SCC76: Economics and Management of Risk in Agriculture and Natural Resources
(Multistate Research Coordinating Committee and Information Exchange Group)
SCC76: Economics and Management of Risk in Agriculture and Natural Resources
Duration: 10/01/2019 to 09/30/2024
Statement of Issues and Justification
Risk and uncertainty are pervasive in agriculture and other natural resource industries. Decisions of stakeholders are constrained by limited and uncertain knowledge about the various sources of risk. These include the unpredictability of future weather, continually changing government policies, and the growing importance of environmental considerations and their intersection with production agriculture. Furthermore, these uncertainties are widespread in nature. Risk impacts vary across agricultural firm types, geographic regions, and government agencies ranging from the local to Federal level.
While much progress has been made in understanding decision-making under uncertainty, the knowledge base remains incomplete due to the continually evolving nature of risk, its impacts, and responses. There is a continuing need to examine both short- and long-term effects of risk in agriculture and other natural resource based industries. Recent developments in both commodity and financial markets highlight the importance of understanding the ever changing nature of risk and risk management in production, both on the input and output side, as well as prices. Of a particular importance and interest is the study of the integration between the food and energy markets and the consequences of such integration with respect to risk and risk management. Better understanding of how risk management practices affect the economic and natural environment, influence the adoption of new technology, and interact with public policies will improve firm-level decision-making and aid policy-makers in addressing important policy issues related to risk. One of the strengths of the predecessor regional projects has been the national scope of the institutions represented by the participants.
While many risk problems and research opportunities are initially driven by local interests and/or specific situations, the earlier projects have demonstrated that the analytical and quantitative procedures developed and presented by project participants can often be successfully applied to understanding and addressing a variety of more broad risk problems. Hence, the information exchanged among project participants generates and distributes benefits for all of the institutions and regions represented by participants. In addition, the information exchange format creates opportunities for researchers to interact on issues of mutual interest, fostering extramural grant-writing efforts. The renewal of SCC-76 would continue the long tradition of bringing together researchers from around the country to strengthen and coordinate research and policy efforts related to risk analysis. Research conducted and presented within the predecessor regional projects focused on characterizing producer attitudes toward risk, deriving distributional aspects of commodity prices and yields, and developing improved decision models for considering risk from the perspective of the individual decision-maker. Due largely to the efforts of participants in those earlier projects, consideration of risk is now widespread in applied agricultural economics research and agricultural farm policy. Many of the methods developed under previous projects and presented at annual meetings are now widely utilized by agricultural and natural resource economists who have themselves never been formally affiliated with these projects.
Over the years, participants have thought it important to broaden the scope of the project beyond just domestic farm-level decision-making to include broader and more international agricultural and natural resource risk issues. This has proven quite beneficial in that it has attracted researchers with broader interests, while still maintaining a core group with interests in farm-level decision-making. Synergies have resulted as participants share cutting-edge approaches to risk analysis as practiced in specific sub-disciplinary areas such as environmental economics and international development economics. Bridging these sub-disciplinary boundaries allows participants to consider alternative approaches that may benefit their specific risk research programs. The continued participation of individuals from government entities suggests that research presented at the annual meetings has important public policy implications.
Provide a scientific/professional forum to facilitate the exchange of theoretical and methodological approaches to risk analysis, and to nurture the development of original concepts and preliminary research efforts related to agriculture and natural resources.
Develop and communicate firm-level analysis of production, financial, price/marketing, managerial, and environmental risks and risk management strategies in agriculture, including analysis of how these risks impact (and are impacted by) government policies, technology adoption, and access to information.
Develop new methods for micro-level modeling of how risk impacts a range of important natural resource and environmental risk issues, including forest, wildlife, and range management, ground- and surface-water pollution, the environmental sustainability of agricultural production systems, and conflicts in resource demands between agricultural and competing users.
Develop and apply economic theory and the behavioral foundations of decision-making under uncertainty, including extensions of expected utility theory, challenges to expected utility theory, behavioral impacts of asymmetrically distributed information, and understanding decision-maker risk attitudes within a portfolio context.
