Academic journal article Journal of Agricultural and Applied Economics

Enhancing Farm Profitability through Portfolio Analysis: The Case of Spatial Rice Variety Selection

Academic journal article Journal of Agricultural and Applied Economics

Enhancing Farm Profitability through Portfolio Analysis: The Case of Spatial Rice Variety Selection

Article excerpt

This study applies portfolio theory to rice varietal selection decisions to find profit maximizing and risk minimizing outcomes. Results based on data from six counties in the Arkansas Delta for the period 1999-2006 suggest that sowing a portfolio of rice varieties could have increased profits from 3 to 26% (depending on the location) for rice producers in the Arkansas Delta. The major implication of this research is that data and statistical tools are available for rice producers to improve the choice of rice varieties to plant each year in specific locations. Specifically, there are large potential gains from combining varieties that are characterized by inverse yield responses to growing conditions such as drought, pest infestation, or the presence of a specific disease.

Key Words: optimal variety selection, portfolio analysis, rice

JEL Classifications: G11, Q15, Q12

Typically, rice producers in Arkansas plant more than one rice variety each year in an attempt to diversify yield risk. However, these variety combinations are typically selected based on variety descriptions, intuition, and average yields, ignoring one of the most important pieces of information, the relationship between varieties. While extension services throughout the Southeast recommend planting multiple rice varieties, they do not provide recommendations or information about the structural interaction between varieties. In the University of Arkansas Extension Service rice production handbook, diversity in seed selection is emphasized. Slaton reports that, "seeding a large percentage of acreage to single variety is not recommended, planting several varieties minimizes the risk of damage from adverse weather and disease epidemics and increases the chance for quality seed with maximum yields" (Slaton, 2001). Extension Agencies in the Southeast do have programs that allow producers to select a specific variety and receive recommendations on optimum seeding rates, seedbed preparation, seeding date range, and drill width. An obvious void in these recommendations may be the most important recommendation of all, which varieties to plant for optimal diversification.

The selection of rice varieties through portfolio theory, similar to the extensive literature in the finance world, offers producers the potential to increase yield and decrease yield variability simultaneously. Using location-specific empirical data, portfolio theory can provide producers a tool that is able to recommend a bundle of varieties to meet a specific objective, either maximizing yield around a given variance or minimizing variance around a given yield. This paper uses existing literature on portfolio theory and applies it to rice varietal selection for six counties in the Arkansas Delta. Three scenarios are evaluated. The first scenario holds constant actual historical yield (bu) and develops a portfolio of rice varieties to minimize the variance around that yield. The second scenario holds historical yield variance constant and develops a portfolio of rice varieties to maximize yield around the given variance. The third scenario develops a portfolio of rice varieties that maximize profit per acre around a specified variance. The final scenario has great appeal given the recent propagation of Clearfield and hybrid varieties. These varieties allow producers greater planting flexibility in more varied environments but also often embody higher production costs. This study takes the rather broad extension recommendation of "diversifying rice varieties to minimize risk" a step further by developing specific portfolios of rice varieties based on spatial costs and production differences to maximize profit and to minimize risk per acre.

Literature Review

Portfolio theory was initially developed by Markowitz (1959) and Tobin (1958), with extensions by Lintner (1965) and Sharpe (1970) focusing on financial investments. A "portfolio" is defined simply as a combination of items: securities, assets, or other objects of interest. …

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