheat in North Dakota and marginal production costs ranging from one to three dollars, introduction of RRW would cause a 20-25% price decrease for conventional herbicides. Similarly, four firms produce conventional fungicides labeled for the suppression of FHB in HRS wheat. This value, combined with per acre marginal production costs ranging from one to three dollars, would likely cause a 19-22% price decrease for conventional fungicides, post introduction of GM FRW. Several implications arise from these results. First, adoption of a new GM wheat variety may not be as high as expected due to likely concurrent price decreases of conventional pesticides. The price decrease leads to a lower production cost of conventional varieties, and some farmers who would likely adopt the GM variety, if there were no price decrease, do not adopt because of the lower cost of conventional production. This price decrease must be included in the determination of potential adoption rates by agbiotechnology firms in their pricing decisions. Second, the release of a GM wheat variety results in an increase in surplus for all types of wheat farmers (GM adopters, conventional pesticide adopters, and no technology adopters). GM adopters benefit because of the release of the GM variety. Conventional pesticide adopters benefit due to the price decreases of the conventional pesticides. Farmers who did not adopt any technology prior to the release of GM wheat may adopt the conventional pesticide because of the lower cost. Third, the release of a GM wheat variety would result in slightly lower payoffs for conventional pesticide producing firms but higher payoffs for agbiotechnology firms. Overall, surplus to farmers and conventional and agbiotechnology firms increases due to the release of a GM wheat variety.

Roundup Ready® Wheat (RRW) was one of the first genetically modified (GM) traits for the wheat sector and was under review by regulatory agencies in the United States and Canada when Monsanto withdrew it from further consideration. There are a multitude of issues associated with the ex ante evaluation of this decision. These include market acceptance and segregation, as well as the varying sources of cost savings and productivity gains. In this article, we develop a spatial partial equilibrium model of the higher-protein hard wheat market and assess the changes in the distribution of welfare associated with release and adoption of RRW. It incorporates segments for GM aversion in each market and segregation costs for each segment. Major conclusions indicate that in the most likely scenario, producer welfare increases by $301 million and consumer welfare increases by $252 million. Producers of hard red spring (HRS) wheat in the United States and Canada win, while hard red winter (HRW) wheat growers lose.

Roundup Ready® Wheat (RRW) was one of the first genetically modified (GM) traits for the wheat sector and was under review by regulatory agencies in the United States and Canada when Monsanto withdrew it from further consideration. There are a multitude of issues associated with the ex ante evaluation of this decision. These include market acceptance and segregation, as well as the varying sources of cost savings and productivity gains. In this article, we develop a spatial partial equilibrium model of the higher-protein hard wheat market and assess the changes in the distribution of welfare associated with release and adoption of RRW. It incorporates segments for GM aversion in each market and segregation costs for each segment. Major conclusions indicate that in the most likely scenario, producer welfare increases by $301 million and consumer welfare increases by $252 million. Producers of hard red spring (HRS) wheat in the United States and Canada win, while hard red winter (HRW) wheat growers lose.

Consistency of functional characteristics in hard red spring (HRS) wheat is a concern confronting sellers and buyers. This research analyzes contract incentives for importers with respect to cost and potential risk of acceptance. A principal-agent framework is utilized to examine contract incentives. In the principal-agent contract, the principal offers the contract, the agent rejects or accepts the contract, and then decides how much effort to apply. All this is subject to risk for the agent and moral hazard for the principal. An example is presented, for which equilibrium contract terms are a base price of 454 cents per bushel for low quality wheat and a premium of 36 cents per bushel if high quality is achieved. The premium for high quality is unchanged as the agent's outside option increases, but increases as the probability of conformance with high effort declines or as the agent's cost of high effort increases. Small changes in several of the parameter values (agent's outside option, agent's cost of high/low effort, principal value for high/low effort, and principal's outside options if the contract was not extended or if the agent rejects the contract) result in the principal not offering a contract.

A number of challenges exist for genetically modified (GM) crop development at the production level. Contract strategies can resolve these challenges. Contracts can be designed to induce legal adoption of GM wheat by varying technology fees, violation detection, and penalties. The primary objective of this research is to analyze contracting strategies to determine terms to minimize technology agreement violation and to induce legal adoption of GM wheat. A simulation model of a crop budget for Hard Red Spring wheat was developed. Results illustrate that contracts can be designed to induce desired behavior. Technology fee, probability of detection, and the level of non-GM premium were the most notable factors influencing adoption decisions.

Fusarium Head Blight (FHB), commonly known as scab, has been a severe problem for wheat and barley producers since 1993. This study provides an update of economic losses suffered by wheat and barley producers in scab-affected regions in the United States. Emphasis is placed on estimating direct and secondary economic impacts of yield and price losses suffered by wheat and barley producers from 1993 to 2001. Nine states are included in the analysis for three wheat classes. Three of the nine states were also used for the analysis of malting and feed barley. The cumulative direct economic losses from FHB in hard red spring (HRS) wheat, soft red winter (SRW) wheat, durum wheat, and barley are estimated at $2.492 billion from 1993 through 2001. The combined direct and secondary economic losses for all the crops were estimated at $7.7 billion. Two states, North Dakota and Minnesota, account for about 68 percent of the total dollar losses.

