or stochastic mode and with various assump-
tions about inflation. In the deterministic
mode with no inflation, the prices and yields
indicated above would be received by the
farmer. If inflation is incorporated, prices re-
ceived and costs increase by the specified rates
of inflation each year. In the stochastic mode,
yields of various types of livestock a farmer ob-
tains vary independently. Because of the influ-
ence of weather, crop yields are correlated and
the prices of many products are correlated be-
cause of substitution effects. In this micro-
level model, variations in the prices received as
a group are assumed independent of yields as a
group. For crops, the correlations among
yields are based on a variance-covariance
matrix derived from Purdue Agronomy Farm
data for the 1951 to 1976 period. Correlations
among prices are based on the annual average
prices received by Indiana farmers during the
1951 to 1976 period, expressed in terms of
1976 purchasing power. Prices received also
are not permitted to fall below a level approxi-
mately 70 percent of the average and these
minimum prices increase with inflation.
INITIAL SITUATIONS
Three hypothetical farm firms represent dif-
ferent asset positions of farmers. For all three
situations the farm operator is assumed to be
28 years old, married, and to have three child-
ren. Each farmer also has the power, tillage,
planting, and harvesting equipment sufficient
for about 320 acres of crops. The hypothetical
farmers are assumed to have experienced the
same prices and yields and to have the same
goals. The initial weightings of these goals and
standards of goal achievement differ among
farmers because of the differences in their re-
source positions.
For Farm A, the low resource farmer has no
land or livestock and operated 240 acres the
preceding year on a 50-50 crop share lease. He
has an investment of $29,160 in machinery,
outstanding loans of $12,000 on the machinery
and $3,000 for operating capital, and a net
worth of $14,160. Debt payments of $7,000 are
due the first year of the simulation. It is as-
sumed that if he purchases land in the future,
the initial purchase would include some build-
ings which could be used for livestock.
For Farm B, the intermediate resource
farmer owns 80 acres, has 25 sows, and
operated an additional 240 acres the preceding
year on a crop share basis. His total invest-
ment is $162,247 and he has long-term debt of
$75,000, intermediate debt of $20,000, and
operating credit of $5,000 for a net worth of
$62,247. Debt payments of $14,000 are due the
first year.
For Farm C, the high resource farmer owns
240 acres, has 25 sows, and operated an addi-
tional 80 acres the preceding year on a crop
share lease. His total investment is $379,247
and he has a net worth of $246,247. Outstand-
ing debt includes $105,000 in long-term debt,
$25,000 in intermediate debt, and $3,000 for
operating credit. Debt payments totaling
$16,250 are due the first year of simulation.
The buildings and livestock operations on
Farms B and C are identical.
Land can be purchased in 80-acre tracts if
the farmers wish to buy and have the neces-
sary financial resources. Five acres of addition-
al land purchased can be used only for perman-
ent pasture. Land also is assumed to be avail-
able in 40, 80, or 120 acre tracts on 50-50 crop
share leases. Possibilities of livestock share
leases are not considered. A simulation run is
terminated if alternatives providing a minimal
level of satisfaction cannot be attained in three
successive years.
Farm operators with three levels of manager-
ial ability, differing only in their technical
transformation rates, are assumed.8 The
average manager obtains yields essentially
equal to the averages indicated previously.
Yields obtained by the high or above average
level manager are 10 percent above the average
level and yields of the below average manager
are 10 percent below the average.
RESULTS AND IMPLICATIONS
The farm firms with the initial resource
situations described were simulated under a
variety of assumed conditions. First, the farms
were simulated for a 20-year period with aver-
age and above average management in the
deterministic mode assuming no inflation. Pre-
liminary analysis indicated that farmers with
below average managerial ability generally
could not attain acceptable levels of satisfac-
tion and the simulations were terminated.
They are not included in the analysis. Second,
these simulations were repeated assuming that
all prices, asset values, and costs increase 3
percent annually. Third, the same initial re-
source situations were replicated 25 times in
the stochastic mode assuming no inflation and
then with 3 percent inflation annually. Fourth,
deterministic simulations were performed
using rates of inflation of 5 percent for land
values, 1 percent for product prices, and 3 per-
8Managerial ability has many aspects. Although only the technical transformation aspect is included in this study, differences in other aspects of managerial
ability are expected to have similar results.
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