Farmer Risk Perceptions and Demand Farmer Risk Perceptions and Demand for Risk Management Educationfor Risk Management Education
Keith H. Coble, Mississippi State UniversityThomas O. Knight, Texas A&M University
George F. Patrick, Purdue University
Alan E. Baquet, University of Nebraska
www.agecon.msstate.edu/riskedu
Supportive Research to Provide a Baseline Supportive Research to Provide a Baseline of Agricultural Risk Managementof Agricultural Risk ManagementEducation NeedsEducation Needs Shed light on producer risk management perceptions
– How producers perceive the risk they face and manage those risks?
– How they want risk management education delivered?– What factors, such as size, age, and education, influence
producers’ perceptions?– How do perceptions vary by region and commodity?
Investigate agricultural lenders’ and extension educators’ perceptions and understanding of alternative risk management tools and strategies.
Activities to DateActivities to Date
Surveys of: – Row crop producers
• A preliminary summary of data• (http://www.agecon.msstate.edu/riskedu/)
• An analysis of policy preferences• The demand for risk management education
– Beef cattle producers– Hog producers– Limited-resource producers
Crop Producer SurveyCrop Producer Survey
Mail survey in four states Stratified by gross revenue Crops emphasized
– Indiana: Soybeans and Corn– Mississippi: Cotton and Soybeans– Nebraska: Soybeans and Corn– Texas: Cotton and Sorghum
1812 useable responses – approximately 30% response rate
Crop Producer Survey - ResultsCrop Producer Survey - Results
Perceptions of risks and risk management tools
Assessment of Risks Confronting Assessment of Risks Confronting the Farmthe Farm
0
0.5
1
1.5
2
2.5
3
3.5
4
4.5
5
Change inFarm
Programs
Change inGovt.
Regulation
YieldVariability
PriceVariability
Change inInput Cost
Change inLand Rent
We
igh
ted
Ave
rag
e R
es
po
ns
e (
1-5
Sc
ale
)
Rated Effectiveness of Risk Rated Effectiveness of Risk Management StrategiesManagement Strategies
Rated Effectiveness of Risk Management Strategies
0
0.5
1
1.5
2
2.5
3
3.5
4
EnterpriseDiversification
Being a lowcost producer
Forward Pricing Crop Insurance Off-farmInvestment
Off-farmEmployment
MaintainingFinancialReserves
We
igh
ted
Ave
rag
e R
esp
on
se (
1-5
Sca
le)
Farmer Interest and Demand for Farmer Interest and Demand for Risk Management Risk Management EducationEducationParticipation in risk management
educational activitiesSources of risk management information Comfort in using risk management toolsDesired content and delivery of future
risk education
Participation in Educational Programs Participation in Educational Programs
During the Past Three YearsDuring the Past Three Years
0.0
10.0
20.0
30.0
40.0
50.0
60.0
Marketing Insurance Financial Mgmt.
Pe
rce
nt
Part
icip
ati
on
Stratum 1: $25,000-$99,999 Stratum 2: $100,000 - $249,999
Stratum 3: $250,000 - $$499,999 Stratum 4: > $500,000
Average Hours of Risk Management Average Hours of Risk Management
Training During the Past Three YearsTraining During the Past Three Years
0.0
2.0
4.0
6.0
8.0
10.0
12.0
14.0
16.0
18.0
20.0
Marketing Insurance Financial Mgmt.
Ho
urs
Stratum 1: $25,000-$99,999 Stratum 2: $100,000 - $249,999
Stratum 3: $250,000 - $$499,999 Stratum 4: > $500,000
Percent of Risk Management Percent of Risk Management Training During the Past Three Years Training During the Past Three Years
From ExtensionFrom Extension
0.0
5.0
10.0
15.0
20.0
25.0
30.0
35.0
40.0
45.0
50.0
Marketing Insurance Financial Mgmt.
Pe
rce
nt
Stratum 1: $25,000-$99,999 Stratum 2: $100,000 - $249,999
Stratum 3: $250,000 - $$499,999 Stratum 4: > $500,000
Comfort in Using Risk Comfort in Using Risk Management ToolsManagement Tools
0
0.5
1
1.5
2
2.5
3
3.5
4
Fwd. Contracting Futures/Options Yield Ins. Revenue Ins. Financial Mgmt.
