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

Tauthors wish to express their gratitude towards DG AGRI for access to the Farm Accountancy Data Network (FADN). They also thank the Editor for his constructive comments that greatly improved this manuscript. This research was conducted in a project funded by a scholarship provided by the agency for Innovation by Science and Technology in Flanders. This paper was realized in the context of the International Agricultural Risk, Finance, and Insurance Conference, Beijing, China, 20-21 June 2012. The authors are grateful to the conference organizers for presenting this opportunity and the conference participants for the many fruitful discussions and their useful feedback.

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.

Source: Agripress    10:44:00|27/05/2014