Summer 1988 // Volume 26 // Number 2 // Feature Articles // 2FEA6
Making Better Decisions
Extension farm management and policy specialists have traditionally conducted educational programs to inform agricultural producers of government farm programs and to help them determine if they should participate in those programs. These decisions have become increasingly complex because of: (1) the requirement that producers bid for the opportunity to participate in some programs such as the Conservation Reserve Program (CRP) and the Milk Production Termination Program (MPTP) and (2) the option of choosing a level of participation in many commodity programs-that is, due to provisions like the 0/92 and 50/92 options of some commodity programs, the participation decision is no longer a simple yes-no choice.
Recognizing these factors, Extension economists in most states develop worksheets or computerized spreadsheets to help producers make the right decisions. These worksheets are designed to incorporate the complexities of the policy provisions into calculation procedures that can be understood and completed by agricultural producers.
In a recent study, we evaluated CRP and MPTP worksheets developed by Extension economists in a number of states.1 Wide variation was discovered in both the analytical procedures and the worksheet styles. In fact, the results (which focused only on a comparison of analytical procedures) suggested that users could have reached different conclusions depending on which worksheet they used to evaluate the decision.
These findings led to guidelines that should help Extension specialists develop better program participation decision aids. These are the product of personal experience in developing such decision aids and of insight gained from working through 20 CRP worksheets and seven MPTP worksheets developed by other Extension specialists. Because the rationale for several of the guidelines is explained with reference to the CRP and MPTP experience, a brief overview of these programs is necessary before the guidelines are laid out.
The MPTP was established by Title I of the Food Security Act of 1985. The program's objective is to encourage the adjustment of milk production to levels consistent with national demand. Dairy producers who terminate milk production for five years receive compensation.
The most obvious economic consequence of MPTP participation is loss of dairy income. Another important factor is the requirement that dairy animals are sold for slaughter or export. Most commercial dairy producers would thus have to sell their herds for slaughter prices that may be half or less of their market value for dairy use. Income tax considerations are also important.
Title XII of the 1985 Farm Bill created the Conservation Reserve Program. The program's objective is to remove highly erodible land from crop production for a 10-year period. Entry into the CRP is based on competitive bidding, and economic use of CRP acreage is severely restricted. Grazing and seed harvesting are prohibited. In fact, the only income permitted from the acreage is income derived from recreational uses, such as hunting leases and camping fees.
Loss of income from crop production is the most apparent economic consequence of CRP participation. Another cost of entering the program is that of establishing a soil-conserving crop cover on CRP acreage. Although up to 50% of this cost is reimbursed by the federal government, the landowner's cost may still be significant. Also, the landowner is responsible for the costs of maintaining conservation practices during the 10-year contract period.
Annual CRP rental payments and establishment cost sharing are the obvious economic benefits of program participation. Other favorable economic consequences may include: (1) reduced machinery and equipment ownership costs and (2) a possible property tax reduction.
The following set of guidelines is the product of personal experience in developing Extension decision aids and of insight gained from working through and comparing 20 CRP worksheets and seven MPTP worksheets developed by other Extension specialists. They're designed as a step-by-step procedure for decision aid development, which should improve the quality of the product produced.
Step 1: Formulate the problem incorporating all technical factors that might affect the results. The MPTP and CRP analyses showed that some decision aids produce inaccurate results because the economic problem isn't fully developed. For instance, several MPTP worksheets failed to incorporate federal income taxes into the analysis. This resulted in significantly underestimating the breakeven MPTP bid.
Step 2: Perform test calculations to determine whether some factors can be omitted from the analysis without significant loss of accuracy. This step is important because it may be desirable to make trade-offs between technical accuracy and simplicity. Often, technical factors that clearly enter into the fully formulated problem may be omitted without significantly affecting the results. A simplified calculation procedure is more likely to be completed correctly and understood by producers.
An example of such a simplification arose in the CRP analysis. It related to calculation of the annual payment required to compensate producers for their share of conservation practice establishment costs. These costs are incurred in the first year of program participation, but the compensation is received in 10 equal annual rental payments.
However, developers of a number of the CRP decision aids chose to ignore the difference in timing. As a result, the calculation procedures were significantly simplified. A comparative analysis over a wide range of discount rates revealed that this simplification caused a minimal difference in the results and thus was probably desirable.
Step 3: Reformulate the problem, including only factors that significantly affect the results. This follows directly from Steps 1 and 2.
Step 4: Develop a procedure that performs the necessary calculations as efficiently as possible without loss of clarity. A logical calculation procedure enhances the user's understanding of, and confidence in, the decision aid. Two procedures can perform the same set of calculations, but the structure of one can make the underlying logic much clearer. In the MPTP and CRP cases, several worksheets segmented the calculations into logically appealing sections. Each of these sections resulted in a set of preliminary calculations obtaining a factor to enter into a summary section, where the final calculations were performed. These procedures were easier to understand than equivalent procedures that performed a long string of sequential calculations without segmenting the problem.
Step 5: Provide supporting materials for preliminary calculations. Government program participation decision aids often require inputs that must be obtained from other fairly involved calculation procedures. For instance, in the case of the CRP, it was necessary to estimate returns foregone from crop production on the CRP acreage. Most of the decision aids requested this as a single entry without specifying what items of costs and returns to include in these preliminary calculations. Several worksheets, however, referred the user to other Extension publications to use in performing these calculations. It's much more likely that the preliminary calculations were performed correctly when a detailed procedure was provided.
Step 6: Test the procedure. The procedure should be tested carefully to see if it produces results consistent with the analytical framework of Steps 1 and 3.
Step 7: Have the procedure critically reviewed. Reviews should be obtained not only from other professional economists, but also from Extension field staff. The economists can check for technical accuracy, and Extension field staff can provide suggestions on ways to improve the clarity of the procedure. Both types of review can contribute to an improved decision aid.
Because government program participation decisions have become increasingly complex, Extension economists have initiated the development of decision aids. The guidelines presented here provide an approach for developing decision aids that should result in procedures with technical accuracy and clear presentation.
1. K. A. Kubiak and T. O. Knight, "Extension Decision Aids for the Milk Production Termination Program and the Conservation Reserve Program: A Comparative Analysis" (College Station: Texas A & M University, Department of Agricultural Economics, 1987).