SOUTHERN JOURNAL OF AGRICULTURAL ECONOMICS
DECEMBER, 1978
SOME IMPACTS OF INFLATION ON
FARM FIRM GROWTH
George F. Patrick
During the 1970s, many changes have influ-
enced U.S. agriculture. Researchers have de-
voted considerable attention to analyzing the
effects of greater variability of agricultural
product prices and means of coping with im-
perfect knowledge. Questions related to energy
and the environment are receiving increased re-
search emphasis. Hathaway [2] has written on
inflation and food prices and Tweeten [10] has
analyzed the real price effects of inflation on
agriculture and total net farm income. Agricul-
tural lenders, farmers, and others have ex-
pressed concern about higher land prices and
capital requirements, but little research has
been directed toward analyzing the effects of
inflation at the firm level.
The objective of this study is to analyze
some of the impacts of inflation on growth,
defined as real net worth and capital invest-
ment of the farm firm. First, the simulation
model developed to analyze the effects of infla-
tion and other factors on the growth of a farm
firm is described. Then three hypothetical
initial “farm” or resource situations are de-
scribed and analyzed. Finally, the simulation
results obtained and some of their implications
are reported.
MODEL
The simulation model used in this study is an
evolution of the behavioral model described by
Patrick and Eisgruber [7]. For each of the hy-
pothetical situations analyzed, the resources
available, goals of the operator, and past ex-
perience define the set of alternatives con-
sidered. Anticipated results of each alternative
are calculated by using prices and yields ex-
pected by the operator. The anticipated out-
come is evaluated in relation to the multigoal
objective function and the plan providing the
highest level of satisfaction is selected for im-
plementation. Results obtained from imple-
mentation of the selected alternative are used
to update information for the following year’s
decision-making.1
The firm’s resource position and goals of the
operator influence the set of alternatives con-
sidered. In the planning process, the first alter-
native considered is that of repeating last
year’s plan, if it provided at least a minimum
level of overall satisfaction. Next, alternatives
involving purchase or share leasing of addi-
tional land are considered. Financial and labor
constraints can limit consideration of land pur-
chase and/or expansion of the acreage operated
on a crop share lease. Given existing livestock,
alternative crop programs representing differ-
ent crop rotations are considered. After analy-
sis of the crop program attention is directed to
expansion and changes in the livestock enter-
prises. Additional labor, machinery, equip-
ment, and building resources can be acquired if
needed to implement an alternative and the
additional costs of these resources are con-
sidered in the budgeting process. The alterna-
tives considered, such as land purchase, can be
influenced by the relative importance of the
operator’s goals.
Price and yield expectations of the hypothet-
ical farm operator are used to budget the
anticipated results of each alternative. Re-
search [6, 9] indicates that farmers tend to pro-
ject the recent past into the future. It is as-
sumed in formulating expectations for year t
that year t-1 is weighted as 70 percent, year t-2
as 20 percent and year t-3 as 10 percent.2 Long-
term expectations with respect to prices and
yields are the mean of the past three years’
levels.
The model assumes the farm operator has
George F. Patrick is Assistant Professor of Agricultural Economics, Purdue University.
Purdue Journal Paper Number 7271. The research on which this article is based was conducted under Project 45073 of the Indiana Agricultural Experiment
Station. Appreciation is expressed to Tim Baker, Craig Dobbins, and Earl Kehrberg for their comments on an earlier version.
'For a further description of the various feedback loops and model’s structure, see 17) and the general discussion in )4].
2These weights are arbitrary, but do not appear inconsistent with the studies cited and they are similar to the weights used by Chien and Bradford [1]. Varying
the weights of the years was found to have little effect in the model.