DECISION MAKING RELATING TO RISK MANAGEMENT STRATEGIES IN A FARM PLANNING MODEL

Scope and Method of Study. The principle objective of the analysis is to determine and evaluate risk efficient farm plans for selected production, marketing, and risk management strategies available to farmers in the study area. The specific objectives are to: (1) develop and analyze the necessary data to determine the price, yield, cost of production, and net income variability; (2) determine the impact on net return variability of alternative marketing and risk management strategies; (3) construct a planning model to determine the risk efficient farm plans; and (4) evaluate these farm plans.;Risk efficient plans are determined for a dryland and irrigated farm situation in Southwest Oklahoma. Farm plans for the dryland farm are derived under the assumptions that farmers will: (1) sell all crops at harvest; (2) participate in Farm Programs and sell crops at harvest; (3) sell all crops at harvest except wheat which is marketed in any amount in any month of the crop year; (4) follow strategy (3) and also participate in Farm Program; (5) follow strategy (3) in combination with forward contracting of wheat for June delivery; and (6) follow strategy (5) in combination with crop-share and cash rent alternatives. The same strategies are analyzed for the irrigated situation except that wheat hail insurance is considered instead of Farm programs.;Findings and Conclusions. All the farm plans derived using the three expectation models have the potential for reducing variability.;Farm Programs result in a slightly lower efficiency frontier for harvest sale, and multiple marketing and forward contracting strategies compared to these strategies without Farm programs. Variability is reduced under the Farm Programs except the harvest sale strategy using the moving average models.;A LP-MOTAD model is used to derive the farm plans. Expected gross margins are calculated in three ways: (1) the mean; (2) a three-year unequally weighted moving average (UWMA); and (3) a three-year equally weighted moving average (EWMA). Risk in gross margins is defined as negative deviations from the expected gross margins.;Wheat hail insurance alternatives do not move the farmer to a higher efficiency frontier compared to the same strategies without insurance. Relative variability is reduced in all strategies that included wheat insurance except the harvest sale strategy using the EWMA model.;The producer attains a higher efficiency frontier under the multiple wheat marketing strategies than sale at harvest with and without Farm Programs, and harvest sale with and without wheat insurance. Relative variability is reduced only under the moving average models for the dryland farm and under the mean expectation model for the harvest sale and wheat insurance strategy for the irrigated farm.;Forward contracting and multiple marketing alternatives resulted in the same solution as under multiple marketing using the mean expectation model. The producer attains a higher efficiency frontier and lower variability when the moving average expectation models are used. Relative variability is reduced for the dryland farm using the moving average models and the irrigated farm using the mean and the EWMA expectation model.;Maximum expected total gross margins and variability are lower for all farm plans under the mean expectation model than under the moving average models. Farm plans derived under the moving average models are similar. The difference in the moving average plans are only in terms of the level at which the activities enter the solutions. The marketing plans are more diversified under the mean expectation model than under the moving average models.