Decisions and Tradeable Production Quota When Yield is Uncertain

This article analyses optimal decisions under regulation by tradable agricultural production/marketing quotas when production is stochastic. For risk-neutral and risk-averse producers the fraction of planned production that is covered by quota is separable from input decisions when yield randomness is additive. The role of quota in protecting against the risk of production shortfall is investigated. A producer is shown to benefit from being allowed to treat as one all tranches of production quota under his control. Production decisions are invariant to this amalgamation. But when production randomness is additive normal, the qualitative impact of amalgamation on quota positions depends upon whether the ratio of rental price to the price difference that is being protected exceeds one half.