What is in this article?:
- Relative Importance of Price vs. Yield Variability in Crop Revenue Risk
- Price-yield correlation
- Revenue variability
This process was repeated for each county in Illinois and the degree of relatedness summarized in terms of the correlation.1 The figure below summarizes the results. As shown, the most intense production regions generally have the strongest (most negative) relationship between yields and prices. Overall, the state average price-yield correlation is -.51 with a low of -.72 and a high of -.31. The correlation can generally be interpreted as the average proportionate change from one to the other, so a value of -.51 would imply that prices and yield respond in opposite directions with about half as large a relative magnitude - or that 51% of an increase in one variable is offset by a decrease in the other.
Next, a current revenue distribution was constructed for each county using the detrended yields and associated normalized price series. The expected or average revenue cannot be constructed by simply multiplying the average price times the average yield due to the correlation effect. In technical terms, the expected product of price and yield is equal to the product of the averages plus the covariance. In this case, the covariance is negative as described above, so the actual average revenue is less than the simple product of the average price and average yield, but the revenue risk is also proportionately lower the more negative the correlation as well. These relationships lead to a natural question: Which is more important to revenue variability, price or yield; and what role does the negative correlation play in mitigating the risk?