Evaluate the impact of public policy on the risk environment of individuals, firms, and sectors within the agricultural economy, including exogenous trade shocks, food safety regulations, and commodity income support programs, changes in financial and agricultural insurance institutions, bioenergy, and resource pricing policies
Procedures and Activities
Annual meetings will continue to be held to allow for the exchange of information on risk and uncertainty. Advertisement of the meetings will be designed to reach a large number of potential participants, such as announcements placed in the bimonthly newsletter of the Agricultural and Applied Economics Association (AAEA). Program schedules will be distributed prior to the meeting to attract additional participation. Predecessor projects have organized paper sessions and organized symposia at various agricultural economics professional meetings. Under the project that is now expiring, the group has published its research presentations online through the AgEcon Search website at http://ageconsearch.umn.edu/ and also several presentations from the 2008 annual meeting resulted in papers published in the April 2009 issue of JARE. Additionally, presentations from the 2012 annual meeting resulted in a special edition published in Choices Magazine. Moving forward, the SCC group will also continue to align activities and efforts with the Applied Risk Analysis and Agricultural Finance and Management Sections of the AAEA for annual meeting presentation sessions as well as journals such as the Ag Finance Review to publish themed issues on risk related topics.
Expected Outcomes and Impacts
- Exchange of ideas, information/data, and research results at a mult-day professional meeting of project members scheduled to be held in the spring of each year.
- Coordination of research and extension programs surrounding the themes outlined in the project objectives.
- Research results and insights which can directly inform and evaluate farm policy and trends in agriculture and its impact on farm-level decisions and the future landscape of agriculture.
- The group commonly publishes its research presentations online through the AgEcon Search website at http://ageconsearch.umn.edu/. It is anticipated that when opportunities arise the group will continue to present research findings through appropriate outlets. Comments: In 2008, SCC-76 made arrangements with the Journal of Agricultural and Resource Economics (JARE) to publish a number of papers that were presented at the annual meeting. These papers, in the general areas of (i) Advances in Risk Modeling Theory and Methodology, (ii) Insurance and Government Policy, and (iii) Market Instruments: Weather Derivatives, Commodity Futures and Options, were published in the April 2009 issue of JARE. Discussions among members of the SCC-76 group directly led to the formation of the new Applied Risk Analysis Section of the Agricultural and Applied Economics Association. This section has already grown to 89 members. In 2012, SCC-76 made arrangements with Choices Magazine to publish a number of papers that were presented at the annual meeting. These six papers were published as a special issue entitled “Current Issues in Risk Management and U.S. Agricultural Policy.” This particular outlet allows the SCC-76 group’s research to reach beyond its typical audience as the magazine is targeted to non-economists and mostly targets policy-makers, extension agents, commodity organizations, and farmers.
- Formal interaction with industry and government agencies in the agricultural risk management/analysis area. These interactions will result in academic research that is more focused on risk issues and problems being faced in practice, as well as feedback on the most effective way to present our academic research to have an impact on policy. Comments: In 2018, the group decided to hold its annual meetings in Kansas City, MO to enhance interaction with staff from National Crop Insurance Services, the Risk Management Agency of the USDA, and Federal Reserve Bank of Kansas City. All three organizations have offices in Kansas City, which makes it much easier for their staff to participate in our meetings. Based on the success of the 2018 meetings, the group is holding the 2019 meetings in Kansas City again and formally providing time on the program for these organizations to present on agricultural risk topics.
Projected ParticipationView Appendix E: Participation
Although this project does not have a specific extension and outreach component, a key role of this group is to foster the development of the field, especially the support and furthering of new research ideas on risk and risk management. Information developed in this project will be disseminated to stakeholders and scientific audiences through refereed journal articles, conference abstracts, extension bulletins when appropriate, AgEcon Search website, and through our annual meetings and reports. The project will also continue to maintain its web page which will be updated by the Chair of the committee.
Administrative issues will be addressed during the business meeting held in conjunction with the annual meeting. During the business meeting elections will be conducted to fill the position of program chair. The program chair coordinates the program for the next annual meeting. The out-going program chair becomes the project chair and is responsible for conducting the business meeting, submitting an annual report on project activities, and maintaining communication with the administrative advisor and the Southern Association of Agricultural Experiment Station Directors.
New for the 2018 year, the executive committee was expanded to include a "past-project chair" position. This will be filled by the project chair, creating a 3-person, rotating team on the executive committee. This change provides the executive committee and the group as a whole with additional leadership support from an experienced committee member.
Selected Works to Highlight Collaboration Among Project Members
Adhikari, S., T.O. Knight, and E.J. Belasco (2013). “Yield Guarantee Determination and the Producer Welfare Benefits of Crop Insurance.” Journal of Agricultural and Resource Economics. Vol. 38, No. 1: 78-92.
Anderson, J.D., A. Harri, and K.H. Coble (2009). “Techniques for Multivariate Simulation from Mixed Marginal Distributions with Applications to Whole-Farm Revenue Simulation.” Journal of Agricultural and Resource Economics. Vol. 34, No. 1: 53-67.
