Generalized safety first and the planting of crops

Abstract

This article adapts a modern shortfall-based portfolio selection rule developed by Stutzer (2000) and Haley and Whiteman (2008) to the farm manager's land allocation problem. The approach provides a useful normative model of land allocation that obviates distributional assumptions and expected utility specifications, and one that selects an optimal allocation that weighs skewness and other higher order moments in addition to mean and variance. This is of particular interest because crop returns often exhibit skewness, which is not accounted for by traditional Mean-Variance (MV)-based approaches. The rule is demonstrated using the data from Lence and Hart (1997).

Keywords:

• land allocation
• skewness
• shortfall

JEL Classification:

• Q10
• Q15

Acknowledgements

The author is grateful to Harry J. Paarsch and Charles H. Whiteman for helpful comments and useful suggestions. The data set used for this analysis is maintained by the Illinois Farm Business Farm Management Association (IFBFMA). The same raw data set was used by Lence and Hart (1997), and it was from them, with permission of Dale Lattz of the IFBFMA, that the raw data were obtained; their helpfulness is gratefully acknowledged.

Notes

¹ See Stutzer (2000) and Haley and Whiteman (2008) for a thorough presentation of the PPI and GSF. Haley (2005) contains a broader discussion of the land allocation problem.

² Source: the Economic Research Service, a division of the US Department of Agriculture.