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The Risk of Farming


images (6) The headlines tell quite a story.  Wet spring and late planting in the Eastern Cornbelt.  Wet weather and vast acreage of spring wheat not planted.  Drought conditions destroying wheat and corn in the Southern Plains.  Extreme day and night temperatures hurting corn across the Cornbelt.  For farmers without crop insurance or on the edge of financial collapse, 2011 could shake out many because of their inability to tolerate risk.  Are you among them?

Agricultural economist Brian Roe at Ohio State University studies farmers’ exposure to risk, how they manage it, and if they manage it.  Compared to non-farm business managers, Roe evaluated one’s willingness to take on risk.  He found one-third rate themselves in the low risk tolerance category; about 40% rate themselves in the middle; and about 27% rate themselves highly risk tolerant.  Nonfarm business owners are more risk tolerant. Only 20% are in the low category while more than 40% are in the high category.

To analyze the differences of why farmers have a different risk tolerance levels to non-farm business owners Roe divided them into different age groups.  The average farmer is older than the median population, and sociologists contend there is a general decline in risk taking behavior as people age.  However, Roe looked at other demographic characteristics of farmers which might indicate their nature of taking on risk.  “If we make farmers ‘look like’ the general population, their risk tolerance jumps 10% and now, they are clearly more risk tolerant than the general population.”  Then he paired farmers with the non-farm business owners and found, “the jump is even bigger; nearly a 19% jump in risk tolerance.”

Subsequently, Roe says farmers cannot be distinguished from the general population for risk tolerance; this is largely driven by the fact that farmers are older than the general population and the non-farm business owner population and, with age, comes less willingness to put up with risk.  And he adds that farmers may be older than the typical non-farm business owner because it may be easier to continue farming into later years than to running other small businesses.  Those dynamics may include large investments in land ownership and possibly long term family farm ownership, farm program familiarity, and specialized information that would not be applicable or transferable as would an owner of a non-farm business.

Roe rhetorically asks, “Is it better, worse or just different for production agriculture to be run by farmers that are less willing to take risks than their non-farm counterparts?”

Typically, someone who engages in a business that has substantial risk, is looking for the substantial reward that accompanies high risk.  Commodity speculation for example.  But small businesses, which may earn the returns of a farming operation, usually are less risky, such as running an office supply store.

Roe says one of the differences between farming and other small business operations is the intergenerational factor, in which family ties either lock someone into farming or may prevent them from farming.  He says “The farm kid who, deep down, doesn’t really like to take risks, may end up running the family farm even if that safe government job was available.”  And he adds, “Farming is also different in that, for some sectors of farming and some regions of the country, federal and state programs provide some downside risk protection through subsidized insurance products and various program payments.  Do these modest protections blunt the risk enough and keep some folks in farming that would have otherwise left for less risky occupations?”

Summary:

The risk assumed in farming operations is substantial, yet many farmers have a tendency to assume less risk, and may be of an age where fewer of their non-farm peers would assume that level of risk.  Agriculture may be one of those occupations where risk is an inherent part of the job, and one enters that profession not seeking high risks and rewards, but knows that it is part of the landscape, just like their inherited cropland.

http://growinggeorgia.com/crops/2460-the-risk-of-farming

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