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Supply Response under Risk: Implications for Counter-Cyclical Payments' Production Impact

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  • William Lin
  • Robert Dismukes

Abstract

This study investigates the role of risk in farmers' acreage decisions for major field crops in the North Central region by revisiting an earlier study by Chavas and Holt. The empirical model is forward-looking and reflects better variable measurement. We test the effects of wealth and revenue risk on supply response. Estimated results are also used to examine the production impact of counter-cyclical payments (CCPs). We find that the effects of risk on supply response are not strong. An increase in initial wealth would lead to greater crop acreage, consistent with decreasing absolute risk aversion. The effect of CCPs on production appears to be negligible.

Suggested Citation

  • William Lin & Robert Dismukes, 2007. "Supply Response under Risk: Implications for Counter-Cyclical Payments' Production Impact," Review of Agricultural Economics, Agricultural and Applied Economics Association, vol. 29(1), pages 64-86.
    • Handle: RePEc:oup:revage:v:29:y:2007:i:1:p:64-86.
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    File URL: http://hdl.handle.net/10.1111/j.1467-9353.2006.00330.x
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    1. 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 33568, United States Department of Agriculture, Economic Research Service.
    2. David A. Hennessy, 1998. "The Production Effects of Agricultural Income Support Policies under Uncertainty," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 80(1), pages 46-57.
    3. Westcott, Paul C., 2005. "Counter-Cyclical Payments Under the 2002 Farm Act: Production Effects Likely to be Limited," Choices: The Magazine of Food, Farm, and Resource Issues, Agricultural and Applied Economics Association, vol. 20(3), pages 1-5.
    4. Herlihy, Michael T. & Young, C. Edwin, 1996. "Issues in Agricultural Commodity Policy," Staff Reports 278808, United States Department of Agriculture, Economic Research Service.
    5. Krause, Mark A. & Koo, Won W., 1996. "Acreage Responses To Expected Revenues And Price Risk For Minor Oilseeds And Program Crops In The Northern Plains," Journal of Agricultural and Resource Economics, Western Agricultural Economics Association, vol. 21(2), pages 1-16, December.
    6. Satheesh V. Aradhyula & Matthew T. Holt, 1989. "Risk Behavior and Rational Expectations in the U.S. Broiler Market," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 71(4), pages 892-902.
    7. Barry K. Goodwin & Ashok K. Mishra, 2005. "Another Look at Decoupling: Additional Evidence on the Production Effects of Direct Payments," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 87(5), pages 1200-1210.
    8. William Lin, 1977. "Measuring Aggregate Supply Response under Instability," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 59(5), pages 903-907.
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