Producer Risk Preferences Research Articles

Can commercial catfish producers always feed efficiently?

Economically efficient feeding levels in intensively stocked ponds might be below minimum biological feeding requirements under adverse market conditions. A catfish production function that estimated relationships between yield and stocking and feeding rates was used as the basis for estimating production relationships. Feed price boundaries were developed that allowed the feeding rate to exceed the minimum biological level but still reflected economically efficient rates over a range of catfish prices and producer risk preferences. At higher stocking densities (20,000/ha), the feed price upper bound is lower than at lower stocking densities. Producers stocking at higher rates will be less likely to maximize profit and meet minimum biological feeding requirements as feed price increases than those producers stocking at lower rates. However, if feed prices exceed the upper bounds calculated in this paper, producers should engage in feeding only at levels necessary to meet farm financial and cash flow obligations until such time as the feed price decreases.

RISK PREFERENCES UNDER PRICE UNCERTAINTIES AND PRODUCTION RISK

This paper deals with estimation of risk preferences of producers when they face uncertainties in output and input prices, in addition to uncertainty in production (usually labeled as production risk). All these uncertainty components are modeled in the context of production theory where the producers maximize expected utility of anticipated profit. Risk preference functions associated with these uncertainties are derived without assuming a specific form of the utility function. Moreover, no distributional assumptions are made on the distributions of the random variables representing price and production uncertainties. A multi-stage estimation procedure is developed to estimate the parameters of the production function and risk preference functions associated with output price uncertainty, input price uncertainty and production risk. Production risk is specified in such a way that one can identify inputs with increasing, decreasing and constant production risks. Similarly, risk aversion behavior is specified in such a way that one can test for different types of risk aversion behavior.

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.

Supply Response to Agricultural Insurance: Risk Reduction and Moral Hazard Effects

AbstractThis paper examines the consequences of agricultural insurance for expected supply. The effect of insurance is shown to decompose into a “risk reduction” effect as well as a “moral hazard” effect. The direction and magnitude of these effects depend on the parameters of the insurance contract, producer's risk preferences, and the underlying technology. Two models are considered for this purpose. In the first model, widely employed in the literature, a producer controls only one input. The second model uses a dual approach to extend the results to the case where a producer controls multiple inputs.

Production Flexibility, Stochastic Separation, Hedging, and Futures Prices

We study a dynamic model where uncertainty about interim output adjustments causes producers to face price, cost and output uncertainty. Stochastically separable production decisions are independent of the producer's risk preferences and expectations and are based on the prevailing futures price as a certain output price. Conditions under which futures contracts achieve stochastic separation are established. Optimal hedging and maturity structure of futures contracts, equilibrium futures prices, and the effects of futures trading on output are studied. The systematic risk premium depends on the product of the futures beta and the covariance of the market return with production revenues. Article published by Oxford University Press on behalf of the Society for Financial Studies in its journal, The Review of Financial Studies.

