Uncertainty, expectations and investment decisions for a sample of central Iowa farmers

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2017-06-14
Authors
Heady, Earl
Hildreth, R.
Dean, Gerald
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Extension and Experiment Station Publications
Abstract

The main forces which prevent farmers from making more efficient managerial decisions are risk and uncertainty. Farming is carried on in a choice framework wherein investment commitments must be made at one point in time, with production and revenue forthcoming later. The magnitude of yields, and the price at which products will be sold, can only be established at the time investments are made. The fact that plans must be based on expectations of, or on guesses about, future prices and yields may lead to two possible kinds of errors: (1) If a particular price is expected and plans are made to conform exactly to these expectations, losses or small profits may be realized if the expectations prove to be wrong. (2) If the farmer realizes that his price or yield expectations may prove to be wrong and accordingly selects a compromise plan, his profits will not be maximized even if the expectations prove to be accurate. The possibility of these two types of errors causes investment decisions to be surrounded with confusion. If the farmer is too conservative in his investment policy, he stands to make errors of the second type; if he is not conservative, he stands to make errors of the first type. Most farmers must adopt a compromise course: They do not "step off the deep end" in making the production and investment decisions which appear consistent with expectations of the future. On the other hand, they necessarily must commit funds if they are to carry on farming operations.

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