Risk preferences of commodity crop producers and specialty crop producers: An application of prospect theory

Abstract

Producers' decisions, such as crop insurance, contract agreement, and technology adoption, involve considerable risk and uncertainty. Particularly, specialty crop production is more vulnerable to risk and requires more intensive management than commodity crop production, while risk mitigation tools for specialty crop production are comparatively limited. We apply Prospect Theory (PT) to analyze risk preferences of U.S. producers, and further compare the preference differences between commodity crop and specialty crop producers. Reference dependent, diminishing sensitivity, loss aversion, and probability weighting, as well as certain farm characteristics and producer demographics, are found to have a significant impact on grower risk attitudes. In addition, we do not observe significant differences in the base PT estimates between commodity crop and specialty crop producers. However, the relationships between risk behavior and individual characteristics vary between the two types of producers, which shed lights on the development of agricultural policies and provide implications for the design of contract and insurance.

Farm Producers' Household Consumption and Individual Risk Behavior after Natural Disasters

“…Given that farmers make decisions in risky environments, it is also important to understand their risk preferences, which affect business decisions regarding crop insurance, marketing, and commodity supply (Chavas and Holt 1996; Eckman, Patrick, and Musser 1996; Zhao and Yue 2020). Following are the two key findings in the literature on farmers' risk preferences: (i) farmers' risk preferences are not the same across studies; on average, farmers are risk-averse, and (ii) from a methodological perspective, farmers should be able to comprehend the risk elicitation task, which can be improved with a contextualized presentation of the elicitation task (Iyer et al 2020).…”

“…Given that farm producers' insurance, marketing, and commodity supply decisions partially depend on their risk-taking capacity (Chavas and Holt 1996; Eckman, Patrick, and Musser 1996; Zhao and Yue 2020), we investigate producers' risk preferences after a natural disaster and income loss experience. Understanding producers' consumption and risk behavior after a disaster can help with policies related to household recovery and designing credit and insurance instruments that can lessen the negative effects of natural disasters.…”

Canopy spray application technology in specialty crops: a slowly evolving landscape

“…Specialty crop production is characterized by a set of economic themes that guide farmer decisions in the use and adoption of technology. Specialty crops often require labor‐intensive production practices, such as drip irrigation, greenhouses, or hand labor, resulting in higher production costs compared with arable crop production 35 . Weather and plant health risks are often acute with specialty crops, as their value is typically tied to their aesthetic quality.…”

“…Weather and plant health risks are often acute with specialty crops, as their value is typically tied to their aesthetic quality. To manage these risks, contracts are often used by larger farms in big production regions, 35 but not as often by the majority of specialty crop farms which are small, privately owned operations with limited cash flow and reserves 10 . When it comes time to harvest, specialty crops are highly perishable so non‐contract producers often have to accept market prices.…”

“…When it comes time to harvest, specialty crops are highly perishable so non‐contract producers often have to accept market prices. Even with all of these economic risks, specialty crop producers often lack robust farm safety net programs such as insurance and market development assistance 35 . Most of these constraints are in contrast to arable crop production, where production costs are low, there is more tolerance for aesthetic faults, and there are robust safety net programs.…”