Production risk,risk aversion and the determination of risk attitudes among Spanish rice producers

Agricultural production is subject to risk and the attitudes of producers toward risk will influence input choices insofar as these affect production risk. Risk attitudes in turn may be affected by certain socioeconomic characteristics of producers. Using 2004 survey data from a cross‐section of 130 Spanish rice farms, we estimate risk‐aversion coefficients of farmers and investigate the influence of a series of socioeconomic variables on their risk attitudes. Our results show that farmers exhibit risk‐averse behavior and that risk attitudes are related to a series of socioeconomic characteristics. In particular, the belief that the farm will continue after the producer retires is found to increase the degree of risk aversion, while age is found to have nonlinear effects on risk aversion. Off‐farm income, especially from nonagricultural activities, is found to reduce risk aversion. Neither the educational level of the producer nor the presence of dependents on the household is found to have an effect on risk preferences. Regarding the production technology, we find that land, labor, and fitosanitary products are risk‐reducing inputs, whereas capital, seeds, and fertilizer all increase risk.     

On the Role of Risk Versus Economies of Scope in Farm Diversification With an Application to Ethiopian Farms

This article investigates the economics of farm diversification. The analysis assesses economies of diversification using a certainty equivalent measure. It identifies two components: one associated with expected income, and one associated with risk exposure. This integrates two lines of research explored in previous literature: economies of scope and risk management. We examine the roles played by complementarity, scale and concavity effects in economies of diversification. The approach is applied to diversification decisions made on Ethiopian farms, with a focus on production uncertainty. The econometric analysis finds large complementarity benefits, providing incentives to diversify. But this is tempered by (non)‐concavity effects that provide incentives to specialise. The analysis also documents how risk affects diversification, including both variance and skewness effects. It provides new insights on economic tradeoffs between farm diversification and specialisation.     

AN ANALYSIS OF WILLINGNESS-TO-PAY FOR CROP INSURANCE*

In this paper a method for estimating a producer's willingness-to-pay for crop insurance is presented. The method includes formulae to capture the impact of crop insurance on the producer's expected income and variance of income. These impacts are evaluated in the context of a model of producer welfare which features both price and yield uncertainty, as well as risk aversion on the part of the producer. The method is applied to the Australian wheat industry and estimates of willingness-to-pay are shown to be relatively sensitive to the levels of coverage and yield variability.     

Analysis of a supply-control program under uncertainty and imperfect competition: Chinese cabbage in Taiwan

Researchers have often attributed the farm–wholesale price spread, after adjusting for marketing costs, as compensation for marketing firms' risk bearing. However, price spreads in excess of marketing costs can also be due to marketing firms' exercise of market power. In settings where both imperfect competition and marketer risk aversion are plausible, a modeling framework must be sufficiently general to accommodate both types of behavior. This article develops and estimates such a model in the context of fresh produce marketing and develops the implications for analysis of supply‐control programs. The model is applied to the production and marketing of Chinese cabbage in Taiwan and specifically to the analysis of supply‐control programs implemented in this industry by the Taiwanese government. The empirical results provide little support for the hypothesis that marketing firms exhibit risk averse behavior, but they do show that marketing firms exercise oligopsony power in procurement of the product from farmers, and that this power is positively related to the quantity supplied in each market period. This provides a heretofore unexplored impetus for supply controls intended to raise producer incomes. However, such controls are also rendered less effective by imperfect competition because marketing firms capture part of the benefits from supply reduction.     

Coping with systemic risk in index‐based crop insurance

The implementation of index‐based crop insurance is often impeded by the existence of systemic risk of insured losses. We assess the effectiveness of two strategies for coping with systemic risk: regional diversification and securitization with catastrophe (CAT) bonds. The analysis is conducted in an equilibrium pricing framework which allows the optimal price of the insurance and the number of traded contracts to be determined. We also explore the role of basis risk and risk aversion of market agents. The model is applied to a hypothetical area yield insurance for rice producers in northeast China. If yields in two regions are positively correlated, we find that enlarging the insured area leads to higher insurance premiums. Unless capital market investors are very risk averse, a CAT bond written on an area yield index outperforms regional diversification in terms of certainty equivalents of both farmers and insurers.     

