Decoupled Farm Payments and the Role of BaseAcreage and Yield Updating Under Uncertainty

In the context of U.S. farm policy, this paper analyzes the effect that expectationsabout base acreage and yield updating in future policies have on a farmer’s productiondecisions in the presence of price, yield and policy uncertainty. We consider a riskaverse farmer producing a single crop whose income consists of market revenue andgovernment payments. We consider two policy regimes. Decisions on acreage andfertilizer use made in the current policy regime are linked to government payments inthe future policy regime through the possibility of a base acreage and yield update inthe future regime. There is policy uncertainty about the possibility of the updates beingallowed in the future. We combine stochastic dynamic programming with presentvalue calculations to link current acreage and input use decisions to future programpayments. The average optimal planted acreage and fertilizer use are increasing inthe subjective probability of the future update. The estimated maximum percentageincrease in the average optimal planted acreage is 6.25%. The estimated maximumpercentage increase in the average yield, resulting from optimal fertilizer use is muchsmaller at 0.134%.[...]