Humboldt-Universität zu Berlin - Farm Management Group

• Price Formation and Agricultural Land Markets

• Structural Change in the German Dairy Sector

• Dynamic Efficiency and Structural Change in Agriculture

• Weather Risk and Climate Change

• Meteorological Forecasts and the Pricing of Weather Derivatives

• Demand and Supply for Crop Insurance in Agriculture

• Impact of Capacity Constraints on Structural Change in Agriculture

• The Inverse Land Size-Productivity Relationship: Land Quality and Land Quality Adjusted Productivity

more research projects: research data base of Humboldt-Universität zu Berlin

Price Formation and Agricultural Land Markets

Land is a crucial production factor in agriculture. In developed countries this input factor is usually in short supply and its overall availability shrinks permanently. On the contrary, the increasing demand of growing farms and more recently of non-agricultural investors causes price pressure on the land market. Thus, it is not surprising that land prices increased in recent years. Though the analysis of land markets is a core topic in agricultural economics, many questions are still unanswered. For example, do land prices reflect the price boom for agricultural commodities and bio-energy? Can land prices be fully explained by fundamental factors or are they also driven by speculative bubbles? What is the role of non-agricultural investors? Should land markets be regulated and if so, what are the most efficient instruments?

Against this background the project aims at understanding the recent developments on land markets, particularly in Germany and the EU. The focus will be on quantitative modelling and empirical (econometric) analyses.

Contact: Prof. Dr. Silke Hüttel, Prof. Dr. Martin Odening
silke.huettel(at)agrar.hu-berlin.de, m.odening(at)agrar.hu-berlin.de

Structural Change in the German Dairy Sector

The European Union is the largest milk producer in the world and the EU dairy sector is one of Europe’s most important farming sectors. This sector reflects both, the complexity of agricultural production in highly regulated markets, as well as a complex system of livestock production. Since 1984 the milk market is regulated by intervention prices and a milk quota scheme. It is conjectured in the literature that the introduction of quantity quotas limits the growth of profitable firms and thereby slows down structural change in an industry.

Since the end of 2007, the milk prices decline drastically. German dairy farmers started protesting against, however, this is not surprising since the German dairy sector plays an important role in the agricultural sectors' value added. Such strong price declines force farms to stop milk production or even to exit the sector. The sector faces a rather strong structural change and this is expected to speed up with the planned milk quota removal in 2014/15. The major aim of this research is to quantify the impact of the milk quota scheme on structural change in order to deduce specific policy recommendations how the expected abolishment of the milk quota scheme in the EU will affect the structural change in the German dairy sector.

Thereby, the presence of the more or less stable share of small (dairy) farms and the particular role of them within structural change is still an enigma. It is commonly known that the net farm exit rate strongly depends on the current share of small farms’ exit rate. However, to our knowledge, the literature does not provide a clear explanation whether small farms represent a transitory state or a stable size category with the ability to survive motivated by considerations other than current profits. Small farms may also benefit from low opportunity costs of fixed factors due to sunk costs.

This research aims in addition to identify the determinants of the abandonment of milk production and explore the potential differences between different scales. The relevant literature offers a large variety determinants such as input and output price levels, price volatility, technical progress, the value of non-farm capital and the value of the milk quota, i.e. the milk quota rent. Also the possibilities to grow also in other production branches, the degree of specialization (sunk costs), a farm successor and the farm specific efficiency are important determinants that need to be tested. Of further interest is the interaction among farms on the land and quota market and the respective impact on farm growth, decline and exit. Based on theoretical considerations the challenge is to show how the identified region-specific interactions can explain regionally differing structural evolvements that even persist over time. The crucial hypothesis that differing dynamics of regional structural change rely on strategic interaction of farms on the market for land and quota is aimed to be tested empirically.

Contact: Prof. Dr. Silke Hüttel
silke.huettel(at)agrar.hu-berlin.de

Cooperation
Dr. Roel Jongeneel, Wageningen University

Dynamic Efficiency and Structural Change in Agriculture

The objective of the research is to investigate the relation between efficiency and structural change in German agriculture. Only efficient farms can be competitive in the long run. Thus it can be conjectured that structural change takes place faster in the presence of inefficient farms. However, in reality differences in economic performance and efficiency are persistent and solid empirical work is necessary for explaining this observed heterogeneity.

From a methodological viewpoint this project contributes to the development of dynamic efficiency models. Based on a dual model of inter temporal decision making a shadow cost approach is used that allows for an econometric estimation of dynamic efficiency under uncertainty.

