IDEAS home Printed from https://ideas.repec.org/p/tea/wpaper/0503.html
   My bibliography  Save this paper

The Role of Risk in the Decision to Produce Post-Decoupling A Stochastic Budgeting Example

Author

Listed:
  • Fiona Thorne

    () (Rural Economy and Development Programme, Teagasc, Athenry, Co. Galway, Ireland)

  • Thia Hennessy

    (Rural Economy and Development Programme, Teagasc, Athenry, Co. Galway, Ireland)

Abstract

Under the Mac Sharry and Agenda 2000 reforms, direct payments comprised a significant portion of farmers’ income in the EU. Farmers had to engage in production to receive these payments but the payments were relatively risk-free and therefore risk may not have played an important role in the production decision. This paper considers the effect of the decoupling of direct payments from production in the EU on the decision to engage in production and in particular, the paper focuses on the role of production risk in that decision. In an environment where direct payments are completely decoupled from production, farmers may engage in an ‘entitlement farming’ system, that is retain their land only to activate the decoupled payment and not actually produce any tangible goods. This paper examines the effect of production risk on the economic trade off between ‘entitlement farming’ and conventional farming. A stochastic budgeting model is developed for two representative farms. The model is used to measure the probability that the returns to the ‘entitlement farming’ system could exceed the profit emanating from a conventional farming system given production risk. The results show that for the less efficient representative farm, the probability of achieving a significantly higher profit by engaging in entitlement farming is 46 percent, while further analysis shows that there is a 9 percent probability that profits from conventional farming systems would be only marginally higher than the ‘entitlement farming’ option.

Suggested Citation

  • Fiona Thorne & Thia Hennessy, 2005. "The Role of Risk in the Decision to Produce Post-Decoupling A Stochastic Budgeting Example," Working Papers 0503, Rural Economy and Development Programme,Teagasc.
  • Handle: RePEc:tea:wpaper:0503
    as

    Download full text from publisher

    File URL: http://www.teagasc.ie/rural-economy/downloads/workingpapers/05wpre03.pdf
    File Function: First version, 2005
    Download Restriction: no

    References listed on IDEAS

    as
    1. Harwood, Joy L. & Heifner, Richard G. & Coble, Keith H. & Perry, Janet E. & Somwaru, Agapi, 1999. "Managing Risk in Farming: Concepts, Research, and Analysis," Agricultural Economics Reports 34081, United States Department of Agriculture, Economic Research Service.
    2. Maurice J. Roche & Kieran McQuinn, 2003. "Grain price volatility in a small open economy," European Review of Agricultural Economics, Foundation for the European Review of Agricultural Economics, pages 77-98.
    3. Roche, M.J. & McQuinn, K., 2002. "Grain Price Volatility in a Small Open Economy," Economics, Finance and Accounting Department Working Paper Series n1130202.pdf, Department of Economics, Finance and Accounting, National University of Ireland - Maynooth.
    4. Lien, Gudbrand, 2003. "Assisting whole-farm decision-making through stochastic budgeting," Agricultural Systems, Elsevier, pages 399-413.
    Full references (including those not matched with items on IDEAS)

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:tea:wpaper:0503. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (John Lennon). General contact details of provider: http://edirc.repec.org/data/reteaie.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.