What benefits are to be derived from improved farm program planning approaches? – The role of time series models and stochastic optimization

This paper examines whether there is room for improvement in farm program decisions through the incorporation of formal mathematical optimization in the practical planning process. Endeavoring to estimate the potential for improvement we investigate four cases of German cash crop farms over the last six years. The formal planning approach includes a systematic time series analysis of farm-specific single gross margins and a stochastic optimization model. To avoid solutions that would possibly exceed the respective farmer's risk tolerance, the apparently accepted variance of the observed program's total gross margin, which represents an observable reflection of the individual farmer's risk attitude, is used as an upper bound in the optimization. For each of the 24 farm/year combinations, the formal model is used in a quasi ex-ante approach that provides optimized alternative programs.