IDEAS home Printed from https://ideas.repec.org/a/spr/agfoec/v7y2019i1d10.1186_s40100-019-0127-7.html
   My bibliography  Save this article

Farm/crop portfolio simulations under variable risk: a case study from Italy

Author

Listed:
  • Franco Rosa

    (University of Udine)

  • Mario Taverna

    (University of Udine)

  • Federico Nassivera

    (University of Udine)

  • Luca Iseppi

    (University of Udine)

Abstract

Important sources of risk in agriculture are yield and price fluctuations caused by unpredictable and uncontrollable events, inducing income volatility and adding considerable complexity to farmers’ decisions. The literature suggests that these events could affect farmers’ risk aversion in decision making and justify their preferences for risk minimizing and safety-first survival, rather than a profit maximization strategy. The aim of this study is to test this hypothesis by using a quadratic programming in linearized version and the sumex utility function, which is representable as sum of products of polynomials and exponential (or “polynex”) functions to simulate risk aversion for specific traits of the E-V frontier (Nakamura, Mathematical Soc Sci 31:39–47, 1996). The linear approximation of the utility function is obtained with the MOTAD approach, consisting in the minimization of errors generated by total absolute deviations of gross income from the expected value (Hardaker et al. Rev Mark Agric Econ 59:9–22, 1991). This method allows different portfolio simulations to be run of selected cereal and oilseed crops as risky prospects, by varying the risk parametrically. The results obtained confirm the hypothesis that risk affects farmers’ decisions and that crop diversification is a viable strategy as a hedge against risk.

Suggested Citation

  • Franco Rosa & Mario Taverna & Federico Nassivera & Luca Iseppi, 2019. "Farm/crop portfolio simulations under variable risk: a case study from Italy," Agricultural and Food Economics, Springer;Italian Society of Agricultural Economics (SIDEA), vol. 7(1), pages 1-15, December.
    • Handle: RePEc:spr:agfoec:v:7:y:2019:i:1:d:10.1186_s40100-019-0127-7
    DOI: 10.1186/s40100-019-0127-7
    as

    Download full text from publisher

    File URL: http://link.springer.com/10.1186/s40100-019-0127-7
    File Function: Abstract
    Download Restriction: no
    File URL: https://libkey.io/10.1186/s40100-019-0127-7?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    References listed on IDEAS

