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Substitutes versus Complements among Canadian Business Risk Management Programs

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  • Uzea, Florentina
  • Poon, Kenneth
  • Sparling, David
  • Weersink, Alfons

Abstract

Business risk management (BRM) continues to be the central objective of agricultural policy in many countries, including Canada and the US. The unprecedented volatility that has characterized the farming sector in recent years is only expected to rise. Thus, governments continue to implement comprehensive suites of BRM programs to assist farmers in coping with these gyrations. This paper aims to examine 1) the relationships between the main Canadian BRM programs (AgriInsurance, AgriStability, and AgriInvest), and 2) if and how those relationships differ across different farms. Understanding the interlinkages between government BRM programs is central for policy makers in order to achieve the desired objectives. The analysis uses data from the Ontario Farm Income Database (OFID), which is a longitudinal farm-level dataset compiled from Ontario farm tax-file records from 2003 to 2011. The dataset contains detailed financial, production and program payment (except for Production Insurance/AgriInsurance payments) data for all Ontario tax-filling farm operations. Additional operator-level Production Insurance/AgriInsurance payment data is linked to farm-level OFID records to complement the program payment data. The paper uses a two-stage approach to examine the relationships between AgriInsurance, AgriStability, and AgriInvest. First, a multinomial probit model is estimated in which the dependent variables are dummies for all eight possible combinations of participation in the three programs and the independent variables include program participation in previous year, operating profit margin, operating expense ratio, leverage, diversification index, size, and sector. In the second stage, the predicted probabilities of the eight participation states from the first stage multinomial function is used as regressors against percentage falls in gross margin (operating revenue minus operating expense), controlled for size and sector. We find that participation in the previous year has a strong and positive effect on participation in the current year, and the three programs are generally treated as compliments. We also find that in general, farms that participate in some combination programs have smaller drops in gross margin compared to those that participate in no programs. Despite this effect, operators continue to drop out of BRM programs.

Suggested Citation

  • Uzea, Florentina & Poon, Kenneth & Sparling, David & Weersink, Alfons, 2014. "Substitutes versus Complements among Canadian Business Risk Management Programs," 2014 Annual Meeting, July 27-29, 2014, Minneapolis, Minnesota 174942, Agricultural and Applied Economics Association.
    • Handle: RePEc:ags:aaea14:174942
    DOI: 10.22004/ag.econ.174942
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    References listed on IDEAS

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    1. Kimura, Shingo & Anton, Jesus, 2011. "Farm Income Stabilization and Risk Management: Some Lessons from AgriStability Program in Canada," 2011 International Congress, August 30-September 2, 2011, Zurich, Switzerland 114755, European Association of Agricultural Economists.
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    Cited by:

    1. Davidson, Kelly A. & Goodrich, Brittney K., 2020. "Nudge to Insure: Can Informational Nudges Increase Enrollment in Pasture, Rangeland and Forage Rainfall Index Insurance?," 2020 Annual Meeting, July 26-28, Kansas City, Missouri 304550, Agricultural and Applied Economics Association.

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    Keywords

    Agricultural and Food Policy; Agricultural Finance;

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