Simulating Net Returns Among Enterprise Selection and Farm Program Choice Under Risk

Abstract

Farm-level returns can provide a measure of a grower’s conviction for crop choice and farm program preference among alternative enterprise and farm program choices across varying levels of risk aversion. The objectives of this study were to incorporate stochastic efficiency with respect to a function as a means of ranking alternative crop enterprise selections among corn, cotton, rice, and soybeans and to include farm program choice between the Agricultural Risk Coverage county option program and the Price Loss Coverage program (PLC) on two representative farms in Louisiana, one located in Rapides County/Parish (central) and one located in Tensas County/Parish (northeast), for grower profitability. Using certainty equivalent (CE) values as proxies for grower risk premium, farm analysis examined those CE values for enterprise and farm program selection on the basis of grower net returns. In the absence of farm program enrollment, a corn/soybean/cotton rotation was preferable for both farms. When farm program payments were considered, cotton/corn/rice rotation would be more profitable for both farms under PLC for the grower across multiple levels of risk aversion. Crop choice and program election have an important place in the farm management decision. As market conditions change, growers are more able to tailor their farm program choice to mitigate the type of risk they deem more imminent (revenue versus price).