Gudbrand Lien

Assisting whole-farm decision-making through stochastic budgeting

Stochastic budgeting is used to simulate the business and financial risk and the performance over a six-year planning horizon on a Norwegian dairy farm. A major difficulty with stochastic whole-farm budgeting lies in identifying and measuring dependency relationships between stochastic variables. Some methods to account for these stochastic dependencies are illustrated. The financial feasibility of different investment and management strategies is evaluated. In contrast with earlier studies with stochastic farm budgeting, the option aspect is included in the analysis.

Do the new organic producers differ from the “old guard”? Empirical results from Norwegian dairy farming

Conventional farmers converting to organics have contributed to most of the rapid expansion of organic farming in recent years. The new organic farmers may differ from their more established colleagues, which may have implications for the development of the organic farming sector and its distinctiveness vis-a`-vis conventional production and marketing practices. The aim of this study was to explore Norwegian organic dairy farmers’ personal and farm production characteristics, farming goals, conversion motives, and attitudes to organic farming, grouped by year of conversion (three groups). A postal survey was undertaken among organic dairy farmers (n = 161). The results show that the newcomers (converted in 2000 or later) were less educated than the early entrants (the so-called ‘old guard’) who converted in 1995 or earlier. The frequency of activities like vegetable growing and poultry farming among the old guard was high. The late-entry organic herds were fed with more concentrates and had a higher milk production intensity, showed a higher incidence of veterinary treatments and less frequent use of alternative medicine than the herds of the two earlier converting groups. For all groups of farmers, the highest ranked farming goals were sustainable and environment-friendly farming and the production of high-quality food. Late entrants more often mentioned goals related to profit and leisure time. On average, the most frequently mentioned motives for conversion were food quality and professional challenges. The old guard was more strongly motivated by food quality and soil fertility/pollution issues than the others, whereas financial reasons (organic payments included) were relatively more important among the newcomers. All groups held very favorable views about the environmental qualities of organic farming methods, albeit with different strengths of beliefs. Even though trends towards more pragmatic and business-oriented farming were found, the majority of the newcomers were fairly committed.

Risk and risk management in organic and conventional cash crop farming in Norway

This study presents empirical insight into organic and conventional cash crop farmers’ perceptions of risk and risk management strategies, and identifies socio-economic variables linked to these perceptions. The data originate from a questionnaire survey of farmers in Norway. The results indicate that organic farmers perceived themselves to be less risk averse than conventional farmers. For both groups, crop prices and yield variability were the two top rated sources of risk, followed by institutional risks. The two groups evaluated risk management strategies quite similarly; favoured strategies were good liquidity and to prevent and reduce crop diseases and pests. The farmers’ evaluation of sources of risk and choice of risk strategies depended on various socio-economic variables. The importance of institutional risks implies that policy makers should be cautious about changing policy capriciously and they should consider strategic policy initiatives that give farmers more long-term reliability.

Risk aversion and optimal forest replanting: A stochastic efficiency study

Abstract A new stochastic efficiency analysis approach, called stochastic efficiency with respect to a function (SERF), is applied to analyse optimal tree replanting on an area of recently harvested forest land. SERF partitions a set of risky alternative tree replanting strategies in terms of certainty equivalents (CEs) for a specified range of attitudes to risk. Both the entailed risk and the forest owner’s risk aversion are taken into account. The forest owner’s degree of risk aversion affects both the optimal tree replacement strategy and the reinvestment decision. The degree of risk aversion also needs to be taken into account when designing policy measures to affect forest investment.

Technical efficiency in timber production and effects of other income sources

In Norway, as in many other European countries, income from forestry has become marginal to owners’ household economies and most employment of forest-owner households is now undertaken off the property. Also, many forest owners have focused increasingly on other revenue-earning activities on their properties, such as providing recreational services. It is a challenge in all kinds of production to find the optimal way of converting inputs into outputs, i.e., to be technically efficient. Extent of financial dependency on income from forestry differs between part-time and full-time forest owners. Since the two groups have different livelihood strategies, it is plausible that full-time forest owners have more professional forest management practices. Data for a cross-section of 3,249 active (i.e., harvesting) forest owners were extracted from the 2004 Sample Survey of Agriculture and Forestry representing the year 2003. A stochastic production frontier analysis was applied to evaluate forest management efficiency impacts of important factors including property and owner characteristics, outfield-related and agricultural activities, off-property income and geographical location in central or remote areas. It was found that many forest owners are technically inefficient, and there exist opportunities for improved performance. Off-property income was found to have an estimated negative impact on technical efficiency, the inefficiency arising (weakly) with increasing share of household incomes from outfield activities, and properties in urban centred areas are less efficient than those in remote areas. One policy implication of the study is that a potentially substantial efficiency increase might be achieved from allowing small inefficient woodlots to merge into larger units of forestry production. Also, providing support for forest management plans may improve efficiency.

