Efficient Farming Options For German Apple Growers Based On Stochastic Dominance Analysis

Apple production is afflicted with various risks. As it is a permanent crop, apple producers are less flexible to react upon undesirable events. As a result, for a sustainable economic performance, the determination of efficient farming options, as a combination of the production system and risk management instruments (RMI), is crucial. Our investigation focuses on this choice problem utilizing stochastic dominance criteria, which apply to a wide range of risk preferences. Based on data for 134 apple producers operating in the two main production areas in Germany, we compare and determine efficient production options for the most common regional varieties. Furthermore, appropriate RMIs are identified using stochastic dominance criteria. In this context we investigate internal RMI (frost irrigation and hail nets) as well as external risk protection tools (insurance options). In Germany only a single insurance concept against hail is available, whereas insurance against late frosts is not at the apple growers’ disposal. As frost insurance exists in neighboring countries, we analyze the effect of the latter based on a hypothetic hail-frost insurance policy. Simulated net present values of a one hectare level serve as decision criterion, for which the associated cumulative probability distributions are evaluated according to first and second degree stochastic dominance criteria. In addition, we use SERF (Stochastic Efficiency with Respect to a Function) as it evaluates farming options for defined ranges of relative risk aversion and thus has a higher discriminative power. The results indicate that Red Prince is the most efficient option in the north and subsidized hail insurance with frost irrigation is superior to frost irrigation as single RMI. In the south Braeburn should be chosen under rational aspects, but the tested insurance solutions are not as efficient as the common production practice under hail nets.