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Building on the risk balancing theory and on recent discussions the appropriateness of using farm income maximization as behavioural assumption, this paper extends the risk balancing framework by accounting for business-household interactions. The purpose of this paper is to theoretically introduce the concept of farm household risk balancing, a theoretical framework in which the farm household sets a constraint on the total household-level risk and balances farm-level and off-farm-level risk.

The paper argues that the risk behaviour of farmers is better understood by considering risk at the household level. Using an analytical framework, equations are derived linking the farm activities, off-farm activities, consumption and business and private liquidity.

The framework shows that a farm household that wants to minimize the risk that total household cash flow falls below consumption needs, may exhibit a wide variety of behavioural responses to changes in the policy and economic environment.

The framework suggests multiple ways for policy makers and individual farmers to support risk management.

Risk management is at the core of the agricultural policy and it is of paramount importance to be able to understand behavioural responses to market and policy instruments. This paper contributes to that by suggesting that the focus of current risk analysis and management studies may be too narrowly focused at the farm level.

The purpose of this paper is to present empirical evidence of risk balancing behavior by European farmers. More specifically, the authors investigate strategic adjustments in the level of financial risk (FR) in response to changes in the level of business risk (BR).

The authors conducted a correlation relationship analysis and run several linear fixed effects regression models using the European Union (EU)-15 FADN panel data set for the period 1995-2008.

Overall, the paper finds EU evidence of risk balancing. The correlation relationship analysis suggests that just over half of the farm observations are risk balancers whereas the other (smaller) half are not. The coefficient in our fixed effects regression suggests that a 1 percent increase in BR reduces FR by 0.043 percent and has a standard error so low that the existence of non-risk balancers is doubtful. The results reject evidence of strong-form risk balancing – inverse trade-offs between FR and BR keeping total risk (TR) constant – but cannot reject weak-form risk balancing – inverse trade-offs between FR and BR with some observed changes in TR. Furthermore, the extent of risk balancing behavior is found to differ between different European countries and across farm typologies.

This study provides European policy makers a first insight into risk balancing behavior of EU farmers. When risk balancing occurs, BR-reducing agricultural policies induce strategic upwards leverage adjustments that unintentionally reestablish or even increase total farm-level risk.

Making use of the large and unique FADN database, to the best of the authors knowledge, this study is the first that provides European (EU-15) evidence on risk balancing behavior, is conducted at an unprecedented large scale, and presents the first risk balancing evidence across countries and farming systems.