ABSTRACT
Production risks emanate from the producer’s inability to accurately forecast input productivity and output yields. Economists spend a significant amount of time calculating optimal input and output levels in various agricultural production settings. These calculations are usually based upon an estimated production function (or response curve) and expected values for input and output prices. Experiments are conducted to determine the shape of a production function. For example, soil and crop scientists test the response of crops to various fertilizer levels. Animal scientists and nutritionists test the response of livestock to various feeding regimes. All of this is important work and, when combined with input and output prices, can provide valuable economic information to producers. However, to be of optimum use, it all needs to be translated into the producer’s production setting, which is typically filled with risks and uncertainty. Risk and uncertainty can quickly turn a well-intentioned and otherwise accurate scientific result into
14.1 Introduction ..................................................................................................299 14.2 Input versus Output Risk ..............................................................................300 14.3 Input Risk ..................................................................................................... 301
14.3.1 Quality of Input Risk ........................................................................302 14.3.2 Quantity of Input Risk ......................................................................303 14.3.3 Input Timing .....................................................................................305 14.3.4 Price of Inputs ...................................................................................305 14.3.5 Stochastic Budgeting Example .........................................................305
14.4 Output Risk ...................................................................................................308 14.4.1 Quality of Output Risk .....................................................................308 14.4.2 Quantity of Output Risk ...................................................................309 14.4.3 Stochastic Budgeting Example-Variable Output............................ 310
14.5 Management Strategies ................................................................................. 312 14.5.1 Reducing Risk within the Business Operation ................................. 314 14.5.2 Transferring Risk Outside the Operation ......................................... 315 14.5.3 Building Capacity to Bear Risk ........................................................ 316
14.6 Summary ...................................................................................................... 316 14.7 The Stochastic Crop Budget Generator ........................................................ 317 References .............................................................................................................. 321
