Evaluating the relationship between income and uncertainty for a Texas ranch organization

Abstract

Variability in yields of rangeland forage and in livestock prices have been important factors constraining the growth and income generating capacity of ranches in Texas and elsewhere. Accordingly this study was initiated to evaluate the impact of selected risk management choices on the level and stability of returns over time for a representative ranch firm. Single and multiperiod quadratic programming were used to model the representative ranch and to derive sets of efficient income-variance plans. The alternatives available to the ranch firm to reduce risks and/or increase profits included: (1) alternative grazing systems for producing weaned calves from a cow-calf operation, (2) vertical integration into wheat grazing and custom feeding for retained and purchased steers, (3) horizontal integration via rangeland purchases to expand the cow herd and (4) alternative uses of non-irrigated cropland. These production alternatives were incorporated into static and dynamic firm growth decision models which were used to prescribe optimal courses of action by decision-makers operating in an uncertain environment. Uncertainty was incorporated into each model through variances and covariances of gross income margins associated with production activities. The static model was developed to evaluate risk-return relationships between ten alternative grazing systems, vertical integration and non-irrigated cropland production alternatives. The ten grazing systems were developed from alternative stocking rates, supplemental feeding rates and alternative rangeland grazing methods. ...