Evaluating Commodity Farm Program Selection and Economic Return Variability on Representative Farms in the Mississippi River Delta Region Using a Risk Return Framework

TL;DR: In this article, the authors evaluate the impact of the Agricultural Act of 2014 on agricultural producers in the Mississippi River delta region of the Mid-South and provide an estimate to the net present value of the cumulative net returns above variable costs to the producer for the five year life of the farm bill.

Abstract: The Agricultural Act of 2014, signed February 7, 2014, introduces a new era of federal support in the production of major agricultural commodities in the United States for the 2014 through 2018 crop years. The ultimate result of the Act was a 954-page piece of legislation that represented market-oriented policies such as the creation of an area-wide shallow loss revenue support program for covered commodities and a greater reliance on crop insurance products offered as a suite of risk management tools available to producers. The impact that this law has on agricultural producers in the Mississippi River delta region of the Mid-south is not yet fully known. Moving forward, the elimination of the direct payment program is likely to have an impact on farm income, as these payments were made annually and were decoupled from actual market prices. Various combinations of federal farm programs, chosen irrevocable, paired with multiple crop insurance products, that are purchased annually, will act to mitigate the risks of production. Simulation analysis provides a basis for evaluating the variability associated with production systems in the Mississippi River delta region. Three representative rice and soybean farms and six corn, cotton, and soybean farms were modeled as to determine the five year net returns resulting from price and yield risk as well as to evaluate alternative farm program and crop insurance selection. Financial performance of these farms is measured for varying levels of risk using a stochastic efficiency criteria. Results are presented for multiple combinations of the agriculture risk coverage and price loss coverage programs of the commodity title and revenue protection, supplemental coverage option endorsement, and the stacked income protection plan for producers of upland cotton contained in crop insurance title of the current farm law. For each farm at each location, an estimate to the net present value of the cumulative net returns above variable costs to the producer for the five year life of the farm bill is provided. Results from xi different farming operations suggest the preferred pairing of farm programs and crop insurance policies does vary across locale and crops.