Is the Market Failing Agricultural Producers Who Wish to Manage Risks?

Abstract

The variability of producers 'net income levels is largely a function of variability in output price, yield, and input prices. Yet, the tools available to manage price risk and yield risk are not widely used by producers. Is the market failing to provide agricultural producers with effective risk management tools? To identify producers' needs, the paper establishes the relative importance of price and yield risk by decomposing the variability of revenues from a sample of crops in California agriculture. The risk tools available to producers of those commodities are compared to producers needs for tools. Results indicate that "market failure" is readily apparent in markets for tools to manage risks. However, the nature of these missing or incomplete markets does not necessarily imply inefficiencies that would justify government intervention. Copyright 1997 Western Economic Association International.

Farmer perceptions of risk in 2017

“…Production risk was identified as the primary source of risk for most farmers in our sample, with the largest mean estimated RPL preference share of 36% (Figure ). This is consistent with previous research that has found that production risks, such as yield variability resulting from weather, diseases, pests, and so forth, are among the most important sources of risk farmers face (Blank et al., ; Harwood et al., ; Jose & Valluru, ; Patrick et al., ). Relative priority placed on production risk is not surprising given that producing physical output is the fundamental operation of any farm business, and the inherent risk associated with production agriculture presents a consistent and impossible to eliminate challenge.…”

“…Using a similar framework, surveys of farmers in Nebraska (Jose & Valluru, ) and California (Blank, Carter, & McDonald, ) produced similar results a decade later with price and yield risks again being identified as the most important sources of variability. The 1996 USDA Agricultural Resource Management Survey (ARMS) performed similar analysis for a representative sample of the US farm sector (Harwood, Heifner, Coble, Perry, & Somwaru, ).…”

Commodity futures markets: a survey

“…Only 20 per cent of the farmers surveyed by the CFTC had ever used forward contracting. In a 1993 survey of California farmers, Blank, Carter and McDonald (1997), studied commodities for which either futures or forward contracts were available. They found that only about 23 per cent of the surveyed farmers price their commodities through forward contracts and only 6 per cent hedge with futures contracts.…”

“…If there is no perceived bias, then this speculative component of the hedge ratio is zero. Survey results have found that farmers prefer forward contracting to direct hedging with futures contracts (Blank, Carter and McDonald 1997). Forward contracts are a substitute for futures contracts, as both provide an opportunity to reduce price risk.…”

A Decision Support Tool Based on a Portfolio Selection Model for Crop Planning under Risk

“…The crops are C 1 = wheat, C 2 = rye, C 3 = barley, C 4 = oats, C 5 = maize, C 6 = sunflower. The areas of the plots are 1 S =10 ha, 2 S =12 ha, 3 S =7 ha, 4 S =11 ha, 5 S =14 ha, 6 S =16 ha, 7 S =9 ha and 8 S =12 ha. The years for historical data are 2001 -2007.…”