The Acreage and Borrowing Effects of Direct Payments Under Uncertainty: A Simulation Approach
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We use simulation methods in an expected utility maximization
framework to analyze a farmer’s optimal resource allocation in the
presence of government payments, decoupled and not. This framework is
extended to incorporate the optimal choice of investment levels in the
presence of credit constraints. Further extensions include a
wealth-dependent interest rate and decreasing marginal yields. We find
decoupled payments affect the optimal choices of the
credit-constrained farmer through a collateral-enhancement effect, so
they do distort production. The 2005 proposal by Senators Grassley,
Dorgan, Hagel, and Johnson to tighten limits on commodity payments is
not found to affect payments of the typical Kansas farmer.