A number of challenges exist for genetically modified (GM) crop development at the production level. Contract strategies can resolve some of these challenges. Contracts can be designed to induce legal adoption of GM crops by varying technology fees, violation detection, and penalties. The objective of this research is to analyze contracting strategies to determine terms to induce legal adoption of GM wheat and to minimize technology agreement violations. A simulation model of the prospective introduction of GM technology into hard red spring wheat was developed. Results illustrate that contracts can be designed to induce desired behavior. Technology fees, probability of detection, and the level of non-GM premium were the most notable factors influencing adoption decisions.

Consistency of functional characteristics in hard red spring (HRS) wheat is a concern confronting sellers and buyers. This research analyzes contract incentives for importers with respect to cost and potential risk of acceptance. A principal-agent framework is utilized to examine contract incentives. In the principal-agent contract, the principal offers the contract, the agent rejects or accepts the contract, and then decides how much effort to apply. All this is subject to risk for the agent and moral hazard for the principal. An example is presented, for which equilibrium contract terms are a base price of 454 cents per bushel for low quality wheat and a premium of 36 cents per bushel if high quality is achieved. The premium for high quality is unchanged as the agent's outside option increases, but increases as the probability of conformance with high effort declines or as the agent's cost of high effort increases. Small changes in several of the parameter values (agent's outside option, agent's cost of high/low effort, principal value for high/low effort, and principal's outside options if the contract was not extended or if the agent rejects the contract) result in the principal not offering a contract.

Questions have emerged in the United States and Canada regarding the role and function of quality in international markets. One has been the definition and composition of different market segments, with a particular focus on higher quality customers. In this study, trends in U.S. wheat exports are analyzed by class, grade, protein, and market segment. Analysis shows trends toward increases in exports of higher grades of Hard Amber Durum (HAD) and Hard Red Spring (HRS); whereas, exports of higher quality grades for Hard Red Winter (HRW) appear to be moderate. Exports of HRS, HRW, and HAD show increases in proportion of exports shipped at higher protein levels and increases in the proportion of exports where protein is specified. Cluster analysis for each class indicated there have been changes through time including: dockage levels for the highest quality segments declined, the percent of shipments specifying protein increased, and there is a shift toward more market segments. Shares of export volumes for the highest quality segments for both HAD and HRS more than doubled their share of export volume from 7% to 21% for HAD and 18% to 42% for HRS, while shares for the high quality segment for HRW were similar in size to earlier periods, although two moderate quality segments did emerge that were not present in earlier periods.

Genetically modified (GM) grains have increased in importance. Moving biotech grains from producers to processors is a challenge for the grain handling system that could involve increased segregations. The objective of this research is to determine how testing strategies affect the logistical costs of a grain pipeline when GM wheat is present. A logistical model was developed and simulated to analyze impacts of uncertainty in demand, receipts, test accuracy, rail deliveries, and transit time. Sensitivities were conducted on certain variables to determine their effects on logistical costs. Analysis revealed that logistical costs are impacted by the number of quality categories and uncertainties in the system. Adding GM grains increased costs due to testing requirements and increased segregation demands as the number of wheat categories rises.

Consistency of functional characteristics in wheat is a concern confronting buyers and sellers. This research analyzes the cost and risk of different procurement strategies for importers. A stochastic simulation model is used to determine the probability of a functional characteristic being satisfied subject to quality targets. Joint probabilities of meeting specifications and costs were determined for alternative functional characteristics. Results indicate that, as more specific characteristics are incorporated into a contract, the probabilities of meeting end-use requirements increase. Specific characteristics come with a higher cost, due to increased testing costs related to identity preservation. The results are summarized as cost/risk tradeoffs confronting buyers in wheat procurement.

Variety development and release decisions involve tradeoffs between yields and characteristics valued by end-users, as well as uncertainties about agronomic, quality, and economic variables. In this study, methods are developed to determine the value of varieties to growers and end-users including the effects of variability in economic, agronomic, and quality variables. The application is to hard red spring (HRS) wheat, a class of wheat for which these tradeoffs and risks are particularly apparent. Results indicate two experimental varieties provide improvements in grower and end-user value, relative to incumbents. Stochastic dominance techniques and statistical tests are applied to determine efficient sets and robustness of the results. A risk-adjusted portfolio model, which simultaneously incorporates correlations between grower and end-use characteristics, is also developed to compare the portfolio value of varieties.

