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The foregone risk premium: a communicative and practical method for the evaluation of risk-return profiles in agriculture

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  • Wauters, Erwin
  • De Cock, Lieve
  • Wit, Jan de
  • Lauwers, Ludwig H.
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    Abstract

    Risk considerations have become increasingly important in nowadays agriculture, due to a variety of reasons. Surprisingly, the practice of formalized risk management is not widespread despite the huge amount of scientific literature on this topic. This discrepancy between risk science and extension is described by many authors. This paper presents a communicative method, rooted in financial economics, to evaluate risk-return profiles in a way that is communicative for individual farmers. The method is derived from the modern portfolio theory, in which individual assets are implicitly compared to the risk-return trade-off of that asset with the highest Sharpe ratio. We use this idea to compare individual risk-return profiles to a particular benchmark. The method can be used for evaluating different risk-return profiles of different farms, different risk management instruments and different production systems. To illustrate the communicative nature of our method, it is applied to evaluate risk-return profiles of conventional versus organic cropping systems.

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    Bibliographic Info

    Paper provided by European Association of Agricultural Economists in its series 2011 International Congress, August 30-September 2, 2011, Zurich, Switzerland with number 115737.

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    Date of creation: 02 Sep 2011
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    Handle: RePEc:ags:eaae11:115737

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    Keywords: Risk and Uncertainty;

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    1. Szvetlana Acs & Paul Berentsen & Ruud Huirne & Marcel van Asseldonk, 2009. "Effect of yield and price risk on conversion from conventional to organic farming ," Australian Journal of Agricultural and Resource Economics, Australian Agricultural and Resource Economics Society, vol. 53(3), pages 393-411, 07.
    2. Joost M.E. Pennings & Philip Garcia, 2001. "Measuring Producers' Risk Preferences: A Global Risk-Attitude Construct," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 83(4), pages 993-1009.
    3. Acs, Szvetlana & Berentsen, Paul & Huirne, Ruud & van Asseldonk, Marcel, 2009. "Effect of yield and price risk on conversion from conventional to organic farming," Australian Journal of Agricultural and Resource Economics, Australian Agricultural and Resource Economics Society, vol. 53(3), September.
    4. Watson, John & Robinson, Sherry, 2003. "Adjusting for risk in comparing the performances of male- and female-controlled SMEs," Journal of Business Venturing, Elsevier, vol. 18(6), pages 773-788, November.
    5. Augustine S. Langyintuo & Emmanuel K. Yiridoe & Wilson Dogbe & James Lowenberg-Deboer, 2005. "Yield and income risk-efficiency analysis of alternative systems for rice production in the Guinea Savannah of Northern Ghana," Agricultural Economics, International Association of Agricultural Economists, vol. 32(2), pages 141-150, 03.
    6. Brorsen, B. Wade & Anderson, Kim B., 1999. "Agricultural Economics Research And Extension Marketing Programs: How Well Are They Integrated?," Journal of Agribusiness, Agricultural Economics Association of Georgia, vol. 17(2).
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