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Farm Level Risk Assessment Using Downside Risk Measures

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  • Berg, Ernst
  • Starp, Michael

Abstract

Recent and presumable future developments tend to increase the risk associated with farming activities. This causes an increasing importance of risk management. Farmers have a wide variety of possibilities to influence the risk exposure of their operations. Among them are the choice of the production program as well as marketing activities including forward pricing and hedging with futures and options. In total all these opportunities comprise a portfolio of activities which must be selected as to match the resources of the farm as well as the farmer's attitudes towards risk. The paper addresses this issue using a whole farm stochastic optimisation approach based on a risk-value framework. The paper starts with a discussion of risk-value models and the relationship between them and the expected utility hypothesis. In the second part the approach is incorporated in a whole farm model that optimizes a portfolio of production activities and risk management instruments. A case study is used to analyse the possibilities and limitations of the approach and to illustrate the effects of yield and production risk on decision making.

Suggested Citation

  • Berg, Ernst & Starp, Michael, 2006. "Farm Level Risk Assessment Using Downside Risk Measures," 2006 Annual Meeting, August 12-18, 2006, Queensland, Australia 25400, International Association of Agricultural Economists.
    • Handle: RePEc:ags:iaae06:25400
    DOI: 10.22004/ag.econ.25400
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    References listed on IDEAS

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    3. Anderson, Jock R. & Dillon, John L. & Hardaker, Brian, 1977. "Agricultural Decision Analysis," Monographs: Applied Economics, AgEcon Search, number 288652, November.
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    5. Anderson, Jock R. & Feder, Gershon, 2007. "Agricultural Extension," Handbook of Agricultural Economics, in: Robert Evenson & Prabhu Pingali (ed.), Handbook of Agricultural Economics, edition 1, volume 3, chapter 44, pages 2343-2378, Elsevier.
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    7. Albrecht, Peter & Maurer, Raimond & Möller, Matthias, 1997. "Shortfall-Risiko/Excess-Chance-Entscheidungskalküle: Grundlagen und Beziehungen zum Bernoulli-Prinzip," Sonderforschungsbereich 504 Publications 97-17, Sonderforschungsbereich 504, Universität Mannheim;Sonderforschungsbereich 504, University of Mannheim.
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    Cited by:

    1. Berg, Ernst & Schmitz, Bernhard, 2007. "Weather-based instruments in the context of whole farm risk management," 101st Seminar, July 5-6, 2007, Berlin Germany 9269, European Association of Agricultural Economists.
    2. 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.
    3. Elizabeth Anne Yeager & Michael R. Langemeier, 2013. "Economic efficiency and downside risk," Applied Economics, Taylor & Francis Journals, vol. 45(36), pages 5012-5020, December.

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    Keywords

    Risk and Uncertainty;

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