THE INFLUENCE OF RISK AVERSION ON THE UPTAKE OF SET-ASIDE: A MOTAD AND CRP APPROACH

This paper applies MOTAD and CRP models to the farm set-aside decision and presents a framework for analysis which examines the influence of risk on the land-idling decision. The results suggest that set-aside payment at a rate of £180-£200 per hectare would be attractive only at relatively high levels of risk aversion on an East Anglian specialist cereal farm and with moderate risk aversion on a Northumberland mixed farm. However, at identical levels of risk aversion, the area set aside was greater on the East Anglian farm. A survey to ascertain farmers' risk: income weightings is suggested as a useful adjunct to this work.     

A dynamic analysis of cost-share agri-environmental programs

The purpose of this paper is to theoretically examine the efficiency of a cost-share agri-environmental program through a farm life cycle lens. Faced with a growing environmental impact from agricultural production, the farmer must decide when and how aggressively to invest in environmental capital. The steady state of the optimal control problem reveals the trade-off between allocating farm profits to consumption versus environmental improvements. A payment from a cost-share program reduces the time to investment in environmental capital, and also permanently increases the farmer's level of investment. A lack of targeting results in inframarginal farmers being paid more than the minimum amount that is required to induce investment. The portion of both the marginal payment and the average payment that induces new investment declines as the government's share of the payment increases, and this decline decreases overall program efficiency. Despite this inefficiency, a larger payment from a cost-share program is shown to decrease the farm's environmental impact in both the short and long run.     

Worth the Risk? The Behavioural Path to Well‐Being

There is increasing interest in the ‘economics of happiness’, reflected in the volume of articles appearing in mainstream economics journals exploring the major determinants of self‐reported well‐being. We contribute by exploring the factors influencing how satisfied farmers are with their quality of life. We find that farm income, subjective perceptions relating to the adequacy of household income, debt, health and personal characteristics such as age and relationship status are significantly associated with farmers’ self‐reported life satisfaction. While significantly associated with farm income, farm structural variables such as farm size, farm type and the presence of a farm successor were not found to be significantly related with life satisfaction. Our results also suggest that farmers who are more risk averse enjoy significantly lower levels of both life satisfaction and farm income than their more risk seeking or risk neutral counterparts. We suggest that, in the same way that risk aversion inhibits farmers from making choices that could lead to an increase in their income, it may also constrain farmers (and the wider public at large) from engaging in certain types of behaviours that could lead to an increase in their self‐reported quality of life. Finally, we find that while farm income is significantly related to self‐reported life satisfaction, the direct correlation between these variables is weak, suggesting that farmer life satisfaction can be distinct from business success.     

AN APPROACH TO THE ECONOMETRIC ESTIMATION OF ATTITUDES TO RISK IN AGRICULTURE*

A simple model is developed relating the debt and asset portfolio of the farm to the production decision, which leads to a small non-linear system of equations. The system is estimated with time-series cross-sectional data from Australian broadacre agriculture using non-linear three-stage least squares. This gives a new method of estimating risk aversion coefficients by using actual behaviour of farmers in a realistic economic environment, rather than games played in artificial situations. Australian farmers are found to be risk averse, and the partial coefficient of risk aversion decreases with wealth and increases with income. The results are consistent with the results of studies by Binswanger in India and elsewhere using a completely different method. This consistency suggests that the partial risk aversion coefficient is a relatively robust measure of attitudes to risk.     

Incorporating risk in a positive mathematical programming framework: a dual approach

In this study we develop a new methodological proposal to incorporate risk into a farm‐level positive mathematical programming (PMP) model. We estimate simultaneously the farm nonlinear cost function and a farmer‐specific coefficient of absolute risk aversion as well as the resource shadow prices. The model is applied to a sample of representative arable crop farms from the Emilia‐Romagna region in Italy. The estimation results confirm the calibration ability of the model and reveal the values of the individual risk aversion coefficients. We use the model to simulate different scenarios of crop price volatility, in order to explore the potential risk management role of an agri‐environmental scheme.     

