Projecting net incomes for Texas crop producers: an application of probabilistic forecasting

Agricultural policy changes directly affect the economic viability of Texas crop producers because government payments make up a significant portion of their net farm income (NFI). NFI projections benefit producers, agribusinesses and policy makers, but an economic model making these projections for Texas did not previously exist. The objective of this study was to develop a model to project annual NFI for producers of major crops in Texas. The Texas crop model was developed to achieve this objective, estimating state prices, yields and production costs as a function of their national counterparts. Five hundred iterations of national price and yield projections from the Food and Agricultural Policy Research Institute (FAPRI), along with FAPRI??????s average production cost projections, were used as input to the Texas crop model. The stochastic FAPRI Baseline and residuals for Ordinary Least Squares (OLS) equations relating Texas variables to national variables were used to incorporate the risk left unexplained by OLS equations between Texas and U.S. variables. Deterministic and probabilistic NFI projections for Texas crops were compared under the January 2005 and January 2006 FAPRI Baseline projections. With production costs increasing considerably and prices rising moderately in the January 2006 Baseline, deterministic projections of 2006-2014 Texas NFI decreased by an average of 26 percent for corn, 3 percent for cotton, 15 percent for peanuts, and 12 percent for rice, and were negative for sorghum and wheat. Probability distributions of projected NFI fell for all program crops, especially sorghum and wheat. Higher hay price projections caused deterministic projections of NFI for hay to rise roughly 13 percent, and increased the probability distributions of projected hay NFI. Deterministic and probabilistic projections of total NFI decreased for each year, especially for 2006-2008 when fuel price projections were the highest. The Texas crop model can be used to simulate NFI for Texas crop producers under alternative FAPRI baselines. The model shows the impact of baseline changes on probability distributions of NFI for each crop and for Texas as a whole. It can also be useful as a policy analysis tool to compare impacts of alternative farm and macroeconomic policies on NFI.