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The cost of agricultural production risk

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  • Babcock, Bruce A.
  • Shogren, Jason F.

Abstract

We examine the relative influence of preferences and technology on producers' ex ante willingness to pay for a reduction in production risk. A risk averse producer pays both an Arrow-Pratt risk premium to stabilize income and a 'production premium' to stabilize yield. Using soil-nitrate risks as our motivating example, we demonstrate that the production premium accounts for 40-85% of producers' willingness to pay for risk reduction. These results demonstrate the relative importance of technology over risk preferences when estimating the costs of agricultural production risk.
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Suggested Citation

  • Babcock, Bruce A. & Shogren, Jason F., 1995. "The cost of agricultural production risk," Agricultural Economics, Blackwell, vol. 12(2), pages 141-150, August.
  • Handle: RePEc:eee:agecon:v:12:y:1995:i:2:p:141-150
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    1. Atanu Saha & C. Richard Shumway & Hovav Talpaz, 1994. "Joint Estimation of Risk Preference Structure and Technology Using Expo-Power Utility," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 76(2), pages 173-184.
    2. Babcock, Bruce A. & Choi, E. Kwan & Feinerman, Eli, 1993. "Risk And Probability Premiums For Cara Utility Functions," Journal of Agricultural and Resource Economics, Western Agricultural Economics Association, vol. 18(01), July.
    3. Babcock, Bruce A. & Blackmer, Alfred M., 1992. "The Value Of Reducing Temporal Input Nonuniformities," Journal of Agricultural and Resource Economics, Western Agricultural Economics Association, vol. 17(02), December.
    4. Babcock, Bruce A. & Chalfant, James A. & Collender, Robert N., 1987. "Simultaneous Input Demands And Land Allocation In Agricultural Production Under Certainty," Western Journal of Agricultural Economics, Western Agricultural Economics Association, vol. 12(02), December.
    5. Babcock, Bruce A. & Blackmer, A. M., 1992. "Value of Reducing Temporal Input Nonuniformities (The)," Staff General Research Papers Archive 10587, Iowa State University, Department of Economics.
    6. Bernardo, Daniel J., 1988. "The Effect Of Spatial Variability Of Irrigation Applications On Risk-Efficient Irrigation Strategies," Southern Journal of Agricultural Economics, Southern Agricultural Economics Association, vol. 20(01), July.
    7. S. SriRamaratnam & David A. Bessler & M. Edward Rister & John E. Matocha & James Novak, 1987. "Fertilization under Uncertainty: An Analysis Based on Producer Yield Expectations," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 69(2), pages 349-357.
    8. Just, Richard E. & Pope, Rulon D., 1978. "Stochastic specification of production functions and economic implications," Journal of Econometrics, Elsevier, vol. 7(1), pages 67-86, February.
    9. Milton Friedman & L. J. Savage, 1948. "The Utility Analysis of Choices Involving Risk," Journal of Political Economy, University of Chicago Press, vol. 56, pages 279-279.
    10. Hanley, Nick, 1990. "The Economics of Nitrate Pollution," European Review of Agricultural Economics, Foundation for the European Review of Agricultural Economics, vol. 17(2), pages 129-151.
    11. Loehman, Edna T. & Nelson, Carl H., 1992. "Optimal Risk Management, Risk Aversion, And Production Function Properties," Journal of Agricultural and Resource Economics, Western Agricultural Economics Association, vol. 17(02), December.
    12. Bernardo, Daniel J., 1988. "The Effect of Spatial Variability of Irrigation Applications on Risk-Efficient Strategies," Journal of Agricultural and Applied Economics, Cambridge University Press, vol. 20(01), pages 77-86, July.
    13. Lence, Sergio H. & Babcock, Bruce A., 1995. "Flexibility, Endogenous Risk, and the Protection Premium," Staff General Research Papers Archive 1766, Iowa State University, Department of Economics.
    14. Nick Hanley, 1990. "The Economics of Nitrate Pollution Control in the UK," Working Papers Series 90/5, University of Stirling, Division of Economics.
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    Cited by:

    1. Mitchell, Paul D., 2003. "Value of imperfect input information in agricultural production," Agricultural Systems, Elsevier, vol. 75(2-3), pages 277-294.
    2. Isik, Murat & Khanna, Madhu, 2002. "Variable-Rate Nitrogen Application Under Uncertainty: Implications For Profitability And Nitrogen Use," Journal of Agricultural and Resource Economics, Western Agricultural Economics Association, vol. 27(01), July.
    3. Predrag Rajsic & Alfons Weersink & Markus Gandorfer, 2009. "Risk and Nitrogen Application Levels," Canadian Journal of Agricultural Economics/Revue canadienne d'agroeconomie, Canadian Agricultural Economics Society/Societe canadienne d'agroeconomie, vol. 57(2), pages 223-239, June.
    4. Archer, David W. & Shogren, Jason F., 1996. "Endogenous risk in weed control management," Agricultural Economics, Blackwell, vol. 14(2), pages 103-122, July.
    5. Murat Isik & Madhu Khanna, 2003. "Stochastic Technology, Risk Preferences, and Adoption of Site-Specific Technologies," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 85(2), pages 305-317.
    6. Lichtenberg, Erik, 2002. "Agriculture and the environment," Handbook of Agricultural Economics,in: B. L. Gardner & G. C. Rausser (ed.), Handbook of Agricultural Economics, edition 1, volume 2, chapter 23, pages 1249-1313 Elsevier.
    7. Mitchell, Paul David, 1999. "The theory and practice of green insurance: insurance to encourage the adoption of corn rootworm IPM," ISU General Staff Papers 1999010108000013154, Iowa State University, Department of Economics.

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