GATT and Environmental Policy Reform: Discussion

Agricultural protectionism in developed countries such as the United States and those in the European Community (EC) involves subsidized production which has led to excess global supply and to low farm-output prices. In response, the purported goal of the Uruguay Round of the GATT negotiations is to increase global efficiency in agricultural production and trade by eliminating distortionary subsidy programs. Additionally, GATT opens the door for more general policy reform with an explicit focus on the environment. Papers by Abler and Shortle and by Just and Rausser address how agricultural interests and environmental resources may be affected by these reforms. Just and Rausser argue that the key to policy reform is the political feasibility of the policy change. A policy reform altering the current distribution of wealth will be contested by those currently empowered. Thus reforms will fail unless empowered interests are eased out and bought off-compensated to take early retirement from the rent-seeking game. A golden parachute is necessary to ease the current patriarchs into the front-porch rocking chair. The relevant task becomes estimating the compensation package necessary to make environmental policy reform feasible to the agricultural community. Although both papers address the costs of political feasibility in GATT, as well as environmental policy reform, at least four issues remain unresolved. First, both papers address policy reform in a deterministic framework. But target prices may be useful to stabilize returns of production. The decoupling of program benefits could involve an increase in output price instability such that producer risk preferences come into play. In addition, even if we assume risk neutrality, a nonlinear production risk could induce significant shifts in behavior. The implication of adding a stochastic element moves us into the world of ex ante choice-a world that Buchanan and Helms argue is less restrictive than the world of ex post choice inasmuch as the ex ante approach incorporates risk preference. In a world of incomplete markets for environmental assets, ex ante expenditures rather than ex post realized outcomes explain choice and welfare. Second, whereas the empirical models are developed in a dynamic context, the analytics of policy reform are static. It could be useful to tie the empirical to the analytical by exploring policy reform in a dynamic setting that accounts for either repeated play or asymmetric information between players. But this is a potential problem in that a multitude of potential Nash or sequential equilibria likely exist (see Fudenberg and Maskin). The Folk Theorems for repeated games suggest that any feasible self-interested payoff can be an equilibrium, provided that the players are sufficiently patient. The range of equilibrium compensation may be quite wide, requiring explicit recognition of how expectations are formed. For signaling games, Cho and Kreps (p. 180) argue that what constitutes an equilibrium is powerfully affected by the 'interpretations' that would be given by [player] B to messages that [player] A might have sent, but in equilibrium does not send. Restrictions of out-of-equilibrium beliefs can reduce the number of acceptable equilibria but may require data that are impossible or extremely costly to acquire. Regardless, stronger links between the dynamic processes associated with policy reform will provide a more rigorous framework for empirical estimation. Although the first two issues may be dismissed as technical nitpicking, the third and fourth cannot. The third involves the potential production and yield impacts of alternative policies. The impact on the agricultural sector in both papers is large. Abler and Shortle argue that implementation of a stylized version of the EC's MacSharry plan of a two-thirds decoupling Jason F. Shogren is an associate professor in the Department of Economics, Iowa State University. Stan Johnson, Lilyan Fulginiti, and Pat Westhoff provided useful comments. Journal paper No. J-14795 of the Iowa Agriculture and Home Economics Experiment Station, Ames, Iowa. Project No. 2872.

A wheat grazing systems model for the US Southern Plains: Part II—Economic analysis of grazing management decisions under weather uncertainty

The Wheat Grazing Systems model was used to investigate the risk associated with stocking density, and beginning and termination date of the grazing season when weather was a source of variation in the system. A total of 91 combinations of beginning/ending dates of the grazing season and stocking densities (managerial strategies) were considered. Each was simulated under typical management conditions of western Oklahoma for fifty grazing seasons using a stochastic daily climatic simulator. Stochastic dominance analysis was used to select efficient strategies assuming the producers were utility maximizers and utility was a function of net returns. Optimal stocking densities were shown to be sensitive to producer risk preferences, ranging from 0·6 steer ha −1 for risk averters to 2·7 steer ha −1 for risk neutral decision makers. A grazing season spanning from 1 November to 15 March was efficient under all risk preferences.

Risk Efficient Perennial Crop Selection: A Motad Approach to Citrus Production

AbstractNumerous studies have analyzed annual crop mix decisions in light of producer risk preferences. Few studies have focused on perennial crop mix decisions. This study attempts to identify not only the optimal mix of grapefruit and oranges for various riskaversion levels, but also optimal planting densities within each species. Experimental plot data from a grapefruit and orange spacing trial over the 1970-82 period were used in a MOTAD formulation to address optimal perennial crop mix and planting density decisions under different capital constraints. An examination of results suggests crop mix and planting density diversification within and across species of citrus as a means of reducing income variability.

Risk Preferences of Agricultural Producers: Their Use in Extension and Research

The specific objectives of this paper are: (1) to review and critically evaluate the current state of knowledge on risk preference measurement methods and empirical results for individual agricultural producers and (2) to suggest directions for future research and extension applications requiring information on risk preferences of individual producers. The Implications of aggregate (industry) risk preferences as in risk supply response studies will not be included in this review.