Risk in Agriculture

Page 1 of 21

Risk in Agriculture

By | November 2012
Page 1 of 21
1.1 Introduction to Agricultural Risk Analysis.
Risk analysis has become increasingly popular in recent years. Accounting for risk in the analysis of farming systems is much harder than pretending it doesn’t exist. In the past, the difficulties have been compounded by confusion over just what risk is and how it can be measured. Risk analysis in agriculture has faltered in the past because of difficulties in estimate and categorizing farmers’ attitudes to risk. It is argued that risk aversion may not be as important for some choices as commonly believed; there are some rough and ready ways to estimate the relevant range of the risk for some target group. Methods of stochastic efficiency analysis then allow at least something to be said about better and worse solutions. Some risk analyses that have been based on the assumptions about the degree of risk aversion has overlooked some of the complexity in making the move from utility of wealth to utility of gains and losses or the utility of income. Moreover, very few such analyses have recognized that risk aversion for permanent income is likely to be much more important than is risk aversion for temporary income. Risk analysis has also been avoided in the past because so many would-be analysts were afraid to tackle the evaluation of risky choices when too few hard data were available to work out the required probability distributions. Too many of those who braved the waters of risk analysis left untold or under-emphasized the dubious relevance to the problem at hand of the data they used to represent uncertainty. It seems that the task of finding better ways to deduce the probability distributions that describe the risks that farmers face has been relatively neglected by agricultural economists.

Risk is a fundamental component of agricultural production and various studies of farmers’ attitudes to risk have generally found that farmers are risk averse (Chavas and Holt 1990 and Pope and Just1991). Risk analysis is...