Assisting Whole-Farm Decision-Making through Stochastic Budgeting

Stochastic budgeting is used to simulate the business and financial risk and the performance over a six-year planning horizon on a Norwegian dairy farm. A major difficulty with stochastic whole-farm budgeting lies in identifying and measuring dependency relationships between stochastic variables. Some methods to account for these stochastic dependencies are illustrated. The financial feasibility of different investment and management strategies is evaluated. In contrast with earlier studies with stochastic farm budgeting, the option aspect is included in the analysis.Farm Management,

Organic Dairy Farming in Norway Under the 100% Organically Produced Feed Requirement

The EU regulation governing organic production will require 100% organic feed in organic dairy systems from August 2005 compared with 85% currently in Norway. This study aimed to assess adjustments in resource use and financial impacts on organic dairy herds using a discrete stochastic programming model. Farm management effects of the regulatory change varied between farm types. For the two organic dairy systems examined, both having a milk quota of 100 000 litres but with varying farmland availability, the introduction of the 100% organic feed regulation resulted in an economic loss of approximately 6-8% of the net income compared to the current regime. The economic loss was mainly due to the considerable higher price of organic compared to conventional concentrates.feed regulation, organic farming, milk production, stochastic programming, Livestock Production/Industries,

Term Structure of Volatility and Price Jumps in Agricultural Markets - Evidence from Option Data

Empirical evidence suggests that agricultural futures price movements have fat-tailed distributions and exhibit sudden and unexpected price jumps. There is also evidence that the volatility of futures prices contains a term structure depending on both calendar-time and time to maturity. This paper extends Bates (1991) jump-diffusion option pricing model by including both seasonal and maturity effects in volatility. An in-sample fit to market option prices on wheat futures shows that our model outperforms previous models considered in the literature. A numerical example illustrates the economic significance of our results for option valuation.Option pricing, Futures, Term structure of volatility, Jump-diffusion, Agricultural markets, Demand and Price Analysis,

Stochastic Utility-Efficient Programming of Organic Dairy Farms

Opportunities to make sequential decisions and adjust activities as a season progresses and more information becomes available characterize the farm management process. In this paper, we present a discrete stochastic two-stage utility efficient programming model of organic dairy farms, which includes risk aversion in the decision maker's objective function as well as both embedded risk (stochastic programming with resource) and non-embedded risk (stochastic programming without recourse). Historical farm accountancy data and subjective judgments were combined to assess the nature of the uncertainty that affects the possible consequences of the decisions. The programming model was used within a stochastic dominance framework to examine optimal strategies in organic dairy systems in Norway.agriculture, risk analysis, stochastic programming, stochastic dominance, organic farming, Livestock Production/Industries, Q12, C61,

A Comparison of Risk Exposure in Aquaculture and Agricultural Businesses

Agriculture and aquaculture have common features associated with their biological nature affecting risk exposure of the businesses. The aim of this paper is to compare risk exposure in salmon farming and agricultural enterprises in Norway by using an implicit error component model to examine the risk structure of yields, prices and economic returns at the farm level. Results indicate a higher farm-level year-to-year variability in yields, prices and economic returns in salmon farming than in agricultural enterprises. The variability in livestock enterprises was generally lower than for crop enterprises. Return on assets was highest in salmon farming with an average annual return of 9.2%. All of the agricultural farm types exhibited a negative average return on assets on average. Stochastic dominance tests of the distribution of economic returns from aquaculture and agricultural farm types showed salmon farming to be the most risk efficient alternative and salmon farming was most attractive from an investor’s perspective.Risk analysis, variability, Norway, Risk and Uncertainty,

Econometric Analysis of the Effects of Subsidies on Farm Production in Case of Endogenous Input Quantities

The effect of subsidies on farm production has been a major topic in agricultural economics for several decades. We present a new approach for analyzing the effects of different types of coupled and decoupled subsidies on farm production with econometric methods. In contrast to most previous studies, our approach is entirely based on a theoretical microeconomic model, explicitly allows subsidies to have an impact on input use, and takes linkages between the farm and the farm household into account.Agricultural and Food Policy, Productivity Analysis,

