PLANNING AND MANAGING

FARM SYSTEMS UNDER

UNCERTAINTY
Presented to:

Agriculture Economics Class

MA Economics, USC
May 27, 2016

CONTENT
11.1 UNCERTAINTY
11.2 RISK
11.3 SOURCES OF FARM-SYSTEM RISK
11.4 MANIFESTATION OF FARM-SYSTEM RISK
11.5 IMPACT OF FARM-SYSTEM RISK
11.6 FARMERS' RISK-MANAGEMENT STRATEGIES
11.7 FORMAL APPROACHES TO RISKY FARM DECISIONS

11.8 SENSITIVITY ANALYSIS

11.9 STOCHASTIC BUDGETING
11.10 SUBJECTIVE EXPECTED UTILITY
11.11 CERTAINTY EQUIVALENCE
11.12 DECISION TREES
11.13 STOCHASTIC DOMINANCE
11.14 RISK-ORIENTED MATHEMATICAL PROGRAMMING
11.15 MONTE CARLO SIMULATION
11.16 DIFFICULTIES IN LONG-TERM FARM DECISION MAKING

UNCERTAINTY AND RISK

Uncertainty

and risk go hand in hand

with farming
short-term planning and management,
however, the assumption of certainty
may often be a reasonable approach.
In general, the shorter the planning
period, the less the uncertainty.
planning and management of a farm
subsystem involves less uncertainty
than does that of a whole-farm system.

11.1 UNCERTAINTY
Uncertainty is a pervasive feature of life.
Uncertainty is also a function of time
Decisions which, because of the influence of
forces beyond the farm manager's control, do not
have a single sure outcome are known as
uncertain decisions
Uncertainty is defined as imperfect knowledge
Decisions which, because of the influence of
forces beyond the farm manager's control, do not
have a single sure outcome are known as
uncertain decisions.

UNCERTAINTY IN CROP-YIELD RESPONSE

TO FERTILIZER AND ITS DEPICTION

11.2 RISK

Risk is only present when the uncertain

outcomes of a decision are regarded by the
decision maker as significant or worth worrying
about

11.3 SOURCES OF FARM-SYSTEM RISK

Two sources: (1) the external environment and
(2) the internal operational environment
external sources of risk relate to uncertain
turbulence in the natural, economic, social, policy
and political environments

major internal sources of risk relate: (1) to the

health of the farm household's members; (2) to
the inter-personal relations between farmhousehold members as influenced by personality,
changing values, attitudes and aspirations; and
(3) to the approach followed by the farm manager

11.4 MANIFESTATION OF FARM-SYSTEM RISK

set of possible outcomes across each of the

alternative choices the farmer may take in
managing the farm system or its subsystems
risky outcomes are of economic significance
Risk in short-term decisions-product prices and
yields which are uncertain
Risk in long-term decisions-all yield, price and
cost variables are likely to be uncertain

11.5 IMPACT OF FARM-SYSTEM RISK

management of the farm more difficult
it generally makes them cautious in their
decision making
generally more susceptible to downside risk

FARMERS' RISK-MANAGEMENT
STRATEGIES
An Overview of Small Farmers' Risk-management Strategies
Functional

Strategy

Type of risk reduced

orientation
Production

Use of stable enterprises

Use of tolerant cultivars
Diversification
in crops
in livestock
within seasons
across seasons
across space
Maintain flexibility

Yield, technology, policy

over time

in durable assets

Keep reserves seed

seed
fodder

Marketing

Spread sales over time

alternative outlets

Arrange

Price

Seek barter

opportunities
Financial

Maintain high

Financia

equity ratio

l, yield,

price

FORMAL APPROACHES TO RISKY

FARM DECISIONS
sensitivity
stochastic

analysis

budgeting

subjective

expected utility analysis

(including certainty equivalent analysis and
decision trees, and stochastic dominance
analysis)

risk-oriented

mathematical programming

and
Monte

Carlo simulation.