Evaluating farm management strategy using sensitivity and stochastic analysis

Abstract

The dramatic changes that have taken place in the production agriculture industry in the last decade have the Long Family Partnership wanting to reassess their farm land management strategy. As land owners, they feel as though they might be missing out on profit opportunity by continuing their current lease agreements as status quo. The objective of this research is to determine the optimal land management strategy for the Partnership farm that maximizes net returns for crop production, but also taking into account input costs and risk. Three scenarios were built: (1) a Base Case of the current share-crop and cash lease Agreements; (2) the possibility of farming their own irrigated farm land and continuing to cash lease land used to produce dryland wheat; and (3) deciding to farm all the irrigated and dry land farm acreage themselves. In order to do this, a whole-farm budget spreadsheet model was generated to assess alternative land management scenarios. The difference in net returns between alternative land rental scenarios were then compared and followed by a sensitivity analysis and stochastic analysis using @RISK software. The findings concluded that there was greater potential to increase net farm income while still conservatively managing risk by investing into their own farm land, as not only owners but also as operators. The stochastic and sensitivity analysis confirmed that farming their own land was more sensitive to changes in yields, prices and input expenses. However, even in consideration of the additional risk, the probability of increasing net farm income was greater for the scenarios in which they farmed their own land.