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There has been massive investment in agricultural assets including farmland, handling and trading, technology, fertilizer, and others. Studies about investing in farmlands have been extensive, but have limited focus on investing IN non-farmland agricultural assets. This paper analyzes the role of farmland and other agricultural investments in class-specific portfolios. We use the Copula-VaR and Copula-VaR with restrictions methods to find, compare, and contrast the optimal portfolio compositions among US farmlands, classified agricultural equities, and grain futures. The results illustrate that farmland is attractive as an investment. However, as risk tolerance is increased, a shift to other agricultural assets would potentially bring higher returns.

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.

The basis values for hard red spring wheat (HRS) have escalated radically, experienced extraordinary levels of volatility (risk), have been subject to a squeeze during 2008, and all these have important implications for market participants. These observations are particularly important to marketers in the Northern Great Plains in the United States, as well as for Canadian marketers. The purpose of this paper is to develop a model to explore the dynamic relationships and interdependencies among terminal market basis values for milling quality higher-protein wheat. Specifically, we seek to identify factors impacting basis values for 13, 14, and 15% protein HRS wheat in addition to the intermakret wheat spread between Minneapolis and Kansas City wheat futures. We specify a vector autoregression (VAR) model to explore these relationships. Exogenous structural variables are specified in addition to dynamic inter-relationships including seasonal variability, inter-temporal variability and dynamic interdependencies among these markets and relationships. The results of interest are that: 1) basis values for these wheat markets been trending up, and have become more volatile; 2) factors impacting this variability is primarily the protein level in HRS, and production of HRW and Canadian (on high protein basis); 3) HRW protein supplies are not significant in the basis equations, but, do have an impact on the interrmarket wheat futures spread; 4) Quality levels.

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.

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.

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).

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 for specific purchases in recent years. There is a wide array of cash contracts with varying terms. Beyond that array, there is also a growing realization of growers not delivering on contracts, in part due to escalation in post-contract prices. This realization is evolving as a major strategic issue 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. An emphasis of these terms relates to options and mechanisms used to entice performance. 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.

The Transpacific trade in container between Northeast Asia and North America is one of the world’s highest volume arterial trade lanes. In comparison with Transpacific trade route, the Transatlantic trade route between Europe and North America is small and has been growing slow. Import container movement in these international trade lanes are the primary sources of United States container import activity. Container movements are heavily concentrated at a number of major gateways. The high concentration affects traffic and congestion at seaport as well as associated major transportation corridors. Concerns over potential long term congestion and large-ship draft restrictions have led shippers to seek alternatives. The all water routing through the Panama Canal to the East Coast is expected to grow to avoid potential congestion at West Coast. Canadian container ports are being developed and provide congestion free service and an interesting option for importers to reach U.S. markets. This paper analyzes the supply chain network with primary focus on import container to United States. An optimization model that integrates international trade and U.S. inland transport networks is developed. The supply chain channels include container import from Northeast Asia through the West Coast to U.S. inland markets of U.S. (defined by Business Economic Area), to East Coast of United States. via the Panama Canal, and European imports to U.S. markets through Gulf and East Coast. This study accounts for container imports to U.S. markets through existing and newly opened container ports in Canada. The model includes capacity restrictions at ports as well as capacities on the inland transport networks. The estimated container traffic flows are reflective of current traffic flows. Heavily concentrated corridors are indentified. Sensitivity analysis was performed to evaluate impacts of congestion on capacity constraints. The optimization model presents a framework for capturing impacts on the supply chain network due to underlying cost structure changes and potential infrastructure constraints.

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.

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.

Ethanol is one of the fastest growing industries in the U.S. agricultural sector. This study estimates factors that impact location decisions by new ethanol plants using logistic regression analysis and spatial correlation techniques. The results indicate that location decisions are impacted by the agricultural characteristics of a county, competition, and state-level subsidies. Spatial competition is particularly important. Existence of a competing ethanol plant reduces the likelihood of making a positive location decision and this impact decreases with distance. Finally, state-level subsidies were significant and a very important variable impacting ethanol location decisions.

The costs of delays for shipping commodities on the Mississippi River are important and adversely impact growth in shipments. Lock and dam expansion requires substantial capital investment and an extended time period to complete. This study analyzes delay costs and the competitive position of grain shipments on the Mississippi River system. A spatial optimization model of the world grain trade was developed. Results indicated that without expansion in barge capacity, delay costs in 2020 would increase on each reach, with some up to $1.08/mt. Expansion results in reduced delay costs. Barge demand is also impacted by rail capacity. Finally, expanding the locks would result in a re-allocation of shipments among modes, reaches, and ports, notwithstanding minor adjustments in production.

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.

