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Decoupled Farm Payments and the Role of Base Acreage and Yield Updating Under Uncertainty

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  • Bhaskar, Arathi
  • Beghin, John C.

Abstract

In the context of U.S. farm policy, this paper analyzes the effect that expectations about base acreage and yield updating in future policies have on a farmer's production decisions in the presence of price, yield and policy uncertainty. We consider a risk averse farmer producing a single crop whose income consists of market revenue and government payments. We consider two policy regimes. Decisions on acreage and fertilizer use made in the current policy regime are linked to government payments in the future policy regime through the possibility of a base acreage and yield update in the future regime. There is policy uncertainty about the possibility of the updates being allowed in the future. We combine stochastic dynamic programming with present value calculations to link current acreage and input use decisions to future program payments. The average optimal planted acreage and fertilizer use are increasing in the subjective probability of the future update. The estimated maximum percentage increase in the average optimal planted acreage is 6.25%. The estimated maximum percentage increase in the average yield, resulting from optimal fertilizer use is much smaller at 0.134%.

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Bibliographic Info

Paper provided by Iowa State University, Department of Economics in its series Staff General Research Papers with number 12851.

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Date of creation: 01 Oct 2007
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Publication status: Published in American Journal of Agricultural Economics, March 2010, vol. 92 no. 3, pp. 849-858
Handle: RePEc:isu:genres:12851

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Postal: Iowa State University, Dept. of Economics, 260 Heady Hall, Ames, IA 50011-1070
Phone: +1 515.294.6741
Fax: +1 515.294.0221
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Web page: http://www.econ.iastate.edu
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References

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  1. Joe Dewbre, 2006. "The Impact of Coupled and Decoupled Government Subsidies on Off-Farm Labor Participation of U.S. Farm Operators," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, Agricultural and Applied Economics Association, vol. 88(2), pages 393-408.
  2. Paolo Sckokai & Daniele Moro, 2006. "Modeling the Reforms of the Common Agricultural Policy for Arable Crops under Uncertainty," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, Agricultural and Applied Economics Association, vol. 88(1), pages 43-56.
  3. Michael J. Roberts & Barrett Kirwan & Jeffrey Hopkins, 2003. "The Incidence of Government Program Payments on Agricultural Land Rents: The Challenges of Identification," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, Agricultural and Applied Economics Association, vol. 85(3), pages 762-769.
  4. Bruce A. Babcock & David A. Hennessy, 1996. "Input Demand under Yield and Revenue Insurance," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, Agricultural and Applied Economics Association, vol. 78(2), pages 416-427.
  5. David A. Hennessy & Bruce A. Babcock & Dermot J. Hayes, 1997. "Budgetary and Producer Welfare Effects of Revenue Insurance," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, Agricultural and Applied Economics Association, vol. 79(3), pages 1024-1034.
  6. Bhaskar, Arathi & Beghin, John C., 2009. "How Coupled Are Decoupled Farm Payments? A Review of the Evidence," Journal of Agricultural and Resource Economics, Western Agricultural Economics Association, Western Agricultural Economics Association, vol. 34(1), April.
  7. Roe, Terry & Somwaru, Agapi & Diao, Xinshen, 2002. "Do direct payments have intertemporal effects on U.S. agriculture?," TMD discussion papers, International Food Policy Research Institute (IFPRI) 104, International Food Policy Research Institute (IFPRI).
  8. Hennessy, David A., 1998. "The Production Effects of Agricultural Income Support Policies Under Uncertainty," Staff General Research Papers, Iowa State University, Department of Economics 1207, Iowa State University, Department of Economics.
  9. Christopher R. McIntosh & Jason F. Shogren & Erik Dohlman, 2007. "Supply Response to Countercyclical Payments and Base Acre Updating under Uncertainty: An Experimental Study," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, Agricultural and Applied Economics Association, vol. 89(4), pages 1046-1057.
  10. Torre Ugarte, Daniel de la & Sanford, Scott & Skinner, Robert A. & Westcott, Paul C. & Lin, William W., 2000. "Supply Response Under The 1996 Farm Act And Implications For The U.S. Field Crops Sector," Technical Bulletins, United States Department of Agriculture, Economic Research Service 33568, United States Department of Agriculture, Economic Research Service.
  11. Bruce A. Babcock & Chad E. Hart, 2005. "How Much "Safety" Is Available under the U.S. Proposal to the WTO?," Center for Agricultural and Rural Development (CARD) Publications 05-bp48, Center for Agricultural and Rural Development (CARD) at Iowa State University.
  12. Barry K. Goodwin & Ashok K. Mishra & Fran�ois N. Ortalo-Magné, 2003. "What's Wrong with Our Models of Agricultural Land Values?," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, Agricultural and Applied Economics Association, vol. 85(3), pages 744-752.
  13. Barry K. Goodwin & Ashok K. Mishra, 2006. "Are “Decoupled” Farm Program Payments Really Decoupled? An Empirical Evaluation," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, Agricultural and Applied Economics Association, vol. 88(1), pages 73-89.
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Citations