Av
era
ge
Re
sp
on
se
1-5
Sc
ale
Stratum 1: Gross Revenue of $25,000-$99,999
Stratum 2: Gross Revenue of $100,000-$249,999
Stratum 3: Gross Revenue of $250,000-$499,999
Stratum 4: Gross Revenue >=$500,000
Interest in Additional Risk Interest in Additional Risk Management EducationManagement Education
0
0.5
1
1.5
2
2.5
3
3.5
4
Fwd.Contracting
Futures/Options Yield Ins. Revenue Ins. Financial Mgmt.
Av
era
ge
Re
sp
on
se
1-5
Sc
ale
Stratum 1: Gross Revenue of $25,000-$99,999
Stratum 2: Gross Revenue of $100,000-$249,999
Stratum 3: Gross Revenue of $250,000-$499,999
Stratum 4: Gross Revenue >=$500,000
Rating of Alternative Learning Rating of Alternative Learning MethodsMethods
0
0.5
1
1.5
2
2.5
3
3.5
Direct Self Training Magazines Internet Mkting. Clubs
Av
era
ge
Re
sp
on
se
1-5
Sc
ale
Stratum 1: Gross Revenue of $25,000-$99,999
Stratum 2: Gross Revenue of $100,000-$249,999
Stratum 3: Gross Revenue of $250,000-$499,999
Stratum 4: Gross Revenue >=$500,000
The Research Question --The Research Question --
Probit models of expressed ‘strong interest’ in additional training in the use of 5 risk management practices?– Forward contracting -Futures and options– Crop yield insurance -Crop revenue insurance– Financial management
Dependent variable– “How would you rate your interest in obtaining additional
information or education on each of the following risk management tools?”
– Rating scale 1-5 where 1 indicates “Low Interest” and 5 indicates “High Interest”
– Dependent variable = 1 for ratings of 4 or 5
Explanatory VariablesExplanatory Variables
Hours of prior training Prior use of practice Cropland acres Off farm income Percent borrowed Operator age College education High potential effect of
price risk
High potential effect of yield risk
Practice recommended by lender
Willingness to accept lower price to avoid risk
Percent of crop acres in corn / cotton / sorghum / soybeans /wheat
Descriptive StatisticsDescriptive Statistics
Variable Mean Min. Max.
S tro ng Inte re s t in : Fo rw a rd C o ntra c t ingF utu re s a n d O p tio nsC ro p Y ie ld In sura n c eC ro p R e v e nu e Insu ra nc eF in a nc ia l M a na g e m e nt
5 0 .05 2 .03 8 .04 0 .05 3 .0
00000
1 0 0 .01 0 0 .01 0 0 .01 0 0 .01 0 0 .0
P rio r H o urs T ra in ing : Fw d . C o nt rac t ing a nd F utu re sa nd O p tio nsC ro p Y ie ld a nd R e v e nu eInsu ra nc e
6 .0
1 .7
0
0
3 0 0 .0
7 2
P rio r U se o f P rac t ic e : Fo rw a rd C o ntra c t ing F utu re s a n d O p tio ns
C ro p Y ie ld In sura n c eC ro p R e v e nu e Insu ra nc eF in a nc ia l M a na g e m e nt
0 .6 10 .3 20 .4 80 .1 7N A
0000
N A
1111
N A
C ro p la nd A c re s (10 0 's ) 1 4 .87 2 5 .0 1 8 0 .0
O ff F arm Inc o m e 2 0 .2 0 1 0 0
Descriptive StatisticsDescriptive StatisticsVariable Mean Min. Max.
P e rce n t B o r ro w e d 3 9 .6 0 1 0 0
O p e ra to r A g e 5 1 1 9 8 9
C o lle g e 0 .6 8 0 1
H igh Po t e nt ia l E ffe c t o f Pric e R isk 0 .9 4 0 1
H igh Po t e nt ia l E ffe c t o f Y ie ld R isk 0 .7 8 0 1
P ra c tic e R e c o m m e n d ed by L e n d e r 0 .3 1 0 1
W illing ne ss to A c c e p t L o w e r P ric e t o A vo id P ric e R isk 0 .3 5 0 1
P e rce n t o f C ro p A c rea g e in C o rn 0 .2 6 0 1 0 0
P e rce n t o f C ro p A c rea g e in C o tt o n 0 .2 3 0 1 0 0
P e rce n t o f C ro p A c rea g e in G ra in So r gh um 0 .0 6 0 1 0 0
P e rce n t o f C ro p A c rea g e in So yb e a ns 0 .3 1 0 1 0 0
P e rce n t o f C ro p A c rea g e in W he a t 0 .0 7 0 1 0 0
VariableForward Contract
Futures &Options
YieldInsurance
RevenueInsurance
FinancialMgmt.