    as
    1. Harry M. Kaiser & Jeffrey Apland, 1989. "DSSP: A Model of Production and Marketing Decisions on a Midwestern Crop Farm," Review of Agricultural Economics, Agricultural and Applied Economics Association, vol. 11(2), pages 157-169.
    2. Rosa, Franco & Vasciaveo, Michela & Weaver, Robert D., 2014. "Agricultural and oil commodities: price transmission and market integration between US and Italy," Bio-based and Applied Economics Journal, Italian Association of Agricultural and Applied Economics (AIEAA), vol. 3(2), pages 1-25, August.
    3. Jean-Paul Chavas & Matthew T. Holt, 1990. "Acreage Decisions Under Risk: The Case of Corn and Soybeans," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 72(3), pages 529-538.
    4. John G. Stovall, 1966. "Income Variation and Selection of Enterprises," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 48(5), pages 1575-1579.
    5. Ray, Daryll E. & Richardson, James W. & De La Torre Ugarte, Daniel G. & Tiller, Kelly H., 1998. "Estimating Price Variability in Agriculture: Implications for Decision Makers," Journal of Agricultural and Applied Economics, Cambridge University Press, vol. 30(1), pages 21-33, July.
    6. P. B. R. Hazell, 1971. "A Linear Alternative to Quadratic and Semivariance Programming for Farm Planning under Uncertainty: Reply," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 53(4), pages 664-665.
    7. Meyer, Jack, 1977. "Second Degree Stochastic Dominance with Respect to a Function," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 18(2), pages 477-487, June.
    8. John Lee & Deborah J. Brown & Stephen Lovejoy, 1985. "Stochastic Efficiency versus Mean-Variance Criteria as Predictors of Adoption of Reduced Tillage," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 67(4), pages 839-845.
    9. Salvioni, Cristina & Esposito, Laura & Henke, Roberto & Rondinelli, V., 2009. "Diversification strategies in small farms in Italy," 111th Seminar, June 26-27, 2009, Canterbury, UK 53964, European Association of Agricultural Economists.
    10. P. B. R. Hazell, 1971. "A Linear Alternative to Quadratic and Semivariance Programming for Farm Planning under Uncertainty," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 53(1), pages 53-62.
    11. Lars Brink & Bruce McCarl, 1978. "The Tradeoff between Expected Return and Risk Among Cornbelt Farmers," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 60(2), pages 259-263.
    12. J. Brian Hardaker & Louise H. Patten & David J. Pannell, 1988. "Utility‐Efficient Programming For Whole‐Farm Planning," Australian Journal of Agricultural and Resource Economics, Australian Agricultural and Resource Economics Society, vol. 32(2-3), pages 88-97, 08-12.
    13. Richardson, James W. & Klose, Steven L. & Gray, Allan W., 2000. "An Applied Procedure For Estimating And Simulating Multivariate Empirical (Mve) Probability Distributions In Farm-Level Risk Assessment And Policy Analysis," Journal of Agricultural and Applied Economics, Southern Agricultural Economics Association, vol. 32(2), pages 1-17, August.
    14. Uri Gneezy & John A. List & George Wu, 2006. "The Uncertainty Effect: When a Risky Prospect is Valued Less than its Worst Possible Outcome," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 121(4), pages 1283-1309.
    15. C. Robert Taylor, 1990. "Two Practical Procedures for Estimating Multivariate Nonnormal Probability Density Functions," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 72(1), pages 210-217.
    16. P. B. R. Hazell & P. L. Scandizzo, 1974. "Competitive Demand Structures under Risk in Agricultural Linear Programming Models," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 56(2), pages 235-244.
    17. G Lien & JB Hardaker, 2001. "Whole-farm planning under uncertainty: impacts of subsidy scheme and utility function on portfolio choice in Norwegian agriculture," European Review of Agricultural Economics, Oxford University Press and the European Agricultural and Applied Economics Publications Foundation, vol. 28(1), pages 17-36, March.
    18. Hardaker, J. Brian & Pandey, Sushil & Patten, Louise H., 1991. "Farm Planning under Uncertainty: A Review of Alternative Programming Models," Review of Marketing and Agricultural Economics, Australian Agricultural and Resource Economics Society, vol. 59(01), pages 1-14, April.
    19. Hanoch, Giora & Levy, Haim, 1970. "Efficient Portfolio Selection with Quadratic and Cubic Utility," The Journal of Business, University of Chicago Press, vol. 43(2), pages 181-189, April.
    20. Sulewski, Piotr & Kłoczko-Gajewska, Anna, 2014. "Farmers’ risk perception, risk aversion and strategies to cope with production risk: an empirical study from Poland," Studies in Agricultural Economics, Research Institute for Agricultural Economics, vol. 116(3), pages 1-8, December.
    21. Anderson, Jock R. & Dillon, John L. & Hardaker, Brian, 1977. "Agricultural Decision Analysis," Monographs: Applied Economics, AgEcon Search, number 288652, November.
    22. Rulon D. Pope, 1982. "Empirical Estimation and Use of Risk Preferences: An Appraisal of Estimation Methods That Use Actual Economic Decisions," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 64(2), pages 376-383.
    23. Nakamura, Yutaka, 1996. "Sumex utility functions," Mathematical Social Sciences, Elsevier, vol. 31(1), pages 39-47, February.
    24. Jeremy F. Shapiro & Vijay M. Singhal & Stephen N. Wagner, 1993. "Optimizing the Value Chain," Interfaces, INFORMS, vol. 23(2), pages 102-117, April.
    25. Mark R. Manfredo & Raymond M. Leuthold, 1999. "Value-at-Risk Analysis: A Review and the Potential for Agricultural Applications," Review of Agricultural Economics, Agricultural and Applied Economics Association, vol. 21(1), pages 99-111.
