Farm-level evidence on risk balancing behavior in the EU-15

Abstract

Purpose – The purpose of this paper is to present empirical evidence of risk balancing behavior by European farmers. More specifically, the authors investigate strategic adjustments in the level of financial risk (FR) in response to changes in the level of business risk (BR). Design/methodology/approach – The authors conducted a correlation relationship analysis and run several linear fixed effects regression models using the European Union (EU)-15 FADN panel data set for the period 1995-2008. Findings – Overall, the paper finds EU evidence of risk balancing. The correlation relationship analysis suggests that just over half of the farm observations are risk balancers whereas the other (smaller) half are not. The coefficient in our fixed effects regression suggests that a 1 percent increase in BR reduces FR by 0.043 percent and has a standard error so low that the existence of non-risk balancers is doubtful. The results reject evidence of strong-form risk balancing – inverse trade-offs between FR and BR keeping total risk (TR) constant – but cannot reject weak-form risk balancing – inverse trade-offs between FR and BR with some observed changes in TR. Furthermore, the extent of risk balancing behavior is found to differ between different European countries and across farm typologies. Practical implications – This study provides European policy makers a first insight into risk balancing behavior of EU farmers. When risk balancing occurs, BR-reducing agricultural policies induce strategic upwards leverage adjustments that unintentionally reestablish or even increase total farm-level risk. Originality/value – Making use of the large and unique FADN database, to the best of the authors knowledge, this study is the first that provides European (EU-15) evidence on risk balancing behavior, is conducted at an unprecedented large scale, and presents the first risk balancing evidence across countries and farming systems.

Farm Support Payments and Risk Balancing: Implications for Financial Riskiness of Canadian Farms

“…These values are similar to those found by Escalante and Barry () for U.S. Illinois grain farms and, more recently, by De Mey et al () for farms of different types in various EU‐15 countries (both studies measured BR as the standard deviation divided by average of net income).…”

“…The fixed effects model allows for correlation between the unobservable individual-specific component u i 6 Escalante and Barry (2003) and De Mey et al (2013) also used the share of negative BR-FR correlations to measure the extent of risk balancing behavior. 7 Other recent studies that used regression analysis to test for risk balancing include Turvey andKong (2009) andDe Mey et al (2013). The other approach used to test for risk balancing is represented by risk programming models (e.g., Escalante and Barry 2001;Cheng and Gloy 2008).…”

“…Escalante and Barry () and De Mey et al () also used the share of negative BR‐FR correlations to measure the extent of risk balancing behavior.…”

“…Other recent studies that used regression analysis to test for risk balancing include Turvey and Kong () and De Mey et al (). The other approach used to test for risk balancing is represented by risk programming models (e.g., Escalante and Barry ; Cheng and Gloy ).…”

Determinants of risk behaviour: effects of perceived risks and risk attitude on farmer’s adoption of risk management strategies

“…Given the complexity and interdependencies of different risks, it is often the case that the very fact of managing one risk brings about other risks (van Winsen et al 2013). Finally, it also can be that farmers are balancing risks: farmers who are more willing to take certain specific risk are at the same time managing other risks to balance total risk (de Mey et al 2014). …”