Farm Support Payments and Risk Balancing: Implications for Financial Riskiness of Canadian Farms

Abstract

Risk balancing refers to the balancing of business risk (BR) and financial risk (FR) by firms through their investment and borrowing decisions. Assuming the concept holds, a decrease in income variability (BR) prompts the firm to incur greater debt levels thereby increasing FR. Reducing (BR), which continues to be the central objective of Canadian agricultural policy through programs such as Canadian Agricultural Income Stabilization Program (CAIS)/AgriStability, may lead farmers to take on more FR than they would take otherwise, which, in turn, increases the risk of equity loss. However, it is not known whether Canadian business risk management (BRM) programs offset BR as intended, and whether any potential reduction leads to increased FR (risk balancing) and possibly higher levels of overall risk for individual farm operations. This paper represents the first attempt to shed light on whether Canadian BRM programs fail to reduce farm risk as a result of farmers' risk balancing behavior using a longitudinal farm-level data set from Ontario. Results are mixed: (1) BRM payments reduce BR for beef farms but not for field crops farms (though the latter result may be due to the lack of data on Crop Insurance payments); (2) risk balancing holds particularly for the larger farms, and (3) BRM programs overall have no significant effect on the likelihood of increased debt use for either sector, on average; however, participation in CAIS/AgriStability increases the probability that farms take on more debt than they would take otherwise for both sectors. Further analysis is needed to determine whether BRM programs increase the probability of default for farms. L'équilibre des risques fait référenceà l'équilibre des risques de l'entreprise et des risques financiers que visent les entreprises dans leurs décisions d'investissement et d'emprunt.À supposer que le concept soit valable, une diminution de la variabilité du revenu (risque de l'entreprise) inciterait l'entreprisè a hausser son niveau d'endettement, ce qui ferait augmenter le risque financier. La diminution des risques de l'entreprise, qui constitue le principal objectif de la politique agricole canadienne et de divers programmes, tels que le Programme canadien de stabilisation du revenu agricole (PCSRA) et * Senior authorship is shared by the first two authors. 595 596 CANADIAN JOURNAL OF AGRICULTURAL ECONOMICSle programme Agri-stabilité, pourrait amener les agriculteursà courir davantage de risques financiers ce qui, par conséquent, augmenterait le risque de perte de capitaux propres. Toutefois, on ne sait pas si les programmes canadiens de gestion des risques de l'entreprise (GRE) contrebalancent ou non comme prévu les risques de l'entreprise ni si une diminution potentielle des risques de l'entreprise entraîne ou non une hausse du risque financier (équilibre des risques) et possiblement une hausse des niveaux de risques dans le cas des exploitations agricoles individuelles. Le présent article se veut une première tentative visantà déterminer,à l'aide d'un ensembl...

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