A recent research article published in the Agricultural and Applied Economics Association’s quarterly magazine caught my attention. The researcher, Brian E. Roe, wanted to answer the question: How well do farmers tolerate risk?
He devised a set of questions to arrive at an answer and then compared farmers’ risk profiles to members of the general population and other non-ag business owners.
Overall, Roe found that farmers are more risk-tolerant than the general population but less risk-tolerant than non-ag business owners.
Roe specifically sampled dairy producers among all the farmers included in his survey. He found that 73 percent of dairy and row crop farmers self-reported that they were prepared to take risks, tolerating them at medium to high levels. More than 80 percent of non-ag business owners said they tolerated those same levels of risk.
This issue contains an intriguing article about the goals of dairy producers when they enter into risk management strategies. It’s written from a risk management consultant’s perspective. ( Click here to read the article.)
Roe’s research article and the risk management consultant’s perspective seem to match. Dairy producers do have a high tolerance for risk.
Even if you created a cool-headed risk management program designed to minimize risk and protect your business, you will naturally tend to want to move the goalposts later toward more risk. At least that’s what research and reality say.
I’m probably not as risky as most of our magazine readers. That’s just one reason why I write about dairying instead of doing it. Yet over the last decade I’ve probably had a change of heart on the subject of how to approach risk in the dairy business.
The most common responses I’ve heard from dairymen to the encouragement to forward contract, lock-in margins and manage risk are: “It’s too costly” or “It doesn’t really seem to make a difference.”
Perhaps it is too costly to secure the riskier size of margin you desire. Perhaps all the money and time that would be required to lock in a smaller, affordable margin wouldn’t satisfy you in the end.
I’m not saying you shouldn’t do any form of risk management. In fact, lenders or others may force you to do some to give them security about their investment in or transactions with your business. They likely don’t have the tolerance for risk that you have.
So do just enough to appease them and own the fact that you are more risky than the general population. Roe summarized the potential outcomes for risk-tolerant producers this way: “One might imagine that those who are more risk-tolerant may make more reckless decisions, but they may also make more bold and innovative decisions.” Higher risk, higher reward. PD
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Walt Cooley
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- Progressive Dairyman
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