Farm-Level Evidence on Risk -Balancing Strategies of Illinois Grain Farmers Against Increasing Income Risk

Abstract

The analytical framework is extended to a simulation-optimization model that takes on a more forward-looking perspective. The goal is to prescribe an optimal strategic plan that allows synergy between risk-balancing and other risk management strategies. The programming model was applied to four farm scenarios. The Base Farm scenario employs standard strategies that include risk-balancing, cash leasing of farmland and investing in nonfarm assets. The most sophisticated scenario, the Complete Farm model, employs share leasing and forward contracting strategies in addition to the standard strategies. The programming models yielded risk efficient final net worth solutions across four classes of risk-averse farmers. The Complete Farm model resulted in the lowest relative variability of final net worth for the two highest classes of risk aversion. These results demonstrate the existence of synergy between risk-balancing and other strategic plans. The risk-reducing mechanisms of most strategies combine more effectively with the profit-generating capacities of some strategies to produce optimal results. Moreover, this study finds that risk-balancing becomes a more significant strategy among highly risk-averse farmers as reflected in the substantial reduction in their leverage ratios compared to less risk-averse decision-makers.