Assessing the Effects of Climate Change on Farm Production and Profitability: Dynamic Simulation Approach

In this paper, a dynamic optimization model was developed to simulate how farm-level realized price and profitability respond to yield change which was induced by climate change. Producers' acreage response was included in the dynamic model considering crop rotation effect. In the crop rotation model, a modified Bellman equation was used to dynamically optimize the net present value of farm profit for a five-year interval. This simulation process was repeated through the year 2050. Then yield, price, and acreage response were compiled to generate realized profit. Results generally indicated that reduction in crop yields due to climate change results in reduced farm profitability for most of the states studied. Predicted climate change is more likely to pose a problem for agricultural production and profitability in the southern U.S. states as compared to the northern U.S. states. Our results also suggest that acreage response alone is not sufficient to ameliorate the potential negative effects of global climate change on agricultural production and profitability. The results of this research are expected to provide a foundation for future related research to aid producers' crop rotation decisions in an unstable price environment.