Prior Hours Training NS 0.2 0.8 0.8 0.8
Prior Use of Practice 14.3 6.6 8.8 12.2 NA
Cropland Acres (100's) NS NS NS 0.002 0.003
Off Farm Income NS NS NS NS NS
Percent Borrowed 0.1 0.2 0.1 0.1 0.2
Operator Age -0.2 -0.4 NS NS -0.4
College NS 8.6 NS 6.2 7.3
High Potential Effect of Price Risk 18.5 11.1 10.2 17.1 17.6
High Potential Effect of Yield Risk NS NS 8.0 6.8 NS
Recommended by Lender 8.9 12.4 12.3 12.6 NA
Willingness to Accept Lower Price toAvoid Price Risk
NS 8.3 11.1 10.1 4.9
Percent Corn NS NS NS NS NS
Percent Cotton NS NS 19.1 24.8 NS
Percent Grain Sorghum NS NS NS NS NS
Percent Soybeans NS NS NS 21.4 NS
Percent Wheat NS NS 21.6 23.7 NS
Marginal Effect Results From Marginal Effect Results From Probit modelsProbit models
Summary of ResultsSummary of Results
Those individuals who had attended average hours of training in the past three years were about 12% more likely to express interest in additional training in each of the areas except forward pricing.
Persons who had used a practice in the past two or three years were about 10% to 12% more likely to express interest in additional training.
Farmers with higher debt-to-asset ratios expressed greater interest in all five areas.
Summary of ResultsSummary of Results
Operator age had a negative effect on interest in training on forward contracting, futures and options, and financial management.
College educated respondents expressed greater interest in training on futures and options, revenue insurance, and financial management.
Persons who perceived themselves as being subject to a high level of price risk had greater interest in training in all areas.
Summary of ResultsSummary of Results
Persons who perceived themselves as subject to a high level of yield risk had greater interest in training on yield insurance and revenue insurance.
Individuals whose lender advocated the use of a risk management practice were about 9% to 13% more likely to express interest in training.
Persons willing to accept a lower price to avoid price risk were about 5% to 11% more likely to express interest in training in areas other than forward contracting.
What does this mean for risk What does this mean for risk management education (RME)?management education (RME)? Results confirm that producers view price and
yield variability as having the highest potentials to affect their incomes.
Other sources of risk are less important - less than 4 but greater than 3 on scale.
Being low-cost producer, maintaining financial reserves, and enterprise diversification were rated above forward pricing and crop insurance for effectiveness in reducing risk.
Implications for RMEImplications for RME
Only 35.0% of producers indicated a willingness to take a lower price to reduce price risk.
51.3% disagreed with statement their primary marketing goal was to reduce risks rather than raise net sales price.
33.6% of cotton producers and 36.8% of corn producers would not give up ANY yield to avoid yield variability.
Implications for RMEImplications for RME
Many producers’ perceptions of risk management strategies apparently do not reflect the risk/reward trade-off that underlies most of risk management
Phase 1 educational programs will need to help those producers understand the fundamentals of risk management. Only after producers understand fundamentals can more specific programs be effective.
Implications for RMEImplications for RME
Costs of risk management is not a popular lesson with many producers.
Programs on reducing price risks are not likely to be popular if producers think they “can beat the market.”
Helps explain some of the lack of success in past efforts.
Results suggest that farm magazines are likely to work better than the Internet for this message.
Implications for RMEImplications for RME
Large-scale producers have greater interest in risk management information and are more comfortable using tools than small-scale producers
Extension has worked with both large and small- scale producers, but has not provided the majority of educational training in risk management.
Needs of producers of different sizes are likely to be different. This challenges us to be creative in program design and delivery
Implications for RMEImplications for RME
Probit analyses suggest that the most likely customer for tomorrow’s risk management education program is the current or past customer.
Challenge to broaden the customer base– New tools like AgRisk?– Partnering with private sector in delivery?– Partnering in development and delivery?