Ando, A., A. Howlader, and M.L. Mallory. 2018. “Diversifying to Reduce Conservation Outcome Uncertainty in Multiple Environmental Objectives.” Agricultural and Resource Economics Review. Forthcoming.
Atwood, J., S. Shaik, and M. Watts (2003) “Are crop yields normally distributed? A Reexamination.” American Journal of Agricultural Economics 85(4), 888–901
Bekkerman, A., B.K. Goodwin, and N.E. Piggott (2008). “Spatio-temporal Risk and Severity Analysis of Soybean Rust in the United States.” Journal of Agricultural and Resource Economics. Vol. 33, No. 3: 311-331.
Belasco, E.J. (2008). “The Role of Price Risk Management in Mitigating Fed Cattle Profit Exposure.” Journal of Agricultural and Resource Economics. Vol 33, No. 3: 332-348.
Belasco, E.J., S.K. Ghosh, and B.K. Goodwin (2009). “A Multivariate Evaluation of Ex ante Risks Associated with Fed Cattle Production.” American Journal of Agricultural Economics. Vol 91, No. 2: 431-443.
Chantarat, S., Mude, A. G., Barrett, C. B., & Turvey, C. G. (2017). Welfare impacts of index insurance in the presence of a poverty trap. World Development, 94, 119-138.
Chantarat, S., A.G. Mude, C.B. Barrett, M.R. Carter. 2013. “Designing Index-Based Livestock Insurance for Managing Assett Risk in Norther Kenya.” Journal of Risk and Insurance. 80 (1): 205-237.
Coble, K.H., L. Chalise, B.J. Barnett, J.C. Miller. 2017. Developing area-triggered whole-farm revenue insurance. Journal of Agricultural and Resource Economics 42:27-44.
Coble, K.H. and T.O. Knight. (2002) ‘Crop Insurance As a Tool for Price and Yield Risk Management.’ In A Comprehensive Assessment of the Role of Risk in U.S. Agriculture, ed. R. E. Just and R. D. Pope (Boston: Kluwer Academic Press) pp. 445-468.
Coble, K. H., T. O. Knight, R. D. Pope, and J. R. Williams (1996) ‘Modeling farm level crop insurance demand with panel data.’ American Journal of Agricultural Economics 78, 439–447
Collins, K. and H. Bulut. “How Will the Farm Bill’s Supplemental Revenue Programs Affect Crop Insurance?.” Choices. (Sept. 2013). Retreived from http://www.choicesmagazine.org.
Deng, X., B.J. Barnett, D.V. Vedenov, and J.W. West. 2007. “Hedging Dairy Production Losses Using Weather-Based Index Insurance.” Agricultural Economics. 36(2): 271-280.
Ellison, B., N. Paulson, M. Taylor, G. Tonsor, G. Schnitkey, and J. Coppess. “Evaluation of Education Offerings Associated with the 2014 Farm Bill” Applied Economic Perspectives and Policy 39(4): 547-558.
Fausti, S. W., and D. M. Feuz (1995) ‘Production uncertainty and factor price disparity in the slaughter cattle market: Theory and evidence.’ American Journal of Agricultural Economics 77, 533–540
Gallagher, P. (1987) ‘U.S. soybean yields: Estimation and forecasting with nonsymmetric disturbance.’ American Journal of Agricultural Economics 69, 798–803.
Glauber, J. W. (2004) ‘Crop insurance reconsidered.’ American Journal of Agricultural Economics 86, 1179–1195.
Goodwin, B. K., and A. P. Ker (2002) ‘Modeling price and yield risk.’ In A Comprehensive Assessment of the Role of Risk in U.S. Agriculture, ed. R. E. Just and R. D. Pope (Boston: Kluwer Academic Press) pp. 289–323.
Goodwin, B. K., and V. H. Smith (1995) The Economics of Crop Insurance and Disaster Aid (The AEI Press).
Goodwin, B. K., M. L. Vandeveer, and J. L. Deal (2004) ‘An empirical analysis of acreage effects of participation in the federal crop insurance program.’ American Journal of Agricultural Economics 86, 1058–1077.
Hart, C. E., B. A. Babcock, and D. J. Hayes (2001) ‘Livestock revenue insurance.’ Journal of Futures Markets 21(6), 553–580.
Hennessy, D. A., B. A. Babcock, and D. J. Hayes (1997) ‘Budgetary and producer welfare effects of revenue insurance.’ American Journal of Agricultural Economics 79, 1024–1034.
Ho, S.-T., Jennifer Ifft, Bradley Rickard, and Calum Turvey. (2018) “Alternative strategies to manage weather risk in perennial fruit crop production”, Agricultural and Resource Economics Review, forthcoming.
