Decoupled Farm Payments and the Role of Base Acreage and Yield Updating Under Uncertainty

We analyze the coupling effect of expectations about base acreage and yield updating in future farm policy on production decisions in the presence of price, yield, and policy uncertainty for a risk-averse farmer producing a single crop. The farmer receives market revenue and government payments. Using stochastic dynamic programming, optimum decisions under present value calculations positively link current acreage and fertilizer decisions to future government payments through expected updates of base acreage and yield in the future regime. Moving from a zero probability of updating to a probability of one increases optimum acreage and yield by 6.25% and 0.134%, respectively. Copyright 2010, Oxford University Press.