The Direct Impact of Risk Management Tools on Farm Income: The Case of Irelands Spring Barley Producers

Abstract

Tillage farmers must manage numerous economic risks including uncertain yields and prices. Despite the presence of government subsidies, 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 and further investment in child education. Forward contracting is the main available risk management tool for Irish tillage farmers. This paper uses a stochastic farm-level model to simulate the potential direct profit impact of this tool under alternative scenarios where 20 per cent of expected output is forward sold. Our results suggest that risk averse farmers may be willing in these scenarios, to forego approximately one to two per cent of their overall farm income to receive the protection of forward contracts. The proportion of market based income tends to be much greater as many tillage farms rely on government subsidies for a majority of their income. The overall direct profit impact also depends on the costs of production and the share of production committed to the contract.