Semester

Summer

Date of Graduation

2010

Document Type

Dissertation

Degree Type

PhD

College

Davis College of Agriculture, Natural Resources and Design

Department

Forest Resource Management

Committee Chair

Gerard E D'Souza

Committee Co-Chair

Jason R Evans

Abstract

The study area of this dissertation is the Appalachian state of West Virginia, where pasture-based livestock has traditionally dominated the state's agricultural production sector. Enhanced production risk has been identified as one of the key risk factors in grass fed beef production. This study aims to look into various risk management options that are available to grass-fed beef producers. One such management option is the various livestock insurance and rangeland, forage and grass land protection policies recently introduced and marketed by the Risk Management Agency (RMA) of USDA. The Livestock Risk Protection Plan (LRP) has been available to West Virginia cattle producers since summer 2006. This plan is uniquely aimed towards price protection. At the same time, two types of rangeland forage and pasture land protection policies have also been introduced by RMA, namely rainfall index and vegetation index based protection policies. These policies may help mitigate production related risk. A brief Internet-based survey was conducted in early summer 2009 of various grass-fed beef producers who market their product electronically in neighboring states including West Virginia, Virginia, Pennsylvania, Kentucky, and Maryland to understand their perception of risk related to grass-fed production. It was found that drought or lack of rainfall is a major concern in their production related activities, an issue that further justified the need for this study. The latter consists of three distinct, but interrelated, essays, all oriented toward a better understanding of the causes, effects, and management of production risk in pasture-beef production settings. Stochastic dominance was the main tool used in the first and second essays to analyze various risky alternatives.;In the first essay, stochastic dominance analysis was used to understand LRP and price risk as may be faced by a grass-fed producer in West Virginia. It was found that in the current scenario, a high basis exists between the AMS 5 market selling price (on which the indemnity payouts are based) and the local cattle auction markets of Virginia and Pennsylvania. Due to this high basis, this LRP may not be suitable to these producers as offered currently.;The second essay deals with production risk and the rainfall index based protection policy of RMA. It was found that though this policy indeed helps to mitigate a certain part of production risk, managers of pastureland should have a thorough understanding of the nature of indemnity payouts. However, this insurance is not yet available in West Virginia. Hence, the study was conducted with Pennsylvania hay trial plots, using data provided by the WVU Agronomy Department.;As discussed earlier, in our e-mail based survey, it was found that drought or lack of rainfall is the major concern for most producers in Appalachia. Accordingly, in the third essay, a unique rainfall/precipitation based option contract was structured to assist businesses better manage rainfall/precipitation related risks. This unique precipitation based call/put option can be exploited by relevant businesses who suffer loss from either too little or too much precipitation. It was further found that there are indeed interested players in the capital market (e.g. Goldman Sachs commodity risk management; Phibro commodities trading firm; etc.) who are willing to underwrite the risk and provide such (rainfall call/put) risk management options to a broad range of businesses including grass-fed producers. This rainfall call/put, when made available through the capital market (underwriter) either as over the counter (OTC) or exchange (CME) traded, would provide yet another weather related risk management option to businesses in West Virginia affected by too much or too little rain fall/precipitation.

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