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Cited by:
  1. Bhaskar, Arathi & Beghin, John C., 2007. "How Coupled Are Decoupled Farm Payments? A Review of the Evidence," Staff General Research Papers, Iowa State University, Department of Economics 12841, Iowa State University, Department of Economics.
  2. Marian Rizov & Jan Pokrivcak & Pavel Ciaian, 2013. "CAP Subsidies and Productivity of the EU Farms," Journal of Agricultural Economics, Wiley Blackwell, Wiley Blackwell, vol. 64(3), pages 537-557, 09.
  3. Mitchell, Paul D. & Rejesus, Roderick M. & Coble, Keith H. & Knight, Thomas O., 2010. "A Real Options Framework for Analyzing Program Participation as Human Capital Investments: The Case of the Average Crop Revenue Election (ACRE) Program," Staff Paper Series, University of Wisconsin, Agricultural and Applied Economics 547, University of Wisconsin, Agricultural and Applied Economics.
  4. Moro, Daniele & Sckokai, Paolo, 2013. "The impact of decoupled payments on farm choices: Conceptual and methodological challenges," Food Policy, Elsevier, Elsevier, vol. 41(C), pages 28-38.
  5. Rizov, Marian & Pokrivcak, Jan & Ciaian, Pavel, 2013. "CAP Subsidies and the Productivity of EU Farms," Factor Markets Working Papers, Centre for European Policy Studies 148, Centre for European Policy Studies.
  6. Kropp, Jaclyn D. & Katchova, Ani L., 2011. "The Effects of Direct Payments on Liquidity and Repayment Capacity of Beginning Farmers," Staff Papers, University of Kentucky, Department of Agricultural Economics 164516, University of Kentucky, Department of Agricultural Economics.
  7. Mitchell, Paul D. & Rejesus, Roderick M. & Coble, Keith H. & Knight, Thomas O., 2011. "Analyzing Farmer Participation Intentions and Enrollment Rates for the Average Crop Revenue Election (ACRE) Program," Staff Paper Series, University of Wisconsin, Agricultural and Applied Economics 560, University of Wisconsin, Agricultural and Applied Economics.
  8. Peckham, Janet G. & Kropp, Jaclyn D., 2012. "Decoupled Direct Payments under Base Acreage and Yield Updating Uncertainty: An Investigation of Agricultural Chemical Use," Agricultural and Resource Economics Review, Northeastern Agricultural and Resource Economics Association, Northeastern Agricultural and Resource Economics Association, vol. 41(2), August.
  9. Just, David R. & Kropp, Jaclyn D., 2009. "Production Incentives from Static Decoupling: Entry, Exit and Use Exclusion Restrictions," 2009 Annual Meeting, July 26-28, 2009, Milwaukee, Wisconsin, Agricultural and Applied Economics Association 49158, Agricultural and Applied Economics Association.
  10. Carpentier, Alain & Gohin, Alexandre & Heinzel, Christoph, 2012. "Production Effects of Direct Payments to Active Farmers: a Microeconomic Dynamic and Stochastic Analysis," 123rd Seminar, February 23-24, 2012, Dublin, Ireland, European Association of Agricultural Economists 122447, European Association of Agricultural Economists.
  11. Kropp, Jaclyn D. & Peckham, Janet G., 2012. "Impacts of U.S. Agricultural and Ethanol Policies on Farmland Values and Rental Rates," 2012 Annual Meeting, August 12-14, 2012, Seattle, Washington, Agricultural and Applied Economics Association 124579, Agricultural and Applied Economics Association.
  12. Jaclyn D. Kropp & James B. Whitaker, 2011. "The impact of decoupled payments on the cost of operating capital," Agricultural Finance Review, Emerald Group Publishing, Emerald Group Publishing, vol. 71(1), pages 25-40, May.
  13. Mary, Sébastien & Mishra, Ashok & Paloma, Sergio Gomez y, 2013. "An impact assessment of EU's CAP income stabilisation payments," 2013 Annual Meeting, August 4-6, 2013, Washington, D.C., Agricultural and Applied Economics Association 149691, Agricultural and Applied Economics Association.
  14. Kropp, Jaclyn D. & Whitaker, James B., 2009. "The Impact of Decoupled Payments on the Cost of Operating Capital," 2009 Annual Meeting, July 26-28, 2009, Milwaukee, Wisconsin, Agricultural and Applied Economics Association 49311, Agricultural and Applied Economics Association.

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