Linkages between tenure, risk, and time attitudes: Effects on farm business decisions

The U.S. agricultural sector in the 1990's is characterized by important structural changes. The most noticeable are a rapid shift of the sector toward a greater integration of activities, an increase in the size of operations, with the main implications on capital mix, profit potential, management form, and risk-bearing capacity. The tenure and ownership structure and its impact on freedom to make key production decisions has also been altered by a variety of operating and financial leases. Changes in tenure and ownership are continuing to occur as a consequence of other structural changes and with significant impacts on farmland leasing.;Debates on farmland leasing center around the efficiency implication of various forms of leases, the relationship between leasing, risk and uncertainty, and inter-temporal nature of farm business plans. Many theoretical predictions continue to conflict with empirical evidence, revealing a plurality of views regarding the virtues of various farmland lease types. Definitive conclusions are yet to be reached.;This study uses the inter-temporal portfolio theory and multi-period quadratic programming to investigate economic motivations of farmland lease arrangements and to explore linkages among tenure, risk, and time attitudes and their effects on farm business decisions and performance. A life-cycle model has been constructed, that views consumption, farm business and off-farm investment, and financing as joint decisions, to answer specific questions such as (i) the effects of the of risk aversion on tenure status and farm performance, (ii) the effects of changing time attitudes on financing, acreage, and tenure status decisions, and (iii) to determine the role of farmland leasing as a financial strategy over time and under conditions of uncertainty. IFBFM data on Illinois grain farms have been used for empirical investigation.;Results of this study show that farm businesses can be analyzed in a life-cycle model, in which tenure, production, financing, and investment decisions can be jointly optimized. In this inter-temporal stochastic setting, the degree of risk aversion and changing time attitudes play important roles in decision making. But risk aversion has stronger effects than do time attitudes. Share leasing also is confirmed as an important response to risk, especially as risk aversion increases.