Effect of yield and price risk on conversion from conventional to organic farming*

Although the benefits of organic farming are already well known, the conversion to organic farming does not proceed as the Dutch government expected. In order to investigate the conversion decisions of Dutch arable farms, a discrete stochastic dynamic utility‐efficient programming (DUEP) model is developed with special attention for yield and price risk of conventional, conversion and organic crops. The model maximizes the expected utility of the farmer depending on the farmer’s risk attitude. The DUEP model is an extension of a dynamic linear programming model that maximized the labour income of conversion from conventional to organic farming over a 10 year planning horizon. The DUEP model was used to model a typical farm for the central clay region in the Netherlands. The results show that for a risk‐neutral farmer it is optimal to convert to organic farming. However, for a more risk‐averse farmer it is only optimal to fully convert if policy incentives are applied such as taxes on pesticides or subsidies on conversion, or if the market for the organic products becomes more stable.     

Risk Preferences of Dairy and Hog Producer in Quebec

The objective of this study is to investigate the nature of risk preferences of Quebec dairy and hog producers. The direct elicitation of utility method is employed to determine producers'degree of risk aversion. The Delphi process is used to obtain more refined and realistic responses. The results reveal that the risk preferences of the randomly selected Quebec farmers are highly diverse. The percentage of risk-taking farmers ranges from 8% to 23% depending upon the level of investment and the nature of the enterprise. On average, the majority of farmers in both groups are found to be risk averse. Based on the differences between the means as well as distributions, although not significant in all cases, hog producers are found to be consistently more risk averse than dairy producers. Moreover, the gap between the two groups widens as the level of investment increases. The implications of this result are that the stability of farm income due to supply management in dairy sector may facilitate investments of a given risk (for example, adoption of a new technology) more so than it would in the hog sector.     

Tactical Opportunities,Risk Attitude and Choice of Farming Strategy: an Application of the Distribution Method

When assessing farming strategies, it is important to account for the opportunities provided for tactically adjusting to outcomes of risk. The hypothesis that accounting for tactical adjustment is more important than accounting for risk attitude was supported in this study with regard to identifying the optimal drainage recirculation strategy for an irrigated dairy farm. Failing to account for tactical adjustment would lead to a sub-optimal choice, costing the farmer about A$3 100 in present value terms. In contrast, failing to account for risk aversion would not affect the strategy chosen. The distribution method was found to be well suited to modelling tactical adjustment.     

Analysing Dutch dairy farmer behaviour towards the provision of public goods: The added value of an economic simulation experiment

The objective of this paper is to examine the value of experiments for assessing the impact of the proposed Common Agricultural Policy of 2013 on farm income and farming strategies. We focus specifically on the impact of an alternative direct payment system based on a flat rate and green payments. We show the added value of an economic simulation experiment to existing economic micro- and sector modeling analysis when analyzing farmer behavior. It is shown that the suitability of and rewards for the provision of green services play a significant role in their uptake by farmers and the support for them. These results are useful in implementing a revised direct payments system in the Netherlands for the future.     

Endogenizing the Planning Horizon in Urban fringe agriculture

To evaluate the nature of farm operation longevity in urban fringe agriculture, this paper develops a model that endogenizes planning horizon and estimates an empirical model whereby anticipated longevity in farming is regressed against farm, farmer, regulatory and land market related variables. The results suggest that the length of the planning horizon is directly related to farm profitability and confirm the impermanence syndrome hypothesis that land values are inversely related to the planning horizon. Contrary to farmers’ claims that periodic land disposal provides an internal source of credit to support long-term viability, the disposition of portions of the farmland is found to shorten the planning horizon. Innovative farmers are found to have longer planning horizons while experiences with Right-to-Farm conflicts are found to result in decreased planning horizon. Given the expected continual increase in land values and the growing physical closeness of farmers to their non-farm neighbors, significant concerns remain about the long-term survivability of urban fringe farmers. This study suggests the importance of considering farmers’ planning horizon as a key component in farmland retention programs.     

Estimation and use of risk aversion coefficient for traditional dryland agriculture in western Sudan

This paper explores the importance of including risk when modeling subsistence-oriented agriculture in a developing nation. The specific objective is to measure the degree of risk aversion for typical farmers in the smallholder traditional agriculture of the Sudan. The procedure followed is to impute the farmer's risk aversion coefficient through a mathematical risk programming technique. Imputed farmers' risk aversion coefficients were used to validate the model specified and identify, for further analysis, a single risk optimal farm plan for each of the different farm situations studied.     