The purpose of this study was to forecast grain and oilseed shipments through the Mississippi River system and to analyze impacts of delay costs. The focus is on the world grain trade and expected changes in response to a multitude of evolving competitive pressures and structural changes. The model is a spatial optimization model of the world grain trade. Important parameters are forecasted and used to evaluate changes in flows through specific logistical channels. Projected import demands are based on consumption functions estimated using income and population and accounting for intercountry differences in consumption dependent on economic development. Each of the competing supply regions and countries were represented by yields, area potential that could be used in production of each grain, costs of production, and interior shipping costs, where relevant. Crucial in this model is the interior spatial competition between the U.S. Pacific Northwest and shipments through the U.S. Gulf, as well as inter-reach competition. Delay costs are the additional costs associated with shipping on the barge system and result from queuing and the added costs for shipments that are delayed. These are an important feature of barge shipping, particularly when shipment volumes are greater. In several of the reaches, grain flows are near the point at which positive delay costs are accrued. At higher volumes, delay costs escalate and ultimately become nearly vertical. The latter is an indicator of capacity, i.e., the level of volume at which the delay costs become perfectly inelastic. The results suggest exports from the United States increase from the base period to 2010, in part due to the assumption that the maximum area for plantings would increase and in part due to the fact that China�s corn exports are assumed nil in 2010 and beyond. U.S. corn exports decline the most, with a potential peak of 62 mmt to around 42 mmt. Wheat exports decline substantially, but soybeans increase through 2030. Exports from the United States are concentrated in the U.S. Gulf, which declines to 57 mmt after reaching a peak of 92 mmt in 2010. Exports from the Pacific Northwest (PNW) are 25 mmt in the base year and decline in later years. The results illustrate that the United States remains an important exporter of soybeans and this conclusion persists in other scenarios. Expansion would result in reduced delay costs on each or Reaches 1, 2, and 4 by about $0.44/mt, $1.04/mt, and $1.01/mt, respectively. Expanding lock capacity reduces delay costs, increases capacity and shipments by barge. Barge shipments increase by about +4 mmt by 2020. Thereafter, the change in barge shipments would be about +0.9 mmt to +2.5 mmt. There is substantive inter-reach competition and by 2020 shipments on Reach 1, 2, and 4 increase, but shipments on Reach 5 and 6 would decrease. Delay costs, in aggregate, are comprised of the lower delay costs that would occur at current capacity, plus the volume effect. The impact of expansions on delay costs are in the area of $61 million, inclusive of both direct effects. Most of this is accrued on Reach 4, followed by Reach 2 and 1. Expansion results in an increase in barge costs due to the increase in volume, a decrease in rail shipping costs, and a slight increase in ocean shipping costs. In total, the impact of expanding locks is a decrease in costs by about $52 million. The base case assumed Energy Information Administration (EIA 2005) projections of corn use in ethanol demand. The model was revised assuming the EIA (2006) estimates of ethanol produced from corn. Results are drastic. Exports from Argentina, Europe, and Eastern Europe increase and wheat exports from Australia increase and exports from the United States decline. Gulf exports decrease (65 to 51 mmt) and PNW changes only slightly to 14 mmt. Most of the decline is in corn and wheat shipments. In addition, there are major changes in flows within the United States. Most interesting is the increase in shipments to the Eastern and Western Corn Belts, reflecting the increase in domestic demand for ethanol use. Also interesting are the changes in flows from the Northern Plains which had previously exported most of its corn through the PNW. These are now shifted with a significant portion destined for domestic movements. The model was run assuming more stylized assumptions for some critical variables, mostly impacting the ability of corn production to expand to meet these competing demands. The results suggest the model is fairly robust in capturing these different assumptions. Most striking in making these comparisons are: 1) corn exports from the United States increase; 2) soybean exports from the United States decline to 28 mmt vs. 36 mmt for the 2010 case; and 3) wheat exports increase from each of the competitors and those from the United States decline, but by not as much as in our unrestricted high-ethanol case. There are important reasons for these differences. Most important are assumptions about the yield growth, the ability to expand corn acres, and differing assumptions on soybean production and exports from the United States vs. competitor countries.

The biodiesel industry in the United States has grown significantly in recent years. Production increased from 25 million gallons in 2004 to an estimated 250 million gallons in 2006, and many new plants are being built. Most biodiesel in the United States is produced from soybean oil, but canola offers characteristics which make it a favorable feedstock for biodiesel production. Characteristics of canola oil also make it an increasingly popular choice for human consumption. This study examines the structure of the biodiesel and canola industries. Specifically, the study describes changes in the biodiesel industry, trends in canola production in the United States and Canada, profitability and production risk for canola, the characteristics of canola oil for both human consumption and biodiesel production, the profitability of biodiesel production, and the potential to meet the demand for biodiesel production in the United States.

Ethanol is one of the fastest growing industries in the U.S. agricultural sector. This study estimates factors that impact location decisions by new ethanol plants using logistic regression analysis and spatial correlation techniques. The results indicate that location decisions are impacted by the agricultural characteristics of a county, competition, and state-level subsidies. Spatial competition is particularly important. Existence of a competing ethanol plant reduces the likelihood of making a positive location decision and this impact decreases with distance. Finally, state-level subsidies were significant and a very important variable impacting ethanol location decisions.

