Can rent adjustment clauses reduce the income risk of farms?
AbstractRisk management is gaining importance in agriculture. In addition to traditional instruments, new risk management instruments are increasingly being proposed. These proposals include the rent adjustment clauses (RACs), which seem to be an unusual instrument at first sight. In contrast with conventional instruments, RACs intentionally allow fixed-cost â€˜rent paymentsâ€™ to fluctuate. We investigate the whole-farm risk reduction potential of different types of RACs via a historical simulation. The change in standard deviation and the value at risk (VaR) of the total gross margin (TGM) measure risk reduction potential. Our results revealed that RACs contribute to farm risk management. However, the trade-off between moral hazard and basis risk must be considered. Our proposal of weather index-based RAC seems to be a â€˜good compromiseâ€™: the problem of moral hazard is completely eliminated by objectively measuring weather data. At the same time, the risk reduction potential of precipitation-based clauses, for example, is comparatively high.
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Bibliographic InfoArticle provided by Institute of Agricultural Management & International Farm Management Association in its journal International Journal of Agricultural Management.
Volume (Year): 01 (2012)
Issue (Month): 4 (July)
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Web page: http://www.ijagman.org
Risk management; rent adjustment clause; moral hazard; basis risk; weather index; value at risk; Farm Management; Financial Economics; Land Economics/Use; Risk and Uncertainty;
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