Eder


Die Bodenkultur - Journal for Land Management, Food and Environment

M. EDER:

Risk analysis based on stochastic dominance A case study with selected cash crops

Summary

A "new" crop is favourable for a risk-neutral decision maker (farmer) if it's expected gross margin is higher than the expected gross margin of an competitive crop. Adecision maker who is averse to risk is interested additionally in the range of the expected gross margins. Assuming specified restrictions on the decision maker's preferences the risk efficiency analysis offers a possibility to examine the risk of planting a crop. In this study the stochastic efficiency criteria is applied. The results of this technique are compared with those using Bayes theorem und u-o-criterion. The yields for calculating the cross revenue of the various crops are obtained from Bundesanstalt für Pflanzenbau based on field trials carried out in Fuchsenbigl (Lower Austria) over aperiod of eleven years (1981 to 1991). Prices and costs are based on the 1992 farm level. Four conventional crops (corn, winter wheat, winter barley und winter rye) and two "new" crops (soybeans and sunflowers) are examined in this study.

Assuming prices and costs on the 1992 level, the "new" crops - specially soybeans - are competitive regarding expected gross margin as weIl as risk efficiency using the techniques named above. In this case the contribution of the area based premium, the so called "Flächenprämie", to the gross margin is a decisive factor for the risk of planting a "new" crop, which means that the risk decreases by increasing contribution of the "Flächenprämie".

The rotations including soybeans and sunflowers turn out to be favourable in comparison of ten hypothetical crop rotations. The analysis using criteria of first-degree stochastic dominance, where the decision makers prefer more to less at all outcome levels, results in an efficient set which contains rotations including soybeans and/or sunflowers. A further procedure assuming decision makers to be averse to risk (second-degree stochastic dominance) identifies only a slightly smaller efficient set. The analysis using criteria of third-degree stochastic dominance does not reduce the number of rotations in the efficient set.

Key-words: risk efficiency analysis, stochastic dominance, decision analysis, risk management.