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How Australian farmers deal with risk

Author

Listed:
  • Amy Khuu
  • Ernst Juerg Weber

Abstract

Purpose - In Australia broadacre crops can be insured against hail and fire damage and some other perils but not against losses caused by drought, flood or frost. The purpose of this paper is to investigate the private provision of crop insurance in Western Australia. Design/methodology/approach - A farm survey was conducted with the cooperation of dryland farmers belonging to Western Australian grower groups. The willingness to pay for hail insurance is modelled as a function of risk aversion, risk of crop failure and government assistance; and the effect of expected crop yield in t/ha on the crop area is investigated. Findings - The empirical analysis shows that the coefficient of relative risk aversion is 2.7. An increase in the variability of crop yield by 20 per cent, which may be caused by future climate change, would raise the willingness to pay for crop insurance one‐to‐one by 20 per cent. Adverse selection plays a minor role because almost all farmers buy full coverage for hail insurance and associated risks. A future supplier of multi‐peril crop insurance must, however, consider the potential forex antemoral hazard because the size of the crop area depends on the expected crop yield in t/ha. Social implications - The Global Financial Crisis has provided a stark reminder that society crucially depends on the efficient and fair allocation of risk. Climate change threatens the livelihood of farmers and food security. Private multi‐peril crop insurance, which has yet to emerge, would improve the welfare of rural populations and the efficiency of farming. Originality/value - Few empirical studies deal with the private provision of multi‐peril crop insurance because the market for multi‐peril crop insurance fails worldwide and private insurance does not exist. In this study, Australian crop insurance serves as a proxy to gain an understanding of multi‐peril crop insurance.

Suggested Citation

  • Amy Khuu & Ernst Juerg Weber, 2013. "How Australian farmers deal with risk," Agricultural Finance Review, Emerald Group Publishing Limited, vol. 73(2), pages 345-357, July.
  • Handle: RePEc:eme:afrpps:v:73:y:2013:i:2:p:345-357
    DOI: 10.1108/AFR-10-2012-0054
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    References listed on IDEAS

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    1. Martin Parkinson, 2011. "Sustainable Wellbeing - An Economic Future for Australia," Economics Discussion / Working Papers 11-17, The University of Western Australia, Department of Economics.
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    Cited by:

    1. Adamson, David & Loch, Adam & Schwabe, Kurt, 2017. "Adaptation responses to increasing drought frequency," Australian Journal of Agricultural and Resource Economics, Australian Agricultural and Resource Economics Society, vol. 61(3), July.
    2. Nauges, Celine & Wheeler, Sarah Ann & Zuo, Alec, 2016. "Elicitation of irrigators’ risk preferences from observed behaviour," Australian Journal of Agricultural and Resource Economics, Australian Agricultural and Resource Economics Society, vol. 60(3), July.
    3. Philippe Bontems & Celine Nauges, 2018. "Production choices with water markets and risk aversion: the role of initial allocations and forward trading," Post-Print hal-02349932, HAL.

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