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

Arathi Bhaskar and John Beghin ()

Staff General Research Papers from Iowa State University, Department of Economics

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%.

Keywords: decoupling; decoupled payment; base update; expectation; direct payment; countercyclical payments; farm bill (search for similar items in EconPapers)
JEL-codes: Q1 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-agr
Date: 2007-10-29
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Forthcoming in American Journal of Agricultural Economics

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Persistent link: http://EconPapers.repec.org/RePEc:isu:genres:12851

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