    26. Bruce A. McCarl & Hayri Önal, 1989. "Linear Approximation Using MOTAD and Separable Programming: Should It Be Done?," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 71(1), pages 158-166.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Assefa, Yared & Yadav, Sudhir & Mondal, Manoranjan K. & Bhattacharya, Jayanta & Parvin, Rokhsana & Sarker, Shilpi R. & Rahman, Mahabubur & Sutradhar, Asish & Prasad, P.V. Vara & Bhandari, Humnath & Sh, 2021. "Crop diversification in rice-based systems in the polders of Bangladesh: Yield stability, profitability, and associated risk," Agricultural Systems, Elsevier, vol. 187(C).
    2. Brečko Jure & Žgajnar Jaka, 2022. "Possible Impact of Risk Management Strategies with Farm Model on a Mixed Farm Type," Business Systems Research, Sciendo, vol. 13(3), pages 23-35, October.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Rosa, Franco, 2014. "Evaluation of risk in farm planning: a case study," 2014 Third Congress, June 25-27, 2014, Alghero, Italy 173126, Italian Association of Agricultural and Applied Economics (AIEAA).
    2. Heidelbach, Olaf, 2007. "Efficiency of selected risk management instruments: An empirical analysis of risk reduction in Kazakhstani crop production," Studies on the Agricultural and Food Sector in Transition Economies, Leibniz Institute of Agricultural Development in Transition Economies (IAMO), volume 40, number 92323, September.
    3. Pannell, David J. & Nordblom, Thomas L., 1998. "Impacts of risk aversion on whole-farm management in Syria," Australian Journal of Agricultural and Resource Economics, Australian Agricultural and Resource Economics Society, vol. 42(3), pages 1-21.
    4. Flaten, Ola & Lien, Gudbrand D., 2005. "Stochastic Utility-Efficient Programming of Organic Dairy Farms," 2005 International Congress, August 23-27, 2005, Copenhagen, Denmark 24743, European Association of Agricultural Economists.
    5. Apland, Jeffrey & Hauer, Grant, 1993. "Discrete Stochastic Programming: Concepts, Examples And A Review Of Empirical Applications," Staff Papers 13793, University of Minnesota, Department of Applied Economics.
    6. Flaten, O. & Lien, G., 2007. "Stochastic utility-efficient programming of organic dairy farms," European Journal of Operational Research, Elsevier, vol. 181(3), pages 1574-1583, September.
    7. Torkamani, Javad & Hardaker, J. Brian, 1996. "A study of economic efficiency of Iranian farmers in Ramjerd district: an application of stochastic programming," Agricultural Economics, Blackwell, vol. 14(2), pages 73-83, July.
    8. Kingwell, Ross, 1996. "Programming models of farm supply response: The impact of specification errors," Agricultural Systems, Elsevier, vol. 50(3), pages 307-324.
    9. Pannell, David J. & Malcolm, Bill & Kingwell, Ross S., 2000. "Are we risking too much? Perspectives on risk in farm modelling," Agricultural Economics, Blackwell, vol. 23(1), pages 69-78, June.
    10. Ridier, Aude & Chaib, Karim & Roussy, Caroline, 2016. "A Dynamic Stochastic Programming model of crop rotation choice to test the adoption of long rotation under price and production risks," European Journal of Operational Research, Elsevier, vol. 252(1), pages 270-279.
    11. Schoney, R. A., 1990. "An Analysis of Wheat Supply Response Under Risk and Uncertainty," Working Papers 244030, Agriculture and Agri-Food Canada.
    12. Young, Douglas & Lin, William & Pope, Rulon & Robison, Lindon & Selley, Roger, 1979. "Risk Preferences Of Agricultual Producers:Their Measurement And Use," Risk Management in Agriculture: Behavioral, Managerial, and Policy Issues, January 25-26, 1979, San Francisco, California 271459, Regional Research Projects > W-149: An Economic Evaluation of Managing Market Risks in Agriculture.
    13. Asci, Serhat & VanSickle, John J. & Cantliffe, Daniel J., 2014. "Risk in Investment Decision Making and Greenhouse Tomato Production Expansion in Florida," International Food and Agribusiness Management Review, International Food and Agribusiness Management Association, vol. 17(4), pages 1-26, November.
    14. Torkamani, Javad, 2005. "Using a whole-farm modelling approach to assess prospective technologies under uncertainty," Agricultural Systems, Elsevier, vol. 85(2), pages 138-154, August.
    15. Lien, Gudbrand & Hardaker, J. Brian & Asseldonk, Marcel A.P.M. van & Richardson, James W., 2009. "Risk programming and sparse data: how to get more reliable results," Agricultural Systems, Elsevier, vol. 101(1-2), pages 42-48, June.
    16. Hardaker, J. Brian & Pandey, Sushil & Patten, Louise H., 1991. "Farm Planning under Uncertainty: A Review of Alternative Programming Models," Review of Marketing and Agricultural Economics, Australian Agricultural and Resource Economics Society, vol. 59(01), pages 1-14, April.
    17. Teague, Paul W. & Lee, John G., 1988. "Risk Efficient Perennial Crop Selection: A Motad Approach To Citrus Production," Southern Journal of Agricultural Economics, Southern Agricultural Economics Association, vol. 20(2), pages 1-8, December.
    18. Musshoff, Oliver & Hirschauer, Norbert, 2008. "Sophisticated Program Planning Approaches Generate Large Benefits in High Risk Crop Farming," 82nd Annual Conference, March 31 - April 2, 2008, Royal Agricultural College, Cirencester, UK 36865, Agricultural Economics Society.
    19. Petrick, Martin & Ditges, C. Markus, 2000. "Risk in agriculture as impediment to rural lending: the case of North-Western Kazakhstan," IAMO Discussion Papers 24, Leibniz Institute of Agricultural Development in Transition Economies (IAMO).
    20. Turvey, Calum G. & Driver, H.C., 1985. "An Examination of Systematic Risks in Agriculture: A Farm Sector Capital Asset Pricing Model," 1985 Annual Meeting, August 4-7, Ames, Iowa 278553, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:spr:agfoec:v:7:y:2019:i:1:d:10.1186_s40100-019-0127-7. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Sonal Shukla or Springer Nature Abstracting and Indexing (email available below). General contact details of provider: http://www.springer.com .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.