Should farmers invest in financial assets as a risk management strategy? Some evidence from New Zealand*

This study explores the potential for risk reduction by New Zealand farmers through the diversification of their farm asset portfolios to include financial investments such as ordinary industrial shares, government bonds and bank bills. Low correlations between rates of return on farm and these financial assets suggest that significant reduction of income variability might follow their inclusion in farmers’ portfolios. Stochastic efficiency analysis is used to analyse alternative portfolios of ordinary shares, government bonds and bank bills and New Zealand farmland, using coefficients of absolute risk aversion derived from a negative exponential utility function. The results suggest that those farmers showing high degrees of risk aversion would gain utility by including financial assets in their portfolios. Deregulation of the New Zealand economy in the 1980s appeared to reduce the potential gains from diversification. Bonds rather than ordinary shares are the main contributors to portfolios which maximise utility for individuals classified as ‘somewhat’ risk averse.     

Hedging dairy production losses using weather-based index insurance

This article proposes a temperature–humidity index insurance product and examines whether this product can effectively protect against the risk of reduced milk production caused by heat stress. Results suggest that even when premiums are at higher than actuarially fair levels and the insurance purchaser is faced with both spatial and temporal basis risks, a temperature–humidity index insurance product would provide risk management benefits to a representative south‐central Georgia dairy producer.     

Farmers’ risk preferences and pesticide use decisions: evidence from field experiments in China

China faces health and environmental problems associated with the use of agricultural chemicals, including pesticides. While previous studies have found that risk aversion affects pesticide use in China, they have focused primarily on commercial cotton farmers. In this study, we consider the case of smaller, semisubsistence and subsistence farmers in a poor and landlocked province of China (Yunnan). We use a field experiment to measure risk aversion and collect detailed data on farm production and input use to specifically ask whether risk aversion affects pesticide use, and whether this effect differs for subsistence farmers producing exclusively for home consumption versus semisubsistence farmers who produce both for home and the market. We find that risk aversion significantly increases pesticide use, particularly for subsistence farmers and for market plots by semisubsistence farmers. Further, this effect of risk aversion significantly decreases with farm size for subsistence farmers, but not for semisubsistence farmers, implying that pesticide use may be used to ensure sufficient food supply for home consumption. Finally, we find barriers to the use of pesticides for subsistence farmers, both in terms of financial constraints and economies of scale. This finding implies that risk‐mitigation strategies, such as crop insurance, may not target food security concerns of subsistence farmers. Given these different motivations for pesticide use, policymakers may wish to consider effective tools to support rural food security for farmers in the poorer regions of China in order to decrease pesticide use.     

Specialization,diversification, and productivity: a panel data analysis of rice farms in Korea

This article examines the microeconomics of productivity associated with specialization/diversification in production activities, with an application to Korean rice farms. Korean rice farms tend to be very small and highly specialized. Our analysis examines the productivity effects associated with both farm size and farm specialization/diversification in Korean agriculture. Relying on farm‐level panel data, the analysis studies farm productivity in a multi‐input multi‐output context, accounting not only for changes in inputs and technical change in rice production, but also for the role of diversification in the production of other crops in current and previous periods. We find positive but small productivity gains from farm diversification. These gains come mostly from complementarity effects across farm outputs, with minimal effect of scale economies. The positive complementarity effects work against nonconvexity effects, which provide strong productivity incentives for rice farms to specialize.     

Expected Utility,Risk, and Marketing Behavior: Theory and Evidence from the Fed Cattle Market

The effect of carcass quality uncertainty on the structure of the slaughter cattle market is investigated. A theoretical extension of the “Theory of Factor Price Disparity” is provided. It is demonstrated that the coexistence of a risk premium wedge between marketing channel (live weight, dressed weight, and grid) pricing mechanisms, in conjunction with varying degrees of producer risk aversion or producer perception of carcass quality uncertainty, contributes to the coexistence of multiple marketing channels. It is also demonstrated that risk and risk preference provide the linkage between carcass quality uncertainty and producer marketing decisions. We demonstrate how this linkage can affect the structure of the fed cattle market and the variability in slaughter volume across marketing channels. We also confirm the linkage between value‐based production techniques that increase seller information on carcass quality and seller increased usage of grid pricing regardless of actual carcass quality. Empirical evidence is provided in support of the supposition that carcass quality uncertainty plays a role in grid market share variability.     

