Impacts of Risk Attitudes on Farm-Level Acreage Flexibility Decisions

Abstract

The 1990 Farm Bill included ''flexibility,'' which allows farmers to plant alternative crops on a percentage of base acres without losing those base acres. This study was conducted to determine how sensitive the flex decision is to the consideration of price and yield risk and to producers' degree of risk aversion. A whole farm simulation model is used to analyze alternative flex planting decisions of representative farms developed throughout the USA using deterministic, stochastic, and risk neutral and averse assumptions. The results indicate that the inclusion of stochastic yields and prices has little impact on the flex decision. For 13 of the 18 farms, the deterministic budgeting results corresponded to the risk analysis recommendations. Where the deterministic and stochastic results differed, the analysis suggests planting fewer flex acres to other crops, i.e. maintaining the crop mix status quo. In conclusion, enterprise budgets can be used to make the flex decision even though they ignore stochastic yields, prices, and risk aversion