Risk Management and the Role of Off-farm Income

Abstract

The majority of farm households in OECD countries earn more off-farm income than farm income, even including government payments. While this is a well recognized fact its implications for risk management have not been well recognized. Current efforts to reform farm support have focused on the variability of farm household income and largely ignored the variability of total farm household income. Since it is common for farm households to allocate labor and capital across both farm and non-farm opportunities, it is also likely that their attitude to risk in farming can best be understood by seeing farm risk and return in a household portfolio of income. This approach immediately leads to farm risk being less problematic the more diversified the portfolio and the less positively correlated farm risk is with other income risks. A secondary implication is the possibility that supposedly risk adverse farmers are reluctant to but actuarially fair insurance because they have already reduced farm risk by engaging in off-farm income, so they must be paid to further reduce risk beyond heir desired level.