Risk Averters that Love Risk? Marginal Risk Aversion in Comparison to a Reference Gamble

We propose an analytical distinction between standard risk aversion based on the valuation of a single gamble and marginal risk aversion based on the change in valuation between two gambles. We measure marginal risk aversion in two dimensions—mean and variance. Data from a field experiment is used to study marginal risk aversion. Our results suggest that individuals rely on a reference gamble when assessing marginal risk. Individual responses to marginal changes in mean and variance are nearly identical in direction and magnitude—suggesting that information on both standard and marginal risk aversion is needed to accurately model behavior.     

Risk preferences of commodity crop producers and specialty crop producers: An application of prospect theory

Producers’ decisions, such as crop insurance, contract agreement, and technology adoption, involve considerable risk and uncertainty. Particularly, specialty crop production is more vulnerable to risk and requires more intensive management than commodity crop production, while risk mitigation tools for specialty crop production are comparatively limited. We apply Prospect Theory (PT) to analyze risk preferences of U.S. producers, and further compare the preference differences between commodity crop and specialty crop producers. Reference dependent, diminishing sensitivity, loss aversion, and probability weighting, as well as certain farm characteristics and producer demographics, are found to have a significant impact on grower risk attitudes. In addition, we do not observe significant differences in the base PT estimates between commodity crop and specialty crop producers. However, the relationships between risk behavior and individual characteristics vary between the two types of producers, which shed lights on the development of agricultural policies and provide implications for the design of contract and insurance.     

Is Risk Aversion Really Correlated with Wealth? How Estimated Probabilities Introduce Spurious Correlation

Economists frequently focus on correlations between wealth and risk preferences but rarely observe the probabilities needed to test this relationship empirically. These unobserved probabilities are typically estimated via profit or production functions conditioned on wealth correlates, which may leave statistical fingerprints on subsequently-estimated risk aversion coefficients and confound correlations between wealth and risk preferences. Using data from an experiment with observable probabilities, we compare risk aversion coefficients based on true probabilities with those based on probabilities estimated using standard approaches and show how estimated probabilities can change risk aversion coefficients substantially and introduce spurious correlation between risk aversion and wealth.     

A NOTE ON DECREASING ABSOLUTE RISK AVERSION AMONG FARMERS IN NEPAL

Attitudes toward risk are explored for a sample of rice growers on small farms in Nepal, in the context of the subjective expected utility maximisation model. Farmers are found to be generally averse to risk, with diverse levels of absolute risk aversion that tend to diminish as wealth increases, both for individuals and in a cross-sectional sense. Relative risk aversion is argued to be the most comparable measure for contrasts of attitudes toward risk.     

Understanding the Economic Factors Influencing Farm Policy Preferences

A survey conducted in Mississippi, Texas, Indiana, and Nebraska elicited producers' preferences for various farm policy changes. This permitted examination of the diversity of preferences that single-state studies have not allowed. Five policy choices, including deficiency payments, loan programs, crop insurance, export programs, and disaster payments were examined. Logit model results predicting producer preferences for each of the five dichotomous policy choices are reported. Explanatory variables based on expected utility theory such as risk aversion, price and yield variability, and price–yield correlation are significant in various models.     

Farmers' Preferences for Crop Insurance Attributes

Utilizing survey data from corn and soybean farmers in the Midwest, this study assesses the relative importance of different features of crop insurance products. Conjoint analysis results indicate that farmers' preferences for flexibility dominate both type of insurance and coverage level. Revenue insurance demand is greater by those who are larger, younger, and farm in more separate locations. Results are significant and consistent by size, insurance usage, leverage, and risk perception. The results permit prediction of market shares of competing insurance products within specific producer segments, and thus also provide guidance for targeting specific producer groups with new product configurations.     

