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1 – 10 of over 1000Cinzia Zinnanti, Attilio Coletta, Michele Torrigiani and Simone Severini
This study assesses the potential impact of the European Income Stabilization Tool (IST – a whole farm income risk management [RM] tool) within a farm cooperative specializing in…
Abstract
Purpose
This study assesses the potential impact of the European Income Stabilization Tool (IST – a whole farm income risk management [RM] tool) within a farm cooperative specializing in vineyards and operating in a small area of production. The authors assess the conditions under which IST could improve the well-being of the associated farmers and, at the same time, improve financial sustainability. Financial aspects are of particular relevance since the characteristics of the cooperative cause the management of the tool to become potentially risky.
Design/methodology/approach
The analysis relies on a balanced panel dataset to report the production and economic characteristics of individual associated farms. This is the basis for simulating the implementation of the IST as described in the current European regulation. The expected utility approach is then used to assess the potential impact on farmers' well-being under different levels of risk aversion and premiums. The analysis of the IST annual cash flow allows for an accurate assessment of its financial sustainability.
Findings
The results suggest that the IST can improve farmers' well-being under plausible levels of risk aversion and premiums, making most farmers willing to support its implementation. Furthermore, the tool could be financially sustainable even if implemented in a specialized and geographically concentrated group of farms. In addition, the results suggest that the use of strategies such as the IST could help cope with negative annual balances by treating the financial sustainability of the fund.
Originality/value
The analysis adds to previous research on the IST by accounting for farmers' risk aversion. Furthermore, it is the first analysis that simulates the implementation of this tool in a sector-specific and concentrated group of farms. The results provide useful evidence for those subjects planning to implement the IST in small and specialized farming systems.
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Johannes Möllmann, Marius Michels and Oliver Musshoff
The outstanding reform of the Common Agriculture Policy allows for changes regarding its most criticized component, the direct payment scheme. The purpose of this paper is to…
Abstract
Purpose
The outstanding reform of the Common Agriculture Policy allows for changes regarding its most criticized component, the direct payment scheme. The purpose of this paper is to investigate farmers’ acceptance of subsidized whole farm income insurance (WFI) and single-crop, multi-peril revenue insurance (RI) that are associated with a reduction of direct payments.
Design/methodology/approach
By applying a generalized multinomial logit model on data of a discrete choice experiment, German farmers’ preferences, expressed as their willingness to pay (WTP), for WFI and RI are revealed.
Findings
The results show a positive WTP for WFI and RI. The average farmer has a higher WTP for WFI than for RI. By increasing the coverage level, the negative influence of a reduction of direct payments on WTP for insurance can be compensated. Individual risk attitude and assessed importance of direct payments for the farm business show a statistically significant influence on the WTP.
Practical implications
The results suggest that, even if direct payments were abolished in order to subsidize WFI or RI, German farmers’ WTP for both insurance products would remain positive. However, to finally assess whether subsidizing insurance is the right means of providing public support, it is necessary to assess whether farmers’ WTP meets the costs for such an insurance scheme.
Originality/value
To the authors’ knowledge, this is the first study investigating German farmers’ WTP for WFI and RI using an experimental approach by explicitly considering the partial to complete replacement of direct payments by subsidized insurance.
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– The purpose of this paper is to determine the sources and factors affecting farm revenue variation on crop and livestock farms in the Northern Great Plains.
Abstract
Purpose
The purpose of this paper is to determine the sources and factors affecting farm revenue variation on crop and livestock farms in the Northern Great Plains.
Design/methodology/approach
A two method approach is used. Variance decomposition analysis is completed on an 18-year balanced panel data set of North Dakota producers to determine the sources of farm revenue variation. The second component of this research uses a random effects estimator to determine the effect of farm characteristics on farm revenue variation measured by coefficient of variation.
Findings
Crop revenue is the largest source of farm revenue variation, with crop insurance being the largest source of revenue variation diversification. Small market crops and corn were found to increase revenue variation compared to those operations that received the largest sum of their revenue from wheat. Government payments and insurance payments were also found to increase farm revenue variation indicating they may provide an incentive to plant more risky crops.
Originality/value
This analysis examined specific enterprises that affect farm revenue variation, which has not been examined in earlier work. This distinction allows for focus on potential policy implications of small market crops and new crops in “transitional planting zones”.
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Nadja El Benni, Robert Finger and Stefan Mann
The purpose of this study is to examine the effects of agricultural policy reform – specifically the change from market to direct payment support – on income variability of Swiss…
Abstract
Purpose
The purpose of this study is to examine the effects of agricultural policy reform – specifically the change from market to direct payment support – on income variability of Swiss farming households. In addition, the observed heterogeneity in income risks across farms and time is explained in terms of farm and regional characteristics.
