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Business and financial risks of small farm households in China

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Author Info

  • Calum G. Turvey
  • Rong Kong
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    Abstract

    Purpose – The purpose of this paper is to investigate the relationships between business risks and credit choices of 400 farm households surveyed in Shaanxi province in October 2007 in the Yangling district. More specifically, this paper investigates whether or not rural farm households in China balance business risks from agricultural production with financial risk from the use of debt. Design/methodology/approach – The data were collected through a survey of 400 farm households in Shaanxi province conducted in October 2007. Four separate regressions are run using a credit measure as the dependent variable and measures of profitability, risk, risk aversion, and demography, and debt source (formal versus informal lending) as independent variables. Findings – The model shows evidence of risk balancing. That is, there is strong evidence that Chinese farmers reduce credit use and financial risk, as business risks increase. Practical implications – The results suggest that Chinese policy makers could encourage the use of finacial leverage and prudent debt use by offering risk reducing programs such as crop insurance, weather insurance, or price insurance. Originality/value – This paper uses a unique survey form to collect production risk data as well as gather information on credit use and sources. Data were collected so that risk measures could easily be computed using a triangular distribution. Furthermore, this is believed to be the first empirical validation of the risk balancing hypothesis

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    Bibliographic Info

    Article provided by Emerald Group Publishing in its journal China Agricultural Economic Review.

    Volume (Year): 1 (2009)
    Issue (Month): 2 (May)
    Pages: 155-172

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    Handle: RePEc:eme:caerpp:v:1:y:2009:i:2:p:155-172

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    Web page: http://www.emeraldinsight.com

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    Postal: Emerald Group Publishing, Howard House, Wagon Lane, Bingley, BD16 1WA, UK
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    Related research

    Keywords: Agriculture; China; Credit; Loans; Risk management; Rural economies;

    References

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    Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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    1. Dennis R. Henderson, 1994. "Measuring and Assessing Vertical Ties in the Agro-food System," Canadian Journal of Agricultural Economics/Revue canadienne d'agroeconomie, Canadian Agricultural Economics Society/Societe canadienne d'agroeconomie, vol. 42(4), pages 549-560, December.
    2. Porter, Gina & Phillips-Howard[malt], Kevin, 1997. "Comparing contracts: An evaluation of contract farming schemes in Africa," World Development, Elsevier, vol. 25(2), pages 227-238, February.
    3. Peterson, H. Christopher & Wysocki, Allen F., 1998. "Strategic Choice Along The Vertical Coordination Continuum," Staff Papers 11651, Michigan State University, Department of Agricultural, Food, and Resource Economics.
    4. Han, Jiqin & Omta, S.W.F. (Onno) & Trienekens, Jacques H., 2007. "The Joint Impact of Supply Chain Integration and Quality Management on the Performance of Pork Processing Firms in China," International Food and Agribusiness Management Review, International Food and Agribusiness Management Association (IAMA), vol. 10(02).
    5. Allen, Douglas & Lueck, Dean, 1992. "Contract Choice in Modern Agriculture: Cash Rent versus Cropshare," Journal of Law and Economics, University of Chicago Press, vol. 35(2), pages 397-426, October.
    6. Masakure, Oliver & Henson, Spencer, 2005. "Why do small-scale producers choose to produce under contract? Lessons from nontraditional vegetable exports from Zimbabwe," World Development, Elsevier, vol. 33(10), pages 1721-1733, October.
    7. Perry, Martin K., 1989. "Vertical integration: Determinants and effects," Handbook of Industrial Organization, in: R. Schmalensee & R. Willig (ed.), Handbook of Industrial Organization, edition 1, volume 1, chapter 4, pages 183-255 Elsevier.
    8. Dave D. Weatherspoon & Thomas Reardon, 2003. "The Rise of Supermarkets in Africa: Implications for Agrifood Systems and the Rural Poor," Development Policy Review, Overseas Development Institute, vol. 21, pages 333-355, 05.
    9. Klein, Benjamin, 1980. "Transaction Cost Determinants of "Unfair" Contractual Arrangements," American Economic Review, American Economic Association, vol. 70(2), pages 356-62, May.
    10. Sartorius, Kurt & Kirsten, Johann, 2007. "A framework to facilitate institutional arrangements for smallholder supply in developing countries: An agribusiness perspective," Food Policy, Elsevier, vol. 32(5-6), pages 640-655.
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    Cited by:
    1. Jin-Tao Zhan & Yan-Rui Wu & Xiao-Hui Zhang & Zhang-Yue Zhou, 2012. "Why do farmers quit from grain production in China? Causes and implications," China Agricultural Economic Review, Emerald Group Publishing, vol. 4(3), pages 342-362, October.

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