Managing basis risk with multiscale index insurance

Agricultural index insurance indemnifies a farmer against losses based on an index that is correlated with, but not identical to, her or his individual outcomes. In practice, the level of correlation may be modest, exposing insured farmers to residual, basis risk. In this article, we study the impact of basis risk on the demand for index insurance under risk and compound risk aversion. We simulate the impact of basis risk on the demand for index insurance by Malian cotton farmers using data from field experiments that reveal the distributions of risk and compound risk aversion. The analysis shows that compound risk aversion depresses demand for a conventional index insurance contract some 13 percentage points below what would be predicted based on risk aversion alone. We then analyze an innovative multiscale index insurance contract that reduces basis risk relative to conventional, single‐scale index insurance contract. Simulations indicate that demand for this multiscale contract would be some 40% higher than the demand for an equivalently priced conventional contract in the population of Malian cotton farmers. Finally, we report and discuss the actual uptake of a multiscale contract introduced in Mali.     

Diversification economies and specialisation efficiencies in a mixed food and coffee smallholder farming system in Papua New Guinea

Smallholder farming systems in Papua New Guinea are characterised by an integrated set of cash cropping and subsistence food cropping activities. In the Highlands provinces, the subsistence food crop sub-system is dominated by sweet potato production. Coffee dominates the cash cropping sub-system, but a limited number of food crops are also grown for cash sale. The dynamics between sub-systems can influence the scope for complementarity between, and technical efficiency of, their operations, especially in light of the seasonality of demand for household labour and management inputs within the farming system. A crucial element of these dynamic processes is diversification into commercial agricultural production, which can influence factor productivity and the efficiency of crop production where smallholders maintain a strong production base in subsistence foods.
In this study we use survey data from households engaged in coffee and food crop production in the Benabena district of Eastern Highlands Province to derive technical efficiency indices for each household over two years. A stochastic input distance function approach is used to establish whether diversification economies exist and whether specialisation in coffee, subsistence food or cash food production significantly influences technical efficiency on the sampled smallholdings.
Diversification economies are weakly evident between subsistence food production and both coffee and cash food production, but diseconomies of diversification are discerned between coffee and cash food production. A number of factors are tested for their effects on technical efficiency. Significant technical efficiency gains are made from diversification among broad cropping enterprises.     

Global Taxation Governance after the 2002 UN Monterrey Conference

Using longitudinal data from 2354 smallholder households in 103 villages in eight African countries, three processes of agrarian transformation are analysed for the period 2002 to 2008: intensification of grain production, commercial diversification from staple crops and income diversification out of agriculture. Methodologically, three multi-level, binary logistic models are used. The trends observed provide grounds for some optimism: despite an overall picture of stagnation, intensification in grains (yield per hectare) seems to be increasing. Farmers have, however, raised productivity through the more intense use of labour resources rather than through technological change, while political commitments to agriculture have not improved the production environment. Rather, economic growth and commercialization emerge as strong drivers of intensification, both at country and household levels. Tendencies towards distress-driven income diversification out of agriculture appear to have abated somewhat in the face of more dynamism in the grain sector, with households moving between the farm and non-farm sectors in response to shifts in producer incentives and non-farm opportunities. Diversification processes within agriculture, meanwhile, point to both push- and pull-driven diversification occurring simultaneously. Grain markets, crop diversification and non-farm opportunities complement one another over time. There is little evidence of even incipient processes of structural transformation among the smallholders surveyed.     

Are we risking too much? Perspectives on risk in farm modeling

Risk and uncertainty have been extensively studied by agricultural economists. In this paper we question (a) the predominant use of static frameworks to formally analyse risk; (b) the predominant focus on risk aversion as the motivation for considering risk and (c) the notion that explicitly probabilistic models are likely to be helpful to farmers in their decision making. We pose the question: for a risk‐averse farmer, what is the extra value of a recommendation derived from a model that represents risk aversion, compared to a model based on risk neutrality? The conclusion reached is that for the types of the decision problems most commonly modelled by agricultural economists, the extra value of representing risk aversion is commonly very little.