Contact: Rashmi Narayana, Christina Wagner
rashmi.nayarana.1(at)agrar.hu-berlin.de, christina.wagner(at)agrar.hu-berlin.de

Cooperation: Dr. Werner Kleinhanss, vTI Braunschweig

Weather Risk and Climate Change

It is an undisputed fact that weather risk increases over time due to climate change. However, qualification of this statement with regard to the type of weather risk and geographical location is needed. In this paper we use local t-tests, change point tests and Mann-Kendall tests to analyze the trends of weather risk indices that are relevant from an agricultural viewpoint. Local test procedures offer more information about the timing and the kind of change in weather risk than global tests do. We also use quantile regression to analyze changes in the tails of weather index distributions. These methods are applied to temperature and rainfall based weather indices in three different climatic zones. Our results show that weather risk follows different patterns depending on the type of risk and the location. We also find differences in the sensitivity of the statistical test procedures.

Contact: Ihtiyor Bobojonov
ihtiyor.bobojonov(at)agrar.hu-berlin.de

Meteorological Forecasts and the Pricing of Weather Derivatives

In usual pricing approaches for weather derivatives, forward-looking information like meteorological weather forecasts is not considered, so that important knowledge used by market participants is ignored in theory. By extending a standard model for the daily temperature, meteorological forecasts are incorporated in the framework of weather derivative pricing, and the information gain compared to a benchmark model without meteorological forecasts is estimated. This approach is applied for temperature futures referring to New York, Minneapolis and Cincinnati with forecast data 13 days in advance. Despite this relatively short forecast horizon, the models using meteorological forecasts outperform the classical approach and forecast the market prices of the temperature futures traded at CME better. Moreover, a concentration on the last two months or on days with actual trading improves the results.

Contact: Matthias Ritter
Matthias.Ritter(at)agrar.hu-berlin.de

Funding: This project was supported by Georg-August-Universität Göttingen and the German Research Foundation (DFG) through the Collaborative Research Center 649 (CRC 649) “Economic Risk”. More details about the CRC 649: http://sfb649.wiwi.hu-berlin.de/

Demand and Supply for Crop Insurance in Agriculture

Crop insurance plays an important role in hedging weather risk in agriculture because agricultural production is severely affected by weather conditions. However, worldwide experience shows that it is rather difficult to establish a market for private (non-subsidized) crop insurance. In recent years, numerous studies have examined the causes of market failures and have conjectured that these failures mainly result from the existence of systemic weather risk. Nevertheless, it is still unclear how to model the impact of systemic weather risk on the viability of crop insurance markets.

Against this background, the objective of the research project is to analyze the demand and supply for weather insurance. For that purpose we develop an equilibrium pricing model based on the expected utility maximization of market participants that takes into account the effect of systemic weather risk. Moreover, this study analyzes the necessity and the efficiency of government subsidies in the crop insurance market.

Contact: Zhiwei Shen
shenzhiw(at)agrar.hu-berlin.de

Impact of Capacity Constraints on Structural Change in Agriculture

Land is an immobile and non-replicable production factor. Since in most Western countries all agricultural land is under usage, this represents a capacity constraint and thus determines an upper production limit. A single firm can only expand its capacity and reach a significantly higher output if another one ceases production and drops out of the market. Thus, exit is a precondition for external market entry and further growth of incumbents. Unfortunately, most of the former studies dealing with entry/exit of firms and dynamic competition do not provide a model that takes these features into account.

The main objective of this research project is to develop a dynamic framework which describes the optimal investment/disinvestment strategies of heterogeneous firms under the above mentioned constraints. The optimal individual behaviour allows computing a dynamic equilibrium and deriving implications for the prospective market structure in the agricultural sector. For this purpose it is necessary to incorporate uncertainty into the model as demand or productivity shocks may force firms to withdraw from the market. This usually causes a new allocation of resources and may give rise to an increasing market concentration.

Kontakt: Stefan Kersting
kersting(at)agrar.hu-berlin.de

The Inverse Land Size-Productivity Relationship: Land Quality and Land Quality Adjusted Productivity

The inverse relationship between land size and productivity is an important topic in development economics. It has motivated an extensive debate. Its truth or falsity has policy implications.

This issue is very important presently because the international agenda is mostly focused on African agriculture. African agriculture is based on small farms. Smaller farms could be considered the most productive and efficient production units for a better development if the inverse relationship were confirmed using innovative methods.

By accounting explicitly for land quality characteristics in efficiency and productivity measurement, the proposed research hopes to shed light on the inverse relationship. First I create an aggregate land quality measure from land characteristics using separability theory with nonparametric methods using Data Envelopment Analysis. Then I propose a nonparametric statistical test for the plausibility of this separability assumption. Finally, I revisit the relationship with nonparametric methods using Data Envelopment Analysis to relax the focus of usual regression methods on average behavior parametric models. The goal of this research is to ascertain the truthfulness of this recurrent empirical relationship.

Contact: Simone Pieralli
simone.pieralli(at)agrar.hu-berlin.de