Managing Risk by Coordinating Investment, Marketing and Production Strategies

This study of the farm firm integrates long run investment and financial decisions, and short-run production and marketing decisions into a single decision framework that includes both time and risk. The results suggest that the use of various strategies for managing market risks allow the entrepreneur to accept more risk in investing and producing; and that an integrated analysis of production, marketing and investment-financing alternatives is essential to make accurate recommendations about risk management strategies. Risk management is receiving much more attention in the literature. Most studies focus on short-run production or marketing decisions; exceptions are stud-ies of risk in farm growth models by Barry and Willman, Kaiser and Boehlje, Batter-ham, and Chen. This study adds long-run investment and financial decisions to broaden the scope of risk analysis. Specific problems analyzed are: 1. How big should the farm be? How much land, machinery, and feedlot should be added? 2. What should be produced? How much should a farmer diversify? 3. How should production be market-ed? Can diversified marketing allow riskier investment or production? No model can fully simulate the com-plex decision set facing farmers. But in-corporating investment, production, and marketing options in one model yields further insights as to interactions among these decisions when risk is present. Mode