Holt, M.T. and J.P. Chavas. (2002) ‘The Econometrics of Risk.’ In A Comprehensive Assessment of the Role of Risk in U.S. Agriculture, ed. R. E. Just and R. D. Pope (Boston: Kluwer Academic Press) pp. 213-242.
Ifft, J., T. Keuthe, and M. Morehart. “Farm Debt Use by Farms with Crop Insurance.” Choices. (Sept. 2013). Retreived from http://www.choicesmagazine.org.
Just, R. E., and Q. Weninger (1999) ‘Are crop yields normally distributed?’ American Journal of Agricultural Economics 81, 287–304
Karagiannis N., H. Assa, A. A. Pantelous, and C. G. Turvey, (2016) “Modelling and pricing of catastrophe risk bonds with a temperature-based agricultural application” .Quantitative Finance Vol. 16 , Iss. 12,2016.
Ker, A. P., and K. Coble (2003) ‘Modeling conditional yield densities.’ American Journal of Agricultural Economics 85(2), 291–304
Krah, K., D.R. Petrolia, A. Williams, K.H. Coble, A. Harri, R. Rejesus. 2017. Producer preferences for contracts on a risky bioenergy crop. Applied Economic Perspectives & Policy.
Meyer, J. (2002) ‘Expected Utility as a Paradigm for Decision Making in Agriculture.’ In A Comprehensive Assessment of the Role of Risk in U.S. Agriculture, ed. R. E. Just and R. D. Pope (Boston: Kluwer Academic Press) pp. 3-20.
Nelson, C. H. (1990) ‘The influence of distribution assumptions on the calculation of crop insurance premia.’ North Central Journal of Agricultural Economics 12, 71–78
Nelson, C. H., and P. V. Preckel (1989) ‘The conditional beta distribution as a stochastic production function.’ American Journal of Agricultural Economics 71, 370–378
Paulson, N.D., J.D. Woodard, and B.A. Babcock. 2013. “Modeling ‘Shallow Loss’ Crop Revenue Programs: Issues and Implications for the 2012 Farm Bill.” Agricultural Finance Review 73(2), 329-344.
Ramirez, O.A. and G. Colson. “Can We Do Better Than Crop Insurance? The Case for Farmer Owned Crop Insurance Savings Accounts.” Choices. (Sept. 2013). Retreived from http://www.choicesmagazine.org.
Ramirez, O. A., S. Misra, and J. Field (2003) ‘Crop-yield distributions revisited.’ American Journal of Agricultural Economics 85(1), 108–120
Shang, Q., Mallory, M., and Garcia, P. 2018. “The Components of the Bid-Ask Spread: Evidence from the Corn Futures Market.” Agricultural Economics: An International Journal. Forthcoming.
Sherrick, B. J., F. C. Zanini, G. D. Schnitkey, and S. H. Irwin (2004) ‘Crop insurance valuation under alternative yield distributions.’ American Journal of Agricultural Economics 86(2), 406–419
Sproul, T.W., D. Zilberman, and J.C. Cooper. “Deductibles Versus Coinsurance in Shallow-Loss Crop Insurance.” Choices. (Sept. 2013). Retreived from http://www.choicesmagazine.org.
Sullivan, K.A., Uchida, E., Sproul, T.W. and Xu, J., 2018. Prospect Theory and Tenure Reform: Impacts on Forest Management. Land Economics, 94(3), pp.405-424
Taylor, M., G. Tonsor, B. Ellison, N. Paulson, G. Schnitkey, and J. Coppess. “Is it Good to Have Options? The 2014 Farm Bill Program Decisions” Applied Economic Perspectives and Policy 39(4): 533-546.
Turvey, C. G., M. Hoy, and Z. Islam (2002) ‘The role of ex ante regulations in addressing problems of moral hazard in agricultural insurance.’ American Journal of Agricultural Economics 62(2), 103–116
Woodard, J.D. and D. Baker. “2013 Farm Bill Dairy Title Proposals Redistribute Program Benefits toward States with Larger Farms.” Choices. (Sept. 2013). Retreived from http://www.choicesmagazine.org.
Woodard, J.D., G.D. Schnitkey, B.J. Sherrick, N. Lozano-Gracia, and L. Anselin. 2012. “A Spatial Econometric Analysis of Loss Experience in the U.S. Crop Insurance Program.” Journal of Risk and Insurance, 79(1), 261-286.
Zackarias, T.P. and K.J. Collins. “Ten Considerations Regarding the Role of Crop Insurance in the Agricultural Safety Net.” Choices. (Sept. 2013). Retreived from http://www.choicesmagazine.org.