A Re-Examination of the Farm Diversification Problem

Abstract

The problem of selecting combinations of enterprises for farms is similar in nature to the portfolio problem for the investor. That is, when net incomes from farm enterprises are viewed in probabilistic terms and the farmer is assumed to be endowed with a particular amount of land, the problem of selecting an optimal mix of enterprises can be interpreted as a special case of the portfolio problem. Recognition of the similarity of the two problems provides a basis for applying the results of recent research in portfolio analysis to studying farm diversification. In particular, the separation theorem and its immediate corollaries suggest a solution to the farm diversification problem under rather general conditions regarding both the decision maker's preference for risk and the feasible set determined by alternative mixes of enterprises. An application of this theorem to the farm diversification problem is made in this article, and a number of extensions which improve the usefulness of the results are suggested.