PROFITABILITY OF ALFALFA HAY STORAGE USING PROBABILITIES: AN EXTENSION APPROACH

Western Journal of Agricultural Economics

is shown in Table 2. Hay harvested in July
and marketed in March has a .43 percent
probability of yielding a 6 percent or less rate
of return on storage investment. This can be
compared to ordinary savings accounts earn-
ing 6 percent or more with no risk of loss. At
the extreme values for percentage rates of
return, July harvest sold in March has a 58
percent probability of receiving a negative 18
percent return or less. Results in Table 2 also
indicate that for most market months, proba-
bility of a large loss (< —18 percentage rate of
return) is less than the probability of a large
gain (1 minus probability of ≤18 percentage
rate of return).

Probability information given here has
been presented to Nevada producers.
Perhaps surprisingly to some, producers at-
tending meetings where this information was
presented did not have any difficulty in
comprehending the probability concept.
However, an educational package such as
developed by Harris and Nelson would likely
be useful in expanding producer’s knowledge
of probabilities.

Extension programs have been developed
elsewhere that enable comparison of alterna-
tive investments with producers’ subjective
probabilities of an outcome, e.g., Holt and
Anderson. This method differs from theirs in
that probabilities based on historical percent-
age changes are developed. Thus, available
prior information is utilized in helping pro-
ducers develop expectations about future
probabilities. These two methods are not in
conflict. Historical data are a source of addi-
tional information that may be used in the
formation of subjective probabilities, recog-
nizing there is currently a lack of knowledge
by economists about how personal probabili-
ties are formed and altered [Binswanger].

The emphasis at extension meetings was
placed on showing producers how to use the
estimated probabilities in comparing expect-
ed rates of return from alternative invest-
ments with that of storing hay. Once produc-
ers accepted this treatment of price risk in
storing alfalfa, the next step of using proba-
bilities to compare alternative investments

126

came quickly. Interestingly, some producers
indicated they would accept different levels
of risk (probabilities) depending on rates of
return expected from alternative invest-
ments. In other words, producer responses
suggested that the estimated probabilities
provided useful decision information.

Summary

Historical data can be a useful guide to
assist producers in making storage decisions.
A basic assumption, of course, is that within
season price variations continue to occur in
the same pattern as in the past. If this
assumption is correct, it is possible to esti-
mate expected average rates of return from
storage and the cumulative probability dis-
tribution of percentage rates of return. This
approach treats price change as the only
unknown variable. All other costs are as-
sumed constant or, in the case of insurance,
to vary in a known manner over time.
Information obtained can be useful to pro-
ducers who differ in both their desired long
run average rates of return from storage and
in their willingness to assume price risk in
any given year.

References

Anderson, Jack R., Dillon, John L. and Hardaker, Brian.
Agricultural Decision Analysis. Iowa State University
Press, Ames, Iowa, 1977.

Binswanger, Hans P. “Risk and Uncertainty in Agricul-
tural Development: Risk, Uncertainty and Agricultur-
al Development, eds. J. A. Roumasset, Jean-Marc
Bousard, and I. Singh, Southeast Asian Regional
Center for Graduate Study and Research in Agricul-
ture, College, Laguna, Phillipines and Agricultural
Development Council, New York, New York, 1979.

Harris, T. D. and A. G. Nelson. Using Probabilities in
Making Farm Decisions: A Slide Presentation. G-3,
Oregon State University Extension Service, 1978.

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