The Management of Risk in Farm Planning

Uncertainty occurs when changes in farm incomes are affected by unpredictable yield and/or price fluctuations while n case of risk it is possible to associate a probability distribution. Determinants of risk/uncertainty are classified into: i) business: climate, stock levels,price volatility due to contingent market conditions; ii) finance: cost of capitals and growing integration between agricultural and financial markets. In this paper it is discussed the whole farm planning by using a sumex utility function and MOTAD to find an efficient portfolio combining a set of activities with different risky prospects. This approach allows to parameterize the risk for specific traits of the sumex utility function. The empirical analysis is performed by defining a typical farm of 100 Ha located in the Northern part of Italy using a sample with 15 years historical observations about the most diffused cereal and oilseed crops (source: Eurostat). The results suggest a trade off between expected returns and risk: if the value of gross income is expected to increase, the farmers tend to specialize in the most profitable portfolio activities, while in the opposite situation it is not so evident that the diversification will drive to cope the risk with profits.