Decoupled farm payments and the Role of Base Updating under uncertainty

In the context of the U.S farm policy, this paper analyzes the effect that expectations about base updating in future policies have on a farmer’s acreage decision in the presence of price, yield and policy uncertainty. We consider a risk neutral farmer producing a single crop whose income consists of market revenue and government payments. We consider two policy regimes. Decisions made in the current policy regime are linked to government payments in the future policy regime through the possibility of a base update in the future regime. There is policy uncertainty about the possibility of a base update being allowed in the future. We combine stochastic dynamic programming with present value calculations to link current acreage decisions to future program payments. The average optimal planted acreage is weakly increasing in the subjective probability of the future base update. The maximum percentage increase in the average optimal planted acreage is 6%.