Design/methodology/approach
Unbalanced farm‐level panel data of the Swiss farm accountancy network (FADN) are used to construct coefficients of variation of five‐year overlapping time intervals for total household income and gross farm revenues over the period 1992 to 2009. Linear fixed effect models are applied to measure the effect of specialization, off‐farm income, direct payments, farm size, and liquidity on the variability of gross farm revenues and household income in the valley, hill, and mountain regions.
Findings
The switch from market‐based support to direct payments has decreased the variability of farm revenues and household income. The strong reliance on direct payments serves as insurance for most farmers and reduces both household income and revenue risk. Off‐farm income can be used by farmers to reduce household income risk but it increases revenue risk in the valley regions. In all of the regions considered, farm size has a positive effect on household income risk and a negative effect on revenue risk. A high degree of specialization increases both gross revenue and household income risk. Potential revenue insurance contracts should specify farmers' off‐farm employment, the degree of specialization, farm size, and regional specific risk profiles.
Originality/value
This paper assesses the complementary effects of specific farm characteristics and risk management strategies with regard to both farm revenue and household income risk. Influences of agricultural policy changes on income risks are also empirically assessed at different spatial scales.
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Juliane Doms, Norbert Hirschauer, Michael Marz and Falk Boettcher
The purpose of this paper is to analyze the hedging efficiency (HE) of weather index insurances (WII) based on a whole-farm approach. The aim is to identify how different types of…
Abstract
Purpose
The purpose of this paper is to analyze the hedging efficiency (HE) of weather index insurances (WII) based on a whole-farm approach. The aim is to identify how different types of WII affect the economic performance risk of real farms in the light of the heterogeneity of farm operations and natural conditions.
Design/methodology/approach
Using historic simulation, the HE of various hedging strategies is computed for 20 farms in regions with moderate natural conditions. A priori defined “standardized” WII and hedge ratios as well as ex post “optimized” strategies are analyzed. The latter is identified through a risk programming approach that determines the strike level and hedge ratio that would have minimized the volatility of each farm’s historic total gross margins (TGMs) ex post.
Findings
(i) The correlations between the weather indexes and the yields of the farms’ main crop (wheat) do not provide useful insights regarding the whole-farm HE because farms’ performance risk is considerably affected by volatile factors other than wheat yield; (ii) Standardized WII are ill-suited to hedge performance risk for the majority of studied farms; (iii) A considerable positive whole-farm HE could have been obtained on average if farmers had been able to use the “optimized” risk management strategy. Using farm-specific information thus seems to be essential for identifying meaningful hedging strategies.
Originality/value
This study provides added value by analyzing the HE of WII for 20 German crop farms in “moderate” regions. The results show that exemplary tests of WII in extreme conditions provide no decision support for farmers in other regions.
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Jennifer E Ifft, Todd Kuethe and Mitch Morehart
– The purpose of this paper is to consider how the federal crop insurance (FCI) program influences farm debt use, one of the key financial decisions made by farm operators.
Abstract
Purpose
The purpose of this paper is to consider how the federal crop insurance (FCI) program influences farm debt use, one of the key financial decisions made by farm operators.
Design/methodology/approach
Using data from the nationally representative Agricultural Resource Management Survey, the paper implements a propensity score matching model of the impact of FCI participation on various measures of farm business debt use. To account for the simultaneity of financial decisions, the paper further tests this relationship using a seemingly unrelated regression model.
Findings
FCI participation is associated with an increase in use of short-term farm debt, but not long-term debt, consistent with risk balancing behavior and current trends in the farm sector.
Research limitations/implications
In addition to risk balancing, the results are also consistent with credit constraints or lender preferences. The paper cannot fully establish causality between crop insurance participation and short-term debt levels. Future research should address these limitations.
Practical implications
Agricultural lending standards are generally conservative and the farm sector as a whole currently has historically low leverage, which implies that an increase in debt use may not be a threat to the financial health of the farm sector.
Social implications
The results indicate that the reduction in total risk facing the farm sector is significantly less than the decline in risk provided by FCI, which is an important consideration for policymakers.
Originality/value
This is the first paper to use an econometric model to analyze the relationship between FCI and farm debt use decisions. This paper can inform future research on the FCI program and farm financial decisions.
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Thomas Url, Franz Sinabell and Karin Heinschink
After several reforms of the common agricultural policy, domestic product prices and farm incomes have become more volatile in the EU. Risk-averse farmers are therefore seeking…
Abstract
Purpose
After several reforms of the common agricultural policy, domestic product prices and farm incomes have become more volatile in the EU. Risk-averse farmers are therefore seeking income stabilizing measures. Margin insurance is among the feasible options but is not yet established in the EU. The purpose of this paper is to explore such an insurance under EU conditions for a major crop.
