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Futures Prices in Supply Analysis Reconsidered

Nathan Hendricks, Joseph Janzen () and Aaron Smith

No 150696, 2013 Annual Meeting, August 4-6, 2013, Washington, D.C. from Agricultural and Applied Economics Association

Abstract: Are futures prices exogenous to agricultural supply? It depends. We argue that crop yield shocks were predictable during the 1961-2007 period because high planting-time futures prices tended to indicate that yield would be below trend. This feature of the data implies that regressions of production on futures prices would underestimate the supply elasticity, i.e., endogeneity in the futures price biases the regression coefficient down. However, this predictability has only a small effect on planted acreage. Thus, estimating supply models with regressions of planted acreage on futures prices entails a small endogeneity bias. Moreover, this small bias is mitigated by adding the realized yield shock as a control variable to such a model as a proxy for the expected yield shock. The marginal contribution of an instrumental variable to bias reduction is thus small.

Keywords: Crop Production/Industries; Demand and Price Analysis; Production Economics (search for similar items in EconPapers)
Pages: 34
Date: 2013-06-03
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Persistent link: https://EconPapers.repec.org/RePEc:ags:aaea13:150696

DOI: 10.22004/ag.econ.150696

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