Futures prices in supply analysis: Are instrumental variables necessary?

Nathan P. Hendricks, Joseph P. Janzen, Aaron Smith

Research output: Contribution to journalArticlepeer-review


Crop yield shocks are partially predictable-high planting-time futures prices have tended to indicate that yield would be below trend. As a result, regressions of total caloric production on futures prices produce estimates of the supply elasticity that are biased downwards by up to 75%. Regressions of the world's growing area on futures prices have a much smaller bias of about 20% because although yield shocks are partially predictable, this predictability has a relatively small effect on land allocation. We argue that the preferred method for estimating the crop supply elasticity is to use regressions of growing area on futures prices and to include the realized yield shock as a control variable. An alternative method for bias reduction is to use instrumental variables (IVs). We show that the marginal contribution of an IV to bias reduction is small-IVs are not necessary for futures prices in supply analysis.

Original languageEnglish (US)
Pages (from-to)22-39
Number of pages18
JournalAmerican Journal of Agricultural Economics
Issue number1
StatePublished - Jan 2015
Externally publishedYes


  • Endogeneity
  • Futures prices
  • Supply response

ASJC Scopus subject areas

  • Agricultural and Biological Sciences (miscellaneous)
  • Economics and Econometrics


Dive into the research topics of 'Futures prices in supply analysis: Are instrumental variables necessary?'. Together they form a unique fingerprint.

Cite this