The foregone risk premium: a communicative and practical method for the evaluation of risk-return profiles in agriculture

Erwin Wauters, Lieve De Cock, Jan de Wit and Ludwig H. Lauwers

No 115737, 2011 International Congress, August 30-September 2, 2011, Zurich, Switzerland from European Association of Agricultural Economists

Abstract: Risk considerations have become increasingly important in nowadays agriculture, due to a variety of reasons. Surprisingly, the practice of formalized risk management is not widespread despite the huge amount of scientific literature on this topic. This discrepancy between risk science and extension is described by many authors. This paper presents a communicative method, rooted in financial economics, to evaluate risk-return profiles in a way that is communicative for individual farmers. The method is derived from the modern portfolio theory, in which individual assets are implicitly compared to the risk-return trade-off of that asset with the highest Sharpe ratio. We use this idea to compare individual risk-return profiles to a particular benchmark. The method can be used for evaluating different risk-return profiles of different farms, different risk management instruments and different production systems. To illustrate the communicative nature of our method, it is applied to evaluate risk-return profiles of conventional versus organic cropping systems.

Keywords: Risk; and; Uncertainty (search for similar items in EconPapers)
Pages: 12
Date: 2011-09-02
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Persistent link: https://EconPapers.repec.org/RePEc:ags:eaae11:115737

DOI: 10.22004/ag.econ.115737

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