AFRE Global Food Systems Economics and Management Position Candidate Seminar - Nicoleta Uzea

Date: September 21, 2015
Time: 10:30 a.m.
Location: 75 Morrill Hall of Agriculture

Seminar Title and Abstract

“Risk Management in the Agri-Food Industry and Unintended Consequences of Government Risk Management Programs”

With volatility on the rise, risk management is becoming one of the most important managerial roles facing the agriculture and food industry. This paper draws upon empirical evidence from agriculture to examine one risk management strategy that is available to businesses – i.e., risk balancing – and how government risk management programs may lead to unintended consequences on firms’ risk management behavior. Risk balancing refers to the balancing of business risk and financial risk by firms through their investment and borrowing decisions. That is, any increase in income variability (business risk) could be offset by a decrease in leverage (financial risk). Conversely, upward adjustments in optimal leverage levels could be warranted when income variability decreases. Using this framework, a number of studies showed theoretically that farm policies designed to reduce business risk can, through risk balancing, lead to increased financial leverage and probability of farm financial failure. This paper takes advantage of a unique longitudinal farm-level data set from Ontario to examine whether Canadian risk management programs fail to reduce farm risk as a result of farmers’ risk balancing behavior. Results show that (1) risk balancing holds particularly for the larger farms and (2) participation in the main government risk management program increases the probability that farms take on more debt than they would take otherwise. The managerial and policy implications of this research are presented.