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Evaluation of risk in farm planning: a case study

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  • Rosa, Franco

Abstract

Many studies suggest that farmers frequently show risk averse attitudes, and choose the “riskminimizing” and “safety first” survival strategy rather than pursuing the profit maximization. This article reports on a study of the impact of risk caused by different events: climate, stock levels, price volatility and other causes affecting the yield and price variability of agricultural crops. This study will simulate the risk in farm decisions using a sumex utility function that allows to parameterize the risk for specific traits of the function, and MOTAD (minimization of total absolute deviations) to simulate an efficient combination of crops in the whole farm planning (WFP). The empirical analysis is represented by a case study consisting in the risk simulation of a farm of 100 Ha, growing vegetable crops located in the Northern region of Italy. The risk is modelled using 15 years historical observations with discrete probability distribution of some of the most diffused cereal and oilseed crops (source: Eurostat). The objective is to evaluate the risk aversion by designing a utility frontier of crop combinations using a LP approximation model. The results indicate the trade off between expected returns and risk: if the value of gross income is expected to increase, the farmers tend to specialize in the most profitable portfolio enterprise while it is not so evident that the diversification will contribute to curb the risk.

Suggested Citation

  • 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).
    • Handle: RePEc:ags:aiea14:173126
    DOI: 10.22004/ag.econ.173126
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    References listed on IDEAS

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    Keywords

    Agribusiness; Productivity Analysis; Risk and Uncertainty;
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