Design/methodology/approach
The paper explores conditions for a viable margin insurance. It presents a modeled-loss trigger for a margin insurance scheme using wheat production in Austria as the case study.
Findings
While margin insurance products are widely used in the USA, such products are not available in the EU. Basis risk seems to be an important reason. An exploration of wheat production in Austria shows that heterogeneity among farms is relevant. The authors demonstrate an approach aiming to lower basis risks.
Research limitations/implications
This paper presents a technically feasible approach to handle the basis risk of a margin insurance under EU conditions. Before such a product can be placed on the market, further research on systemic risk is needed. Market research is necessary to fine-tune the details of the product to meet the actual demand of farmers. Further empirical validation of the modeled losses is needed. Legal implications are not explored in this paper.
Practical implications
The insurance product presented here demonstrates a concept that is established in the USA under EU conditions. It is motivated by several shortcomings of income risk mitigation approaches in the EU.
Social implications
Income risk may be seen as a problem of social policy. The approach shows that it can be addressed by market-oriented instruments.
Originality/value
To the authors’ knowledge, this paper is the first to propose a tool to handle basis risk for margin insurance products in agriculture in the EU. A special feature of the proposed approach is that it is not limited to a single product such as wheat.
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Atina Ahdika, Dedi Rosadi, Adhitya Ronnie Effendie and Gunardi
Farmer exchange rate (FER) is the ratio between a farmer's income and expenditure and is also an indicator of farmers’ welfare. There is little research regarding its use in risk…
Abstract
Purpose
Farmer exchange rate (FER) is the ratio between a farmer's income and expenditure and is also an indicator of farmers’ welfare. There is little research regarding its use in risk modeling in crop insurance. This study seeks to propose a design for a household margin insurance scheme of the agricultural sector based on FER.
Design/methodology/approach
This research employs various risk modeling concepts, i.e. value at risk, loss models and premium calculation, to construct the proposed model. The standard linear, static and time-varying copula models are used to identify the dependency between variables involved in calculating FER.
Findings
First, FER can be considered as the primary variable for risk modeling in agricultural household margin insurance because it demonstrates farmers’ financial ability. Second, temporal dependence estimated using the time-varying copula can minimize errors, reduce the premium rate and result in a tighter guarantee's level of security.
Originality/value
This research extends the previous similar studies related to the use of index ratio in margin insurance loss modeling. Its authenticity is in the use of FER, which represents the farmers' trading capability. FER determines farmers’ losses by considering two aspects: the farmers’ income rate and their ability to fulfill their life and farming needs. Also, originality exists in the use of the time-varying copulas in identifying the dependence of the indices involved in calculating FER.
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Erwin Wauters, Yann de Mey, Frankwin van Winsen, Steven Van Passel, Mark Vancauteren and Ludwig Lauwers
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…
Abstract
Purpose
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.
Design/methodology/approach
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.
Findings
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.
Social implications
The framework suggests multiple ways for policy makers and individual farmers to support risk management.
Originality/value
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.
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Matthias Buchholz and Oliver Musshoff
Increasing environmental concerns have placed the need for an enhanced water resources management on the policy agenda. In this context, a restrictive regulation of water…
Abstract
Purpose
Increasing environmental concerns have placed the need for an enhanced water resources management on the policy agenda. In this context, a restrictive regulation of water withdrawals for irrigation has gained in importance. The purpose of this paper is to investigate how a reduction in water quotas and increased water prices affect risk‐efficient crop choices and the related economic implications for northern German farmers.
Design/methodology/approach
The authors apply a whole‐farm risk programming approach to a typical arable farm in northern Germany. By using irrigation field trials, production activities with varying irrigation intensities and inherently incorporated crop yield uncertainty are defined.
Findings
In contrast to increased water prices, a reduction in water quotas leads to higher water savings and lower economic disadvantages for farmers. Due to an adjusted portfolio crop choice, as well as irrigation intensity, the reduction in the expected total gross margin is partially offset.
Research limitations/implications
This example ensures volumetric water monitoring at the farm level which, however, remains a major pitfall in many other countries. From a methodological perspective, the crop yield distribution choice might affect the findings. Likewise, the consideration of downside risk in an irrigation context appears to be interesting for future research.
Originality/value
This is the first paper to compare the implications of differentiated water quotas and water pricing schemes suggested by the European Water Framework Directive, while taking risk‐efficient crop portfolio considerations into account. This approach facilitates water reallocation not only between crops, but also in terms of the crop‐specific irrigation intensity. Crop yields are based on a unique panel of micro data rather than expert opinions or simulations.
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