An analysis of the role of futures prices, cash prices, and government programs in acreage response

An integrated investigation of futures price, cash price, and government programs is pre-sented in the context of an econometric model of acreage supply response for U.S. corn and soybeans. The analysis refines the role of different sources of price information in the farmers' acreage decision. It is found that the government corn support price program plays a major role in corn and soybean production decisions. Also, the results indicate that futures prices are not good proxies for expected future cash prices in the presence of government programs. This raises questions about the informational efficiency of futures prices when government intervenes in the market place. Many econometric analyses have been developed for investigating crop acreage response (e.g., Houck and Ryan; Houck and Subotnik; Gallagher; Gardner). In such models, acreage decisions are specified as a function of the expected output price. In the Nerlovian tradition, the expected price may be determined from past mar-ket prices (Houck and Ryan; Houck and Subotnik; Gallagher). More recently, by considering that futures prices are expect-ed spot prices in the future, Gardner has argued in favor of using the futures price in supply response. However, while Peck, Gardner, Telser and Morzuck et al. view futures prices as expected prices, the evi-dence on the quality of futures prices as forecasts is somewhat mixed. On the one hand, Just and Rausser have shown that futures prices forecast relatively well compared to econometric forecasts, sug