RISK MANAGEMENT FOR AGRICULTURAL PRODUCERS

• Sponsoring Institution: National Institute of Food and Agriculture
• Project Status: COMPLETE
• Funding Source: HATCH
• Reporting Frequency: Annual
• Accession No.: 1010204
• Project Start Date: Oct 1, 2016
• Project End Date: Sep 30, 2021
• Program Code: [(N/A)]- (N/A)

Recipient Organization
UNIVERSITY OF CALIFORNIA, BERKELEY
(N/A)
BERKELEY,CA 94720

Performing Department
Agricultural and Resource Economics, Berkeley

Non Technical Summary
Agricultural production is an inherently riskyundertaking.Because much of agricultural production in both theU.S. and abroad is undertaken by family farms, finding ways to managethose risks is of critical importance, both to secure the livelihoodsof farmers and to ensure the efficiency of production. There exist a variety of tools agricultural producers use to manage risk, such as crop insurance programs that are provided and subsidized by the government. Although thesetools that are explicitly designed for risk management are very important to U.S. agriculture as a whole, they play a less significant role in California because of California's large variety of crops not included in such programs. Therefore alternative arrangements that are less explicitly designed to manage risk, such as contracts between producers and first-handlers, will prove extremely important. Thus a more comprehensive analytical approach towards contractual arrangements is necessaryin order to better understand agricultural markets.The general approach of this project is to expand uponthe existing bodies of research on optimal contracts and on marketing and production contracts in U.S. agriculture. The existing theoretical literature on optimal contracts is extensive, while literature on applications to U.S. agriculture is limited. Major goals of this project include establishing a framework for determining optimal risk-management arrangments depending on different environments and commodities, as well as being able to measure the value of contracts and other risk-management arrangements. This will be acheived by dynamically modeling contracts between producers and first-handlers using real-world data. Ultimately, this project has the potential to help agricultural producers by improving their contracts and other risk-management decisions.

Animal Health Component

17%

Research Effort Categories

Basic

72%

Applied

17%

Developmental

11%

Classification

Knowledge Area (KA)	Subject of Investigation (SOI)	Field of Science (FOS)	Percent
601	1499	3010	100%

Knowledge Area
601 - Economics of Agricultural Production and Farm Management;

Subject Of Investigation
1499 - Vegetables, general/other;

Field Of Science
3010 - Economics;

Keywords

risk management

contracts

agricultural contracts

agricultural producers

crop insurance

risk

agriculture

optimal contracts

Goals / Objectives
To design a theoretical framework capable of describing the optimalrisk-management arrangements across different environments andcommodities.To design methods that can be used to measure the value ofcontracts or other arrangements in reducing the risk borne byproducers.To help agricultural market participants to improve the efficiencyof their contracts, thereby improving the competitive position oftheir various industries.

Project Methods
The theoretical approach I take to accomplish the first goal is to begin with a dynamic model in which producers contract withsome intermediary (e.g., a packer/shipper, broker, or grainelevator), who may subsequently store or transport the commodity todifferent locations. If possible, both parties may seek to pooltheir risks; however, because the producer may make managementdecisions not observed by the intermediary, too much pooling ofrisk may induce the producer to avoid certain costly decisions orinvestments. The optimal provision of incentives in the contractwill balance the need to protect the producer from risk against theneed to make him bear an outsized share of the costs of hisbehavior.To accomplish the second goal, I begin with the theoreticalmodel and data on the actual contracts used for procuring aparticular commodity, downstream prices for that commodity atdifferent locations, and outcomes realized under the contract(e.g., producer compensation and quantities produced). From thisit is possible to infer the influence of different contractualprovisions on the outcomes of interest.Finally, to accomplish the third goal I can use information onthe distribution of outcomes and inferred preferences andtechnologies to calibrate the theoretical model. Differencesbetween the contract that theory indicates is efficient and theactual contracts prevailing in the industry will eitherpoint to an error in the theory and inference, or will suggest waysin which the real world contract can be improved.

Progress 10/01/16 to 09/30/21

Outputs
Target Audience:Other researchers; policymakers involved in design of government risk management programs (e.g., crop insurance in the US). Changes/Problems: Nothing Reported What opportunities for training and professional development has the project provided?One doctoral dissertation testing measurement of welfare central to approach by Carly Trachtman nearly complete; training of another PhD student (Jedidiah Silver) in development of econometric approaches to estimation and testing. How have the results been disseminated to communities of interest?A variety of talks at conferences or seminars. Notably {``Relative Household Welfare from Relative Expenditures,'' Plenary address to STEG/CEPR Annual Conference, January 2021.} {``Farm-Households,'' Invited presentation to the Artificial Intelligence for Food Systems Institute, Berkeley, October 2020.} ? What do you plan to do during the next reporting period to accomplish the goals? Nothing Reported

Impacts
What was accomplished under these goals? 1) Major progress in theoretical description of problem, including method to distinguish between the effects of financial risks on production and the effects of distortions in input markets. 2) Work advanced on applications and data to use methods (data from US ARMS, Thailand, LSMS-ISA countries).