This study provides a framework to value investment strategies to mitigate possible agro-terrorism occurrences in the food supply chain and to determine where these investments would reduce the most risk. This framework is applied to two food sectors that could be at risk: milk and green onions. Stochastic optimization is used to determine the costs and risk premiums of alternative tracking strategies. The real options method along with a portfolio of options, also referred to as the "tomato garden" framework, is used to determine where and when alternative intervention strategies should be implemented to reduce the most risk. Finally, policy implications are derived on the cost-risk tradeoffs, probability of attacks, and containment efforts if there is an attack by using game theory to determine the incentives needed to motivate participants in the milk and green onion supply chains to invest in security measures.

Introduction: This report provides an overview of the important factors affecting investments in agricultural value-added ventures. The introductory section outlines current research on factors important in the location of economic activity. Research applied to specific agricultural value-added ventures, such as food manufacturing and livestock feeding and finishing operations, are discussed. A listing of resources available to entrepreneurs considering value-added investments concludes the introductory section. Following the introductory section are short overviews of industries that already have, or may have, potential for increasing economic activity in the state. All are based on the important foundation of agriculture in the state's economy or upon the natural resource base giving the state a comparative advantage in investments in alternative energy or resource-based recreation.

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.

A principal-agent problem was specified to define the equilibrium solution of a contracting strategy for a U.S. supplier exporting wheat to meet EU traceability requirements. The buyer (principal) offers a contract, the supplier (agent) accepts the contract, and then the supplier decides whether to offer a contract to the farmer. Nature at each level of the supply chain represents uncertainty due to adventitious commingling and imperfect information. Results indicate farmers would require 9 c/bu and suppliers 8 c/bu to induce their participation in the contracting strategy.

Agricultural firms that use Value at Risk (VaR) tend to be the large diversified corporations. The benefits of VaR in the agricultural industry are not limited to large conglomerates; however, and this study provides empirical examples of how mid to large sized commodity end-users can use VaR to quantify price risk exposure. By reporting price risk in terms of dollars as a single summary statistic, VaR provides a more intuitive measure of risk for decision makers, especially when the distribution of portfolio value changes is non-normal. VaR also separates downside from upside potential by focusing on the left-hand tail of a portfolio's distribution of returns. The purpose of this study is to demonstrate how VaR can be applied to the portfolio of a hypothetical U.S. bread baking company. Six of the bakery's prominent commodity inputs were considered, including flour, bakery shortening, and sugar. Mill feed price risk was also included since it is commonly a component of flour pricing agreements. In one case, a portfolio of costs and the risk of procurement cost changes are measured. In another case, output price risk was included and represented white pan bread prices as a price risk variable. This portfolio contains both cost and revenue items, and the risk of payoff changes resulting from input and output price changes is considered. In another case, the VaR for a Mexican flour milling company was modeled inclusive of the effect of foreign exchange risk. In each case, different hedging instruments were considered for use in various hedging strategies. Though VaR can be utilized by decision makers for numerous management aspects, in the cases analyzed in this study VaR estimates are used to quantify the price risk associated with different hedging strategies. While risk reduction is the primary reason for hedging, it is not the only aspect that management must consider. Numerous other aspects enter into the decision, which are not represented in the VaR statistic. Therefore, VaR is a valuable tool for measuring the risk exposure of these firms, but in no way does it tell the whole story.

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.

Replaced with corrected version of paper 04/04/08.

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.

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.

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.

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.

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.

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.

The grain handling sector in Canada and the United States is vital to agriculture and trade. In a typical year on the Canadian prairies, about 140,000 producers deliver some 20 to 30 mmt of grain for export to primary elevators. In the United States, about 2.1 million producers deliver about 300 mmt of grain to primary elevators. Canadian grain is moved to export position using more than 400,000 hopper cars and marine containers, where about 1,200 ships per year are loaded. In the United States, about 1.08 million rail carloads of grain are originated per year, and about 23 mmt of grain are shipped on barges per year. These U.S. figures are in addition to trucks, which, more so than in Canada, are also used to deliver grain to primary processors and to terminal and export markets. The volume of grain trade gives rise to concern about risks of terrorism in the sector.(1) From a security perspective, the grain, pulse and oilseed supply chain is noteworthy because much of it is characterized by relatively long-term, insecure, bulky storage (particularly on farms) along with numerous modal and inter-modal product transfers. These factors suggest there are many places where chemical or biological contaminants could be introduced into this supply chain. From the perspective of the United States, security throughout the Canadian system as well as the U.S. system is a concern, since cross-border traffic in these products is significant, with an average of about six million tonnes of grain products alone imported into the U.S. each year (USDA-FAS, 2003). Numerous interventions to enhance food safety and mitigate the risk of terrorism have been adopted or are in the process of being developed. Some of these are private initiatives and voluntary, as a component of firm-level security processes. Others are being adopted in response to legislated initiatives. The stakes are large, and there are likely to be substantial differences in costs and effectiveness of different approaches.

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.