A Microsimulation Model for Risk in Irish Tillage Farming

Abstract

Tillage farmers must manage numerous economic risks including uncertain yields and prices. Despite the presence of government payments, these factors can generate a relatively high variability in farm income. The improved management of farm income variability can contribute towards stability in household consumption, support for farm investments, further investment in child education and a reduction in the mental stress associated with variable incomes. In this paper, we develop a new farm-level stochastic microsimulation model to simulate the degree of risk attached to the production of Irelands main tillage grain crop i.e. spring barley for animal feed usage. Forward contracting is the main available risk management tool for Irish tillage farmers. Our microsimulation model is extended in order to estimate the impact of forward contracting on farm income risk. Our results show that forward contracting can reduce farm income risk significantly but that other stable sources of income are probably necessary to contain the exposure to the income risk attached to cereal production. The model is capable of addressing the income risk associated with multiple crops although this version of the model is confined to one particular crop. The model can be further extended to accommodate other risk management tools such as crop insurance or a farm management deposit scheme. This will allow policymakers, farmers and other interested parties to assess the impact of alternative risk management policies on the heterogeneous pool of Irish tillage farmers.