Impact of Risk within the Northern Ireland Dairy Sector

This paper examines farmers’ decision making under risk and uncertainty. In particular, the study identifies the type of risk preference (averse, neutral or seeking) and measures the magnitude of risk preference before and after the introduction of the Single Farm Payment (SFP). The analysis therefore provides an insight into the impact of this fundamental policy change on farmer risk behaviour. Furthermore, it examines agricultural production decision making under price uncertainty. Empirically, it evaluates the impact of risk and uncertainty using Farm Business Survey (FBS) data of NI dairy farms. Using an econometric approach (maximize expected utility), a comprehensive methodology is employed that enables price uncertainty and risk preference under the Common Agricultural Policy (CAP) to be analysed simultaneously. The methodology permits the testing of common risk aversion theoretical hypotheses, including Arrow’s hypothesis on the effect of wealth on the measures of risk aversion. Also, this methodology enables the identification of the impact of farmers’ attitude to risk, price uncertainty and other criteria (e.g. age, education, and family labour) on their production decisions. The results are relevant to both policy makers and farmers. With regards to the former, the results reveal the factors which influence famers’ decision making, therefore, enabling policy makers to evaluate the effectiveness and efficiency of agricultural policies and thus introduce improvements in future policies. With regards to farmers, the results demonstrate the consequences of risk and uncertainty on their operational environment.