Special segregations that provide unique qualities for end use products are being specified by buyers. As users of wheat become more specific about quality, the number of quality segregations that the logistical pipeline must accommodate increases. The additional cost of increased grain segregations will influence the optimal level of wheat variety segregations marketed in a supply chain. The primary objective of this research is to develop a model that captures the logistical costs of increased grain segregations in the marketing system. A simulation model was developed to add logistical uncertainty in demand, receipts, rail deliveries, and transit time. Sensitivities were conducted on certain variables to determine their effects on logistical costs. Logistical costs increase as more segregations are added. In addition, increasing uncertainty into the system raises logistical costs. Pipeline configuration also affects costs as the number of categories/storage bins present at origin may differ from the wheat categories demanded or the number of storage bins present at the export elevator.

A stochastic optimization model was developed to determine optimal testing strategies, costs, and risks of a dual marketing system. The model chooses the testing strategy (application, intensity, and tolerance) that maximizes utility (minimizes disutility) of additional system costs due to testing and quality loss and allows simulation of the risk premium required to induce grain handlers to undertake a dual marketing system versus a Non-GM system. Cost elements including those related to testing, quality loss, and a risk premium were estimated for a model representing a grain export chain. Uncertainties were incorporated and include test accuracy, risk of adventitious commingling throughout, and variety declaration. Sensitivities were performed for effects of variety risks, penalty differentials, re-elevation discounts, import tolerances, variety declaration, risk aversion, GM adoption, and domestic end-user.

Development of genetically modified (GM) wheat varieties is proceeding; however, several critical issues remain the focus of contention. This project summarizes the current state of knowledge on some of these critical issues for commercialization of GM wheats. Background on the evolution of GM Wheats is presented. Then, agronomic adoption and competitiveness of GM crops; research on GM traits in wheat; consumer acceptance of GM crops (a separate section is included on issues related to consumer acceptance of GM crops); regulatory issues and status; international trade; testing, segregation, and identity preservation; and production and marketing risks are examined. Finally, there is a description of the likely marketing system to evolve and a discussion of outstanding issues.

U.S. white corn production, consumption, and exports increased from 1980 to 1999/00 and production and area have since declined. White corn is produced largely in Nebraska, Kentucky, and Texas, although production in Texas has declined and has increased in other states (Illinois, Indiana, and Iowa). Major domestic processors of white corn are located in the southern United States, with the closest large domestic processor located in St. Joseph, MO. Comparisons of white and yellow corn varieties suggest yields are similar, but have a wide range of variability. Net returns for white corn are most affected by white corn premiums and yield differences relative to yellow corn in southeastern and south central North Dakota. A 10 percent yield advantage for white corn over yellow corn or increases in the white corn premium from 10 cents/bu to 30 cents/bu would increase net returns to labor by $10/a in southeastern North Dakota. Effects of increases in yield advantages or white corn premiums have larger impacts in Nebraska than in North Dakota. Estimated net local prices for North Dakota were 22-25 cents/bu higher for shipment to the Pacific Northwest (PNW) export market than for shipment to domestic markets. This dominance of the PNW market for exports of either white or yellow corn from North Dakota and cost disadvantages relative to production from Nebraska makes serving the domestic processing market not so attractive. Results would change if: 1) a local processor or domestic market were to arise which was not at a disadvantage to being supplied from other areas; 2) premiums for white corn over yellow corn were to increase for a sustained period of time; 3) yield advantages of white corn varieties relative to yellow corn varieties increase; or 4) an export market which was not disadvantaged relative to being supplied from other regions were to emerge.

This study examined moisture specification practices in the United States and for major exporters and assessed impacts of changes to a nil or constant moisture basis on prices and revenue. These were examined under scenarios where information on moisture in current prices is limited and under a scenario where current prices reflect Full Knowledge of moisture advantages. Results indicate that changing to a nil moisture basis (which requires a subsequent adjustment in volumes to reflect the subtraction of moisture) would increase reported prices from 42 to 70 c/bu for the wheat classes, while changing to a 12 percent constant moisture basis would have limited impacts on reported prices. Effects on relative prices/revenue depend on whether knowledge of moisture advantages are reflected in current prices. If current prices reflect moisture advantages (Full Knowledge), then relative effects on prices/revenues are minimal. If current prices do not reflect moisture advantages (Limited Knowledge), then prices/revenue in drier production regions would increase.

Managing quality risks, especially grain quality, has been a challenge facing farmers, grain merchandisers, and policymakers for many years. With the advent of genetically modified organisms (GMOs), food safety, and identity preservation, this is even more challenging today. In this paper, an equilibrium crop insurance model was developed and used to analyze the impact of quality risks on equilibrium coverage levels and risk premiums that suppliers of insurance and barley producers would be willing to provide when yield and revenue insurance instruments explicitly incorporate quality risks. The asking price concept and sensitivity analysis were used to evaluate farmers' behavior after they purchase crop quality insurance and to provide guidance and direction in the development of risk-efficient quality insurance instruments.