Academic journal article
By Alexander, Corinne; Fernandez-Cornejo, Jorge; Goodhue, Rachael E.
Journal of Agricultural and Resource Economics , Vol. 28, No. 3
Prior to the 2000 planting season, some industry observers predicted acreage of genetically modified crops would decline dramatically. However, actual 2000 plantings presented a puzzle. Farmers reduced their acreage of genetically modified corn, but concurrently increased their acreage of genetically modified soybeans. We demonstrate that it may be theoretically optimal for risk-averse farmers to reduce their corn acreage but not their soybean acreage. However, past experience, attitudes, and farm size explained planting decisions to a larger degree than did risk preferences.
Key words: expected utility, genetically modified crops, two-limit tobit model
The introduction of genetically modified (GM) crops in 1996 was heralded as a new era of agriculture; farmers would benefit from lower production costs, higher yields, and reduced pesticide use. From the beginning, Europe and Japan expressed misgivings about food that had been genetically manipulated, and refused to import transgenic grain. The European and Japanese consumer controversy over GM crops intensified in late 1999 and early 2000. Anticipating the possibility this negative reaction would spark consumer concerns in the United States, several American companies, including Gerber, Frito-Lay, and Heinz, announced they would discontinue use of GM ingredients in their products. Consequently, agricultural producers entering the 2000 crop year faced increased uncertainty regarding the demand for these crops.
Prior to the 2000 planting season, some industry observers predicted GM acreage would decline dramatically. However, actual 2000 plantings presented a puzzle. Farmers reduced their acreage in GM corn, but concurrently increased their acreage in GM soybeans. Our objective is to analyze the determinants of spring 2000 planting decisions, and evaluate the importance of demand uncertainty for GM crops as a decision factor. We model the demand uncertainty as an uncertain price penalty for GM crops. A theoretical model of the acreage allocation decision for a risk-averse producer is paired with producers' assessments of the relative production risks and returns of GM and conventional crops. These assessments were elicited using focus groups. Testable hypotheses are obtained regarding the effects of the GM controversy, and then are tested using data from a spring 2000 survey of Iowa producers.
A producer's acreage allocation decision is modeled using expected utility maximization for a risk-averse producer choosing between a GM and a conventional variety. The producer faces yield risks for GM and conventional products. Due to the controversy, the producer faces a further risk for the GM crop in addition to price risk. In comparing the GM and conventional varieties, we focus on the additional risk associated with the GM alternative, since both the GM and conventional crops face the same underlying price risk associated with commodity crops. In order to emphasize the GM-conventional variety choice, the allocation decision is examined within a specific commodity rather than across commodities. Including commodity price risk responses and the cross-commodity acreage allocation decision would complicate the analysis substantially without providing additional insight into the questions we emphasize.
The decision to model risk-averse producers is based on findings of previous economic research as well as producer comments elicited through focus group discussions. Several empirical studies have established that producer risk aversion is an important factor in acreage allocation decisions using producer-level data. Results of a study conducted by Marra and Carlson suggest the intensity of adoption could be explained by differences in farmer attitudes toward risk and the covariance of enterprise returns. Saha, Shumway, and Talpaz jointly estimated production function and utility function parameters and determined that Kansas wheat farmers exhibited risk-averse preferences. …