Analysing Farmers' Decision-Making Process Face to the Mid-Term Review of the Common Agricultural Policy in the Alentejo region of Portugal

This paper describes an experiment that was carried out in order to examine the decision making process of farmers in the Alentejo dryland region of Portugal. Cumulative Prospect Theory allows modeling the Alentejo dryland farmers' decision process, because when they decide what crops and livestock activities will produce the different results are appraised relatively to the initial wealth, which permits its appraisal in terms of gains and of losses. An inquiry is developed to study the Alentejo dryland farmers' preferences, which intend to determine risk preferences through a set of games. A discrete sequential stochastic programming model is developed to examine farmers' decision-making process face to the mid-term review of the Common Agricultural Policy. The objective function, that maximizes the total value of the game, portrays the farmers' behavior face to risk and it is constituted by the set of functions (value function and probability weighting function) ranked upward. The total value of the games will be given by the sum of the positive and negative components. Model results show that Cumulative Prospect Theory portrays the Alentejo dryland farmers' decision-making process quite well. All the farmers produce durum wheat as main agricultural production and choose the maximum of number of cattle heads and sheep herds. The full decoupling of income payment from agricultural production leads to the abandonment of the durum wheat production. The beef cattle farmers keep their production and the sheep farmers reduce their herds drastically. The introduction of 50% of sheep premium, proposed by the Portuguese Government, raises sheep production, accompanied of the increase of the pasture area. These results permit to conclude that the Portuguese Government's proposal is sufficiently cautious because, on the one hand, when associating to 100% of suckler cow premium allows the use of the shares negotiated with European Union in 2003 and when associating to 50% of sheep premium permit the maintenance of sheep herd. On the other hand, the Portuguese Government's proposal of crop subsidies not linked to agricultural production forces the farmers to choose alternative agricultural activities in the bad soils. Finally, the introduction of the area crop-yield insurance program associated with the new Common Agricultural Policy is an interesting alternative for the Alentejo dryland farmers, because the new Common Agricultural Policy only secure a minimum farm income level, while the insurance program permits making face to agricultural production variability and avoids the abandonment of the agricultural activity.