Understanding How U.S. Farms Use Risk Management Tools to Mitigate Financial Stress and Reduce Farm Exit

Financial stress remains persistent in U.S. agriculture, threatening the long-term viability of farm operations despite the availability of numerous risk management tools. While previous studies have examined the effectiveness of individual risk management strategies, less is known about how farmers use these tools either independently or in combination and whether these tools are associated with lower levels of financial stress. This study examines the combination of risk management tools used by different farmers and evaluates which bundle of tools are effective in alleviating financial stress. Using farm-level data from the USDA Agricultural Resource Management Survey (ARMS), we employ the Latent Class Analysis (LCA) using indicators of participation in risk management strategies such as crop insurance, government support programs, and diversification strategies. The resulting clusters capture the distinct risk management portfolios farms use. An ordered logit model is then used to examine the association between risk management bundles and farm financial stress while controlling farm and operator characteristics.