Whole-farm risk management in arable farming: portfolio methods for farm-specific business analysis and planning

Keywords:Economics, panel data, arable farming, revenue variability, farm business and financial characteristics, portfolio analysis, quadratic risk programming, utility-efficient programming, crop insuranceThe problem of farm income instability remains an important problem for agricultural decision-makers. Due to the difficulties in making an accurate prediction of the future, agricultural business is a risky business with unstable incomes. However, farmers have a number of tools to manage such risky situations (for instance, they use diversification possibilities on farm or price contracts). Portfolio optimisation is a useful tool to evaluate the consequences of alternative risk management strategies for a farmer, providing the protections and opportunities with respect to a wide range of risky prospects. The main advantage of portfolio optimisation is that it is able to capture much data covering whole-farm context, finding an optimum taken the interaction between the activities into account.The main aim of this research is to analyse an individual whole-farm portfolio structure and to evaluate the possibilities of risk-reduction in order to stabilise farm income in arable farming. In the analysis four main steps have been distinguished. First, farm revenue variability was analysed between farms and within a farm. Within-farm analysis overviews the variability and dependency of crop revenue components (i.e., yields and prices) over time and their effect on farm revenue. Between-farm analysis refers to farm revenue variability that is affected by differences in business and financial characteristics of farms. Second, an evaluation of the trade-off between expected gross margins and standard deviations was carried out using linear programming and quadratic risk programming. This analysis showed (considerable) differences between farms, which should be recognised in advising farms on portfolio selection. Then an analysis was carried out that clarifies the advantages and disadvantages of two portfolio optimisation approaches (parametric versus non-parametric). This analysis deals with the complex problem of specification and inclusion of the joint distribution of farm activities into the analysis. Finally an evaluation of farm income stabilisation by diversification and insurance within farm portfolio context was presented using the two portfolio optimisation approaches (parametric and non-parametric). Three hypothetical types of insurance products were considered: yield insurance, price insurance and revenue insurance. Insurance was found to be an efficient risk-management tool to stabilise farm income.

Bibliographic Details

Main Author:	Kobzar, O.
Other Authors:	Huirne, Ruud
Format:	Doctoral thesis biblioteca
Language:	English
Subjects:	arable farming, change, crop insurance, economic analysis, farm income, farm management, linear programming, netherlands, risk, risk behaviour, variation, agrarische bedrijfsvoering, akkerbouw, economische analyse, inkomsten uit het landbouwbedrijf, lineair programmeren, nederland, oogstverzekering, risico, risicogedrag, variatie, verandering,
Online Access:	https://research.wur.nl/en/publications/whole-farm-risk-management-in-arable-farming-portfolio-methods-fo
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