Econometric Analysis of the Effects of Subsidies on Farm Production in Case of Endogenous Input Quantities

Replaced with revised version of paper 07/29/09.panel data, subsidies, household model, endogeneity, Norwegian grain farming, Agricultural and Food Policy, Consumer/Household Economics, Production Economics,

Life and work on small-scale farms in Norway: an outlook based on survey results linked to financial data

This paper studies what causes (small-scale) farmers to leave their farms and typically move to urban areas. A data set is constructed by linking survey results with financial data, and the data set is analyzed by multivariate statistical techniques. Our results indicate that, while existence and size of future farm production is important, there is also a difference between farmers who primarily have financial objectives for their farming, and those who have more lifestyle oriented objectives. The latter group is, everything else being equal, more likely to stay on the farm. This could imply that, if preventing migration from rural to urban areas is a policy objective, production support schemes will be effective for some groups, but will be less effective for the group with lifestyle objectives. If this group is to be encouraged to stay on the countryside, policies directed at improving the general living conditions in the local community are likely to be more effective than specific support schemes related to agricultural production.migration, farmer objectives, agricultural policy, structural equation modelling, Agricultural and Food Policy, Research Methods/ Statistical Methods,

Optimal Length of Leys in an Area with Winter Damage Problems – Optimal Economic Lengths of Leys

The optimal economic life cycle of grass leys with winter damage problems in northern Norway and the threshold of winter damage before it is profitable to re-seed grasses are investigated. The loss in profit of a sub-optimal strategy compared to an optimal strategy is briefly discussed. An infinite horizon stochastic dynamic programming model including a normally distributed yield process with possibilities for discrete downward jumps is developed. The jump process reflects the sudden drop in production after winter damage. Normally the yield of ley increases the first few years after a year with downward jump, and this dynamic is included in the model. The transition probabilities used in the model are estimated with Monte Carlo simulation. Our result show that, in the case of winter damage of 50% or more compared to fields without winter damage, it is optimal to replace the ley immediately. If the winter damage is limited to 20-40% of the yield of fields without winter damage, the replacement decision depends on the age of the ley and the current yield level. It does not always pay to replace immediately mildly winter damaged fields that are still producing high yields. It does not pay to replace a ley if there has been no winter damage since establishment and if the relative yield level is ‘satisfactory’ at least until the first episode of winter damage occurs.Farm Management,

DETERMINANTS OF PART-TIME FARMING AND ITS EFFECT ON FARM PRODUCTIVITY AND EFFICIENCY

Little attention has been given in the agricultural economics literature to the impact of off-farm work on farm productivity and efficiency. More knowledge about what determines part-time farming and whether farm productivity and efficiency are affected by part-time farming could help policy makers introduce better targeted rural development policies. This paper aims to fill the above-mentioned gaps by first analysing factors that influence the choice of off-farm work; and then examining how off-farm work influences productivity and technical efficiency at the farm level. An unbalanced panel data set from 1991 to 2005 from Norwegian grain farms is used for this purpose. The results show that the likelihood of off-farm work and the share of time allocated to it increase with increasing age (up to 39 years), and with low relative yields (compared to others farms in the surrounding area/region). The level of support payments is not significantly associated with the extent of off-farm work. Large-scale farms and single farmers tend to have a lower likelihood of off-farm work. Average technical efficiency was found to be 79%. Farmers with low variability in farm revenue were found to be more technically efficient than farmers with high revenue variability. We did not find any evidence of off-farm work share affecting farm productivity − the predicted off-farm work share was not statistically significant. In other words, we did not find any systematic difference in farm productivity and technical efficiency between part-time and full-time farmers.off-farm work, productivity, efficiency, unobserved heterogeneity, panel data, Farm Management,