Optimal Sequential Plantings of Corn and Soybeans Under Price Uncertainty

Michael Livingston, Michael Roberts and Yue Zhang ()
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Yue Zhang: Department of Agricultural and Resource Economics

No 201412, Working Papers from University of Hawaii at Manoa, Department of Economics

Abstract: Optimal crop choice and fertilizer applications depend on the stochastic dynamics of commodity prices, fertilizer prices, and the agronomic effects of rotation versus monoculture. The efficient decision rule accounts for real option values associated with maintaining land disposition in an environment with highly uncertain future prices and irreversible past planting decisions. We parameterize a baseline model for a representative acre in Iowa and compare the model's predictions and profits to relatively naive, shorter-horizon decision rules, and a field managed with optimal fertilizer applications conditional on corn and soybeans always being rotated. We also examine the effects of a permanently larger premium on corn prices relative to soybean prices, which has been observed in locations near recently established ethanol plants. We then compare the various decision rules to actual crop choices in a panel of over 6500 Iowa plots during 1979-2007. As compared to less forward-looking objectives, we find the agronomic benefits of rotations coupled with real option values can lead to a more inelastic response of planting decisions to both transitory and permanent price changes. Always rotating, regardless of prices, is close to optimal, but so are shorter-horizon objectives. One implication is that reduced corn monoculture and fertilizer application rates might be implemented with modest incentive payments of $4 per acre or less.

Keywords: crop rotations; uncertainty; option value; supply response; dynamic programming. (search for similar items in EconPapers)
JEL-codes: Q11 Q12 (search for similar items in EconPapers)
Pages: 55 pages
Date: 2014-04
New Economics Papers: this item is included in nep-agr
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Citations: View citations in EconPapers (2)

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http://www.economics.hawaii.edu/research/workingpapers/WP_14-12.pdf First version, 2014 (application/pdf)

Related works:
Journal Article: Optimal Sequential Plantings of Corn and Soybeans Under Price Uncertainty (2015)
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