Projecting net incomes for Texas crop producers: an application of probabilistic forecasting

Agricultural policy changes directly affect the economic viability of Texas cropproducers because government payments make up a significant portion of their net farmincome (NFI). NFI projections benefit producers, agribusinesses and policy makers, butan economic model making these projections for Texas did not previously exist.The objective of this study was to develop a model to project annual NFI forproducers of major crops in Texas. The Texas crop model was developed to achieve thisobjective, estimating state prices, yields and production costs as a function of theirnational counterparts. Five hundred iterations of national price and yield projectionsfrom the Food and Agricultural Policy Research Institute (FAPRI), along with FAPRI’saverage production cost projections, were used as input to the Texas crop model. Thestochastic FAPRI Baseline and residuals for Ordinary Least Squares (OLS) equationsrelating Texas variables to national variables were used to incorporate the risk leftunexplained by OLS equations between Texas and U.S. variables.Deterministic and probabilistic NFI projections for Texas crops were comparedunder the January 2005 and January 2006 FAPRI Baseline projections. With productioncosts increasing considerably and prices rising moderately in the January 2006 Baseline, deterministic projections of 2006-2014 Texas NFI decreased by an average of 26 percentfor corn, 3 percent for cotton, 15 percent for peanuts, and 12 percent for rice, and werenegative for sorghum and wheat. Probability distributions of projected NFI fell for allprogram crops, especially sorghum and wheat. Higher hay price projections causeddeterministic projections of NFI for hay to rise roughly 13 percent, and increased theprobability distributions of projected hay NFI. Deterministic and probabilisticprojections of total NFI decreased for each year, especially for 2006-2008 when fuelprice projections were the highest.The Texas crop model can be used to simulate NFI for Texas crop producersunder alternative FAPRI baselines. The model shows the impact of baseline changes onprobability distributions of NFI for each crop and for Texas as a whole. It can also beuseful as a policy analysis tool to compare impacts of alternative farm andmacroeconomic policies on NFI.