Effects of Reduced Government Deficiency Payments on Post-Harvest Marketing Strategies

Effects of reducing government deficiency payments on a wheat producer's post-harvest marketing strategies are evaluated. The deficiency payment is predicted using an average option pricing model to properly value both intrinsic and time values of the deficiency payment. The biggest loss to producers from reducing deficiency payments is in reduced revenue. Although the deficiency payment helps reduce revenue risk, marketing strategies are available that can reduce risk nearly as well as the deficiency payment program can. Some producers will compensate for reduced deficiency payments by increasing use of futures and options contracts. For others, however, the optimal strategy is to sell wheat at harvest, because of high opportunity cost, storage cost, or risk aversion. For those producers, the uncertain deficiency payments increase variability of returns, or risk. Reducing payments reduces this risk, and leads to decreased use of futures and options contracts.