Optimal On-Farm Grain Storage by Risk-Averse Farmers

• Main Authors: Jing-Yi Lai, Robert J. Myers, Steven D. Hanson
• Format: Article
• Language: English
• Published: Western Agricultural Economics Association 2003-12-01
• Series: Journal of Agricultural and Resource Economics
• Subjects: grain storage; risk aversion; stochastic dynamic programming
• Online Access: https://ageconsearch.umn.edu/record/31063

Most previous research on post-harvest grain storage by farmers has assumed risk-neutral behavior and/or made restrictive assumptions about underlying price probability distributions. In this study, we solve the optimal on-farm storage problem for a risk-averse farmer under more general assumptions about underlying price distributions. The resulting model is applied to Michigan corn farmers and findings show, contrary to the "sell all or nothing" risk-neutral rule, risk-averse farmers will spread sales out over the storage season. As farmers become more risk averse, the optimal strategy is to sell more grain at harvest and spread sales over the storage season, even though this practice reduces expected return. This result is more consistent with observed farmer behavior than the "sell all or nothing" risk-neutral rule.