Hostname: page-component-cd9895bd7-7cvxr Total loading time: 0 Render date: 2024-12-24T16:42:10.391Z Has data issue: false hasContentIssue false
  • English
  • Français

Risk Balancing in an Integrated Farm Risk Management Plan

Published online by Cambridge University Press:  12 June 2017

Cesar L. Escalante  and
Peter J. Barry
Get access Rights & Permissions [Opens in a new window]

Abstract

Using optimization techniques in a Simulation framework, this study demonstrates the synergy between risk balancing and alternative strategies in effectively reducing risk under changing farm conditions. Highly risk-averse farmers tend to prefer integrated risk-management plans, based on the diversification principle, that yield offsetting combinations of the risk-reducing benefits of most strategies and the profit-generating capacities of the others. The greater appeal of a more diversified plan usually downplays the risk balancing strategy as the farm utilizes credit reserves to implement other production and marketing plans considered essential to Overall risk reduction. The farm, however, still realizes overall, though more regulated, reduction in its financial risk position.

Keywords

business riskexpected utility-mean variance frameworkfinancial riskmulti-period quadratic programming modelRisk Balancing HypothesisQ12Q14
Type
Research Article
Information
Journal of Agricultural and Applied Economics , Volume 33 , Issue 3 , December 2001 , pp. 413 - 429
Copyright
Copyright © Southern Agricultural Economics Association 2001

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

Barry, P.J. “Financing Growth and Adjustment of Farms Under Risk and Inflation.” Modeling Farm Decisions for Policy Analysis. Baum, K.H. and Schertz, L.P., eds. Boulder: Westview Press, 1983.Google Scholar
Barry, P.J. and Baker, C.B.. “Management of Firm Level Financial Structure.” Agricultural Finance Review 37(1977):50–63.Google Scholar
Barry, P. J., Baker, C. B. and Sanint, L. R., “Farmers’ Credit Risks and Liquidity Management.” American Journal of Agricultural Economics 63(1981):216–27.CrossRefGoogle Scholar
Barry, P. J., Bierlen, R. W. and Sotomayor, N. L.. “Financial Structure of Farm Businesses Under Imperfect Capital Markets.” American Journal of Agricultural Economics 82:4(2000).Google Scholar
Barry, P. J., Escalante, C. L. and Bard, S. K.. “Economic Risk and the Structural Characteristics of Farm Businesses.” Agricultural Finance Review (forthcoming).Google Scholar
Barry, P. J., Moss, L. M., Sotomayor, N. L. and Escalante, C. L.. “Lease Pricing for Farm Real Estate.” Review of Agricultural Economics 22,1 (Spring-Summer 2000):2–16.Google Scholar
Barry, P. J. and Robison, L. J.. “Portfolio Theory and Financial Structure: An Application of Equilibrium Analysis.” Agricultural Finance Review 47(1987):142–51.Google Scholar
Barry, P. J. and Willmann, D. R.. “A Risk Programming Analysis of Forward Contracting with Credit Constraints.” American Journal of Agricultural Economics 58(1976):62–70.Google Scholar
Collins, R.A. “Expected Utility, Debt-Equity Structure, and Risk Balancing.” American Journal of Agricultural Economics 67(1985):627–29.Google Scholar
Ellinger, P. N. and Barry, P. J.. “The Effects of Tenure Position on Farm Profitability and Solvency: An Application to Illinois Farms.” Agricultural Finance Review 47(1987): 106–18.Google Scholar
Escalante, C. L. “Farm-Level Evidence on the Risk-Balancing Hypothesis from Illinois Grain Farms.” PhD Dissertation, University of Illinois, Urbana-Champaign, January 2001.Google Scholar
Escalante, C. L. and Barry, P. J.. “Strategic Adjustments in Capital Structure By Agricultural Firms.” Working paper, Center for Farm and Rural Business Finance, University of Illinois, December 2000.Google Scholar
Food and Agricultural Policy Research Institute. FAPRI1999 U.S. Agricultural Outlook. Internet site: http://www.fapri.org/pubs/outlook.html.Google Scholar
Featherstone, A.M., Moss, C.B., Baker, T.G., and Preckel, P.V.. “The Theoretical Effects of Farm Policies on Optimal Leverage and the Probability of Equity Losses.” American Journal of Agricultural Economics 70(1988):572–79.CrossRefGoogle Scholar
Feldstein, M.S. “Mean Variance Analysis in the Theory of Liquidity Preference and Portfolio Selection.” Review of Economic Studies 36(January 1969):5–12.Google Scholar
Freund, R.J. “The Introduction of Risk into a Programming Model.” Econometrica 24(1956): 253–63.CrossRefGoogle Scholar
Gabriel, S. C. and Baker, C. B.. “Concepts of Business and Financial Risk.” American Journal of Agricultural Economics 62(1980):560–64.Google Scholar
Gwinn, A. S., Barry, P. J. and Ellinger, P. N.. “Farm Financial Structure Under Uncertainty: An Application to Grain Farms.” Agricultural Finance Review 52(1992):43–56.Google Scholar
Hanoch, G. and Levy, H.. “The Efficiency Analysis of Choices Involving Risk.” Review of Economic Studies 36(July 1969):335–46.Google Scholar
Harwood, J., Heifner, R., Coble, K., Perry, J. and Somwaru, A.. Managing Risk in Farming: Concepts, Research, and Analysis. USDA, No. 774, March 1999.Google Scholar
Illinois Agricultural Statistics Service. 1999 Illinois Annual Summary. Internet site: http://www.nass.usda.gov/il/1999/.Google Scholar
Knutson, R. D., Smith, E. G., Anderson, D. P. and Richardson, J. W.. “Southern Farmers’ Exposure to Income Risk Under the 1996 Farm Bill.” Journal of Agricultural and Applied Economics 30,1(July 1998):35–46.Google Scholar
Lemieux, C. M., Richardson, J. W. and Nixon, C. J.. “Federal Crop Insurance vs. ASCS Disaster Assistance for Texas High Plains Producers: An Application of Whole Farm Simulation.” Western Journal of Agricultural Economics 7(1982): 141–54.Google Scholar
Markowitz, H. Portfolio Selection: Efficient Diversification of Investments. New Haven, 1970. Google Scholar
Meyer, J. “Two-Moment Decision Models and Expected Utility Maximization.” The American Economic Review 77(June 1987):421-30.Google Scholar
Pulley, L.B. “A Generalized Mean-Variance Approximation to Expected Utility for Short Holding Periods.” Journal of Financial and Quantitative Analysis l6(l98l):361–73.Google Scholar
Scott, J. T. Jr., “Changes in Capital and Income Relationships.” N. C. Journal of Agricultural Economics 5(July 1983):27–37.Google Scholar
Tobin, J. “Liquidity Preference as Behavior Towards Risk.” Review of Economic Studies 25(February 1958): 65-87.Google Scholar
Townsend, J. P. and Brorsen, B. W.. “Cost of Forward Contracting Hard Red Winter Wheat.” Journal of Agricultural and Applied Economics 32,1 (April 2000): 89-94.CrossRefGoogle Scholar
Turvey, C. G. and Baker, T. G.. “Optimal Hedging Under Alternative Capital Structures and Risk Aversion.” Canadian Journal of Agricultural Economics 37 (March 1989): 135—43.Google Scholar
United States Department of Agriculture. The Federal Agriculture Improvement and Reform Act of 1996. Internet site: http://www.usda.gov/farmbill/titleO.htm.Google Scholar