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.     

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.     

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.     

Farmers’ Willingness to Participate in Payment‐for‐Environmental‐Services Programmes

Understanding farmers’ willingness to participate in agricultural payment‐for‐environmental‐services (PES) programmes is an essential precondition for designing effective and efficient programmes. Willingness to participate is typically examined via stated preference surveys using the standard hurdle model for whether and how much to participate. Among respondents who decline to participate, such analyses cannot distinguish between respondents who declined due to the payment level and those who were not interested at all. This paper applies a double hurdle model to incorporate a prior condition for whether a respondent is even willing to consider participating in the PES market. The model uses a unique stated preference survey permitting separation of the consideration and enrolment decisions of 1,700 farmers in Michigan, USA. The first hurdle probit model suggests that farmers’ willingness to consider PES chiefly depends on farm and farmer characteristics, while the second hurdle tobit model shows that decisions on whether and how much to enrol depend more on the payment offer and marginal benefit–cost criteria. This study provides fresh insights on facilitating farmer participation in PES programmes using tiered strategies that differ in costs of programme payment and administration.     

Efficient Waste? Why Farmers Over-Apply Nutrients and the Implications for Policy Design

Understanding why farmers over-apply fertilizer is essential to designing effective agro-environmental policy. If farmers are simply inefficient, possibilities exist for simultaneously improving farm profits and the environment. If not, costly trade-offs are necessary. This article examines why farmer perceptions of agronomic advice, input substitutability, hidden opportunity costs, uncertainty, and risk aversion can make it economically rational to "waste" fertilizer by applying it above agronomically recommended rates. I use this information to evaluate the relative merits of policy responses such as insurance, education, cost-shares, regulation, taxes, and land retirement.     

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.     

Group heterogeneity and the economic effect of farmer organisation participation: Empirical evidence from Taiwan

We explore the effects of different farmer organisations on smallholder farmers' economic performance. The average treatment effect of switching between different farmer organisations is examined. In addition, based on the premise that a higher level of social capital is accumulated through participation in multiple farmer organisations, we also investigate how the economic consequences of farmer organisation membership vary with the intensity of participation. Our conceptual model explicitly includes social capital to provide a micro-foundation and a theoretical justification for the linkage between farmer organisation participation and the economic outcome. This indicates that participating in different types of farmer organisations is beneficial for farm households only when the returns from social capital investment outweigh the time cost of participation. Our empirical results suggest that membership of farmer organisations that are more homogeneous in terms of member specialty and similarity in production and marketing activities results in a significant increase in farm sales revenue and net returns. This result supports the view that technological proximity accentuates knowledge spillovers within the farmer organisations, and thus leads to better economic outcomes. In line with the prediction of the theoretical model, the average treatment effect of participation is found to increase with the number of organisations that farmers belong to. Moreover, results from the quantile regression provide empirical evidence supporting increasing returns to social capital accumulated through participation in several farmer organisations.     

影响林农造林投资行为因素实证研究——基于福建林农调查数据分析

本研究通过探讨影响农户造林投资行为因素,对影响农户造林投资行为因素进行筛选,最终获得影响农户造林投资行为因素为:户主受教育程度、劳动力、家庭总收入、林业收入、工资性收入、林地面积、对林业是否熟悉、风险意识、资金获得性、林产品销售情况、采伐限额。     

A Partial Adjustment Model of Federal Direct Payments in Canadian Agriculture

Delays in direct payments to Canadian farmers reduce the income loss protection that is provided by federal income stabilization and related programs. This issue is examined using Statistics Canada federal direct payment and net farm income data from 1981 to 2010. An estimate of the reduced protection against farm income loss that can be attributed to payment delays is obtained using a simple partial adjustment model, first with and then without the assumption of a constant rate of adjustment over time. The results point to a highly significant reduction in program effectiveness that can be attributed to delays in direct payments. There is no evidence to support the common belief that payment delays have significantly increased since the introduction of the Canadian Agricultural Income Stabilization program in 2003.