Effects of government program payments on farm portfolio diversification

Management expertise and many technological advances tend to favor farm enterprise specialization while income uncertainty due to yield and price variability favors diversification. However, government acreage reduction programs may influence the optional farm-enterprise activity mix and its relationship to off-farm investments. Previous work has not examined both optimal farm investments and the effects of government payments on farm portfolios. This study integrates an examination of optimal farm portfolios with off-farm investment alternatives and the impact of government acreage reduction program payments on the optimal activity mix. A risk-programming model is used to assess farm versus off-farm asset investment strategies and the impact of government program payments on risk-efficient investment portfolios. Comparisons are then made between the resulting risk-efficient portfolios. To highlight the impacts of government program payments due to the methods and procedures used, readers are encouraged to examine the relative changes in the investment portfolios and not concentrate on the absolute investment levels alone. Results indicate that investments in livestock production and financial securities diversify away some risk associated with crop production. As risk aversion increases, the farm will diversify more rapidly toward livestock production and low risk off-farm investments. However, the corn acreage reduction program influences the optimal mix of activities toward more specialization in corn and soybean production and higher investments in the riskier off farm investments. The income-assuring aspect of the acreage reduction program payments, therefore, allows the decision maker to make riskier farm and off-farm investments than perhaps otherwise expected.