Perceived risk sources and strategies to cope with risk among forest owners with and without off-property work in eastern Norway

Abstract This paper presents empirical insight into part-time and full-time property owners’ perceptions of risk and risk management strategies. In addition, the relationships between forest owners with varying degree of off-property work and property and forest owner characteristics, risk perceptions, risk management strategies and harvesting behaviour are examined. The data originate from a questionnaire responded to by forest owners in eastern Norway which were merged with 9 years of logging data. Timber price variability and institutional risks were perceived as primary sources of risk. Use of advisers from the forest owners’ association, buying personal insurance and off-property work were perceived as the most important ways to handle risk. The results show that off-property work affects to a lesser degree what forest owners perceived as important risk sources, but that risk perceptions affect to a stronger degree the ways in which risk was dealt with. The chosen risk management strategies influenced the forest owners harvesting behaviour to some extent, but more research on the issue is needed to clarify the relationship. There was a positive relationship between owners with off-property activities and their performance as timber suppliers. Several measures, such as improved rural education, revision of some of the arrangements that regulate property mergers and support measures for increased on-property diversification may increase annual timber harvesting and reduce variability in harvesting level.

Stochastic efficiency analysis with risk aversion bounds: a comment: Stochastic efficiency analysis with risk aversion bounds

A recent contribution by Meyer et al. (2009, p. 521) corrected an error of fact by Hardaker et al. (2004b, p. 253) about the comparison between stochastic dominance with respect to a function (SDRF) and stochastic efficiency with respect to a function (SERF). While both methods compare risky prospects for a bounded range of degrees of risk aversion, SERF, unlike SDRF, also demands an assumption that a chosen measure of risk aversion is constant over all levels of outcomes being evaluated. It is argued that it is generally reasonable to make such an assumption, especially when the form of the utility function and the bounds on the degree of risk aversion are carefully chosen. Then SERF has the advantage that it can lead to a smaller efficient set than that identified by SDRF. SERF also has advantages of ease and transparency in use.

A comparative study of risk exposure in agriculture and aquaculture

Abstract Agriculture and aquaculture have common features associated with their biological nature affecting the risk exposure of the businesses. The aim in this study was to compare risk exposure in salmon farming and agricultural businesses in Norway by using detrending and variance decomposition procedures to examine the risk structure of yields, output prices and economic returns at the farm level. Results indicated a higher farm-level year-to-year variability in yields, output prices and economic returns in salmon farming than in agriculture. The between-farm variability exceeded the within-farm variability, implying that returns critically depend on persistent factors such as managerial ability and farm-production conditions. Return on assets (ROA) was highest in salmon farming with an average annual return of 9.6%. All of the agricultural farm types exhibited a negative average ROA. Stochastic dominance analysis of the distribution of ROAs from aquaculture and agricultural farm types pointed to salmon farming as the most risk-efficient alternative.

Risk programming analysis with imperfect information

A Monte Carlo procedure is used to demonstrate the dangers of basing (farm) risk programming on only a few states of nature and to study the impact of applying alternative risk programming methods. Two risk programming formulations are considered, namely mean-variance (E,V) programming and utility efficient (UE) programming. For the particular example of a Norwegian mixed livestock and crop farm, the programming solution is unstable with few states, although the cost of picking a sub-optimal plan declines with increases in number of states. Comparing the E,V results with the UE results shows that there were few discrepancies between the two and the differences which do occur are mainly trivial, thus both methods gave unreliable results in cases with small samples.

Productivity and profitability decomposition: a parametric distance function approach.

Abstract One of the main focus of productivity studies is measurement of partial and/or total factor productivity which is entirely based on the production technology. In firm level studies these productivity measures do not necessarily indicate firm performance judged in terms of their financial performance (for example, profit) and are not very intuitive. In this article we provide the link between physical productivity and profitability, and in doing so we decompose profit change in terms of changes in outputs, output and input prices, in addition to technical change (TC), returns to scale, and markup components. Thus, the decomposition takes into account both the characteristics of the technology and prices. The technology part of the decomposition technique is based on a primal representation of the multi-output technology – estimation of which does not depend on price data. The technique is illustrated using Norwegian dairy farms during the period 1993–2006. We find that TC and especially markups had positive effects on profit growth. However, these positive effects were to some degree offset by negative effects from scale, input and output prices. The positive markup component indicates the presence of non-competitive behavior in output markets, which is expected in a regulated industry such as Norwegian dairy farming.