Publications

• Type: Journal Articles Status: Published Year Published: 2021 Citation: Christiaensen, Luc, Ethan Ligon, and Thomas Pave Sohnesen. "Consumption Subaggregates Should Not Be Used to Measure Poverty." The World Bank Economic Review (2021).

Progress 10/01/19 to 09/30/20

Outputs
Target Audience:Other researchers and economists interested in risk in agriculture. Changes/Problems: Nothing Reported What opportunities for training and professional development has the project provided?1 PhD student involved in developing database of expenditures for US farm households; 1 PhD student involved in developing empirical methods for understanding the impact of risk on producer decisions 1 MA student involved in construction of large dataset on consumption expenditures, to be used to assess exposure to risk. How have the results been disseminated to communities of interest?Academic publications. What do you plan to do during the next reporting period to accomplish the goals?Pursuing work involving modeling and estimation of risk for US producers, as well as contrasting this risk with risk borne by farmers in low income countries.

Impacts
What was accomplished under these goals? Progress on Major goals (1) & (2): Sometimes we don't /know/ the environment in which agricultural producers are operating, and in particular it's difficult to know what financial constraints producers face. In a major paper with Zhimin Li I work out ways to infer /both/ how much risk-sharing there is /and/ whether the financial regime under which producers are operating is characterized by imperfections related to private information.

Publications

• Type: Journal Articles Status: Published Year Published: 2020 Citation: Li, Zhimin and Ethan Ligon (2020), "Inferring Informal Risk-Sharing Regimes" Journal of Economic Behavior & Organization 177:941-955.

Progress 10/01/18 to 09/30/19

Outputs
Target Audience:Other researchers and economists interested in risk in agriculture. Changes/Problems: Nothing Reported What opportunities for training and professional development has the project provided?Training for six undergraduates and three PhD students. How have the results been disseminated to communities of interest?Journal publications, new course at UC Berkeley (EEP153) What do you plan to do during the next reporting period to accomplish the goals?Continue work on measurement of marginal utilities of expenditure, with new focus on inferring individual welfare from household-level expenditures.

Impacts
What was accomplished under these goals? Progress made on measuring marginal utility of expenditures for US Farmhouseholds; variation in this closely related to risk.

Publications

• Type: Journal Articles Status: Published Year Published: 2019 Citation: Ligon et al (2019) "What explains low adoption of digital payment technologies? Evidence from small-scale merchants in Jaipur, India," PLoS One 14(7).

Progress 10/01/17 to 09/30/18

Outputs
Target Audience:Other researchers and economists interested in risk in agriculture. Changes/Problems: Nothing Reported What opportunities for training and professional development has the project provided?Training of PhD students. How have the results been disseminated to communities of interest?Via published journal articles, seminars, conferences. What do you plan to do during the next reporting period to accomplish the goals?Two papers are near completion.

Impacts
What was accomplished under these goals? Advances in both theory and estimation for extracting welfare measure from farmers, including successful application of these methods to farm households in the USDA ARMS data.

Publications

• Type: Journal Articles Status: Awaiting Publication Year Published: 2018 Citation: Ethan Ligon and Laura Schechter. "Structural experimentation to distinguish between models of risk sharing with frictions in rural Paraguay", _Economic Development and Cultural Change, Forthcoming

Progress 10/01/16 to 09/30/17

Outputs
Target Audience:Primary audience is other economists and scientists, including researchers and practitioners at certain multilateral international organizations, such as the UN and the World Bank. Changes/Problems: Nothing Reported What opportunities for training and professional development has the project provided?Graduate student Elliott Collins implemented methods for measuring welfare in his 2017 dissertation. How have the results been disseminated to communities of interest?Publications in economic journals; workshops; seminars. What do you plan to do during the next reporting period to accomplish the goals?Plan to develop empirical methods, apply to populations including US farmers.

Impacts
What was accomplished under these goals? Major work on the theory of how to best measure household welfare in a dynamic setting with limited data on expenditures. See publications on Frisch demand systems.

Publications

• Type: Journal Articles Status: Published Year Published: 2017 Citation: Ligon, Ethan, and Elisabeth Sadoulet. "Estimating the Relative Benefits of Agricultural Growth on the Distribution of Expenditures." World Development (2017).
• Type: Journal Articles Status: Published Year Published: 2017 Citation: Ligon, Ethan. "All ?-separable demands and rationalizing utility functions." Economics Letters 147 (2016): 16-18.
• Type: Journal Articles Status: Published Year Published: 2016 Citation: Ligon, Ethan. "Some ?-Separable Frisch Demands with Utility Functions''." Economics Bulletin 36.1 (2016): 68-74.