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Optimal Sequential Plantings of Corn and Soybeans Under Price Uncertainty

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Author Info

  • Michael Livingston

    ()
    (US Department of Agriculture, Economic Research Service)

  • Michael J. Roberts

    ()
    (Department of Economics, University of Hawaii at Manoa)

  • Yue Zhang

    ()
    (Department of Agricultural and Resource Economics)

Abstract

Optimal crop choice and fertilizer applications depend on the stochastic dynamics of commodity prices, fertilizer prices, and the agronomic effects of rotation versus monoculture. The efficient decision rule accounts for real option values associated with maintaining land disposition in an environment with highly uncertain future prices and irreversible past planting decisions. We parameterize a baseline model for a representative acre in Iowa and compare the model's predictions and profits to relatively naive, shorter-horizon decision rules, and a field managed with optimal fertilizer applications conditional on corn and soybeans always being rotated. We also examine the effects of a permanently larger premium on corn prices relative to soybean prices, which has been observed in locations near recently established ethanol plants. We then compare the various decision rules to actual crop choices in a panel of over 6500 Iowa plots during 1979-2007. As compared to less forward-looking objectives, we find the agronomic benefits of rotations coupled with real option values can lead to a more inelastic response of planting decisions to both transitory and permanent price changes. Always rotating, regardless of prices, is close to optimal, but so are shorter-horizon objectives. One implication is that reduced corn monoculture and fertilizer application rates might be implemented with modest incentive payments of $4 per acre or less.

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File URL: http://www.economics.hawaii.edu/research/workingpapers/WP_14-12.pdf
File Function: First version, 2014
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Bibliographic Info

Paper provided by University of Hawaii at Manoa, Department of Economics in its series Working Papers with number 201412.

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Length: 55 pages
Date of creation: Apr 2014
Date of revision:
Handle: RePEc:hai:wpaper:201412

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Keywords: crop rotations; uncertainty; option value; supply response; dynamic programming.;

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  1. Deaton, Angus & Laroque, Guy, 1996. "Competitive Storage and Commodity Price Dynamics," Journal of Political Economy, University of Chicago Press, vol. 104(5), pages 896-923, October.
  2. Burt, Oscar R. & Worthington, Virginia E., 1988. "Wheat Acreage Supply Response In The United States," Western Journal of Agricultural Economics, Western Agricultural Economics Association, vol. 13(01), July.
  3. Williams,Jeffrey C. & Wright,Brian D., 2005. "Storage and Commodity Markets," Cambridge Books, Cambridge University Press, number 9780521023399, April.
  4. Eckstein, Zvi, 1984. "A Rational Expectations Model of Agricultural Supply," Journal of Political Economy, University of Chicago Press, vol. 92(1), pages 1-19, February.
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