A PORTFOLIO CHOICE MODEL OF THE FINANCIAL RESPONSE OF INDIANA FARMS TO ALTERNATIVE PRICE AND INCOME SUPPORT PROGRAMS (DISCRETE STOCHASTIC PROGRAMMING)
Abstract
The purpose of this study is to estimate Indiana corn-soybean-hog farm level financial adjustments that may occur under alternative price and income supports. Specifically, the effects of alternative policies on farm wealth, debt use, diversification and growth are examined. Results from a theoretical model indicate that with the elimination of price and income supports, farmers will use less debt, and reduce the probability of farm bankruptcy. An empirical model was set up to empirically test the hypotheses from the theoretical model. A four year discrete stochastic programming model of a representative Indiana corn-soybean-hog farm was constructed. The model consists of 4262 constraints, 6225 variables, with 901 nonlinear variables. Three alternative government policies are studied. The "1981 programs" scenario is a continuation of the 1981 Farm Bill with levels of support frozen at 1984 levels in nominal dollars. The "1985 programs" scenario represents the 1985 Farm Bill. Finally, the last policy studied is a "Free Market" scenario, which completely eliminates price and income supports for corn and wheat. Results indicate that with the elimination of price and income supports, farmers can expect on average a 10 to 40 percent decrease in the annual growth rate of equity. The average growth rates in equity are nearly equal under the 1981 and 1985 programs. The Free Market form tends to be a smaller more diversified operation than either the 1981 or 1985 farms. Off-farm employment is much more important to the Free Market farmer. Equity capital is also more valuable to a farmer operating under the Free market. The optimal portfolio of assets for a farm operating under the 1981 programs is nearly the same for the farm operating under the 1985 programs. Under the 1981 and 1985 programs farmers rely on cropland as a means to diversify risk. In conclusion, with the elimination of price and income supports, farms will be less specialized and smaller than they will be under government programs. A farm with above average probability and a 40 percent debt load was found to have a high probability of survival.
Degree
Ph.D.
Subject Area
Agricultural economics
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