Explicit incorporation of farm program variables in a quadratic risk programming model: a Texas South Plains example
Ejimakor, Godfrey Chima
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Net farm income variability that may be associated with farm programs such as target prices are often ignored in risk programming models. Target price programs have been in existence for sometime and form part of the underlying net farm income distribution. Nonlinear programming models were constructed to measure the impact of target prices on the distribution of net farm income. In one model, the variance-covariance matrix of crop gross margins were adjusted for the effects of target prices. In another model, the programming problem was modified to incorporate the distribution of target prices into a quadratic programming framework by measuring each crop's gross margin as a linear function of the corresponding target price. Risk efficient farm plans were estimated for each of the models. Analysis of the sensitivity of the optimal farm plans to changes in the target price distribution was conducted. Yield and price data from the Texas High Plains region were used. Estimated optimal farm plans obtained by use of the adjusted variance-covariance matrix were found to have less variability for the same levels of income when compared with other solutions at low levels of risk aversion. The modified model produced the most risk efficient farm plans when deficiency payments were not included in the gross margins. The expected net farm income-variance frontier estimated for the modified model was found to be the most dominant. Compared to the conventional model, the modified model gave risk reductions of up to 30 percent. The income-variance frontier which included deficiency payments dominated the corresponding frontier without deficiency payments. Sensitivity analysis with the modified model indicated that mean target prices and coefficients of variation are negatively correlated at some target price levels. The correlation is positive at other target prices levels. The findings demonstrate that decision making could be improved in a risk-return framework by adjusting or modifying the programming model. Risk efficiency is increased by participation in farm programs. Furthermore, target price policy could be used to reduce or increase risk and/or income at the farm level.