The effect of risk on the distribution of benefits from farm programs and land values

Joyce Ann Hall, Purdue University

Abstract

Reducing risk to producers is a farm policy goal. In fact, it may be the most important reason for the existence of farm programs. As well, government intervention to reduce risk may increase social welfare. Also, considerable empirical evidence suggests the importance of risk in agriculture. Yet most policy analysis focuses on the income increasing abilities of farm programs and uses riskless models. Given farm policy goals and the importance of risk in agriculture, this does not seem appropriate. Recently, due in part to farm financial stresses and increasingly large government expenditures on farm programs, several alternative programs have been suggested. Suggestions have included the lowering of loan rates and target prices, removing target prices, mandatory supply control programs, or ending government support entirely. Therefore, the purpose of this dissertation was to conduct an economic analysis of these alternative programs in a model that captures risk endogenously. The results of this study suggest corn and soybean acreage, as well as land rents and prices, are responsive to risk, but that the elasticities with respect to risk are small. Second, the results do not suggest that there are social benefits to government programs that reduce risk. In contrast, programs which did relatively poorly in stabilizing producer revenues yielded greater net social benefits. It does not appear necessary to endogenize risk to correctly rank programs in terms of their ability to increase and stabilize producer revenues. However, when risk is endogenous some programs, particularly loan programs, appear relatively better. In conclusion, the results of this study suggest that econometric models should be estimated as risk responsive but that there are not necessarily net social benefits to programs which reduce risk. Policy analysis may appropriately reach this conclusion without explicitly considering risk in policy simulation models. However, considering risk as an endogenous variable will aid in determining the magnitude of change and variability in producer revenues and land prices, between alternative policies.

Degree

Ph.D.

Advisors

Brorsen, Purdue University.

Subject Area

Agricultural economics

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