How do a Farmer’s Production Decisions Affect Risk?
Farmers make a variety of decisions that influence the risks they face. For example, irrigation can reduce yield losses in the event of drought. While fertilizer can boost yields, it can also increase yield variability. Similarly, while improved hybrid crops can boost yields, it can also result in more variable yields when compared to locally adapted crop varieties.
The notion that some production choices can decrease yield variability, while others can increase variability was first formalized by Just and Pope (1978). Since the effect of production decisions on yield variability is theoretically indeterminate, a key contribution of this article was the Just-Pope production function. The Just-Pope production function provides a practical way for empirically determining how input choices like seed variety or fertilization affect the mean and variance of crop yields. The extensive use of the Just-Pope production function by agricultural economists is a testament to its utility. The insights of Just and Pope were further developed by Pope and Kramer (1979) resulting in the taxonomical classification of input choices as risk increasing, risk decreasing, or risk neutral.
The insights of both articles have been widely applied in the context of developing farmers’ input choices and the effect of these choices on risk. The most widely explored input has been fertilizer, which has also provided the most consistent results. Increased use of fertilizer tends to increase yield variability, though whether fertilizer is risk increasing or decreasing is less clear because fertilizer also increases average yields and production costs. The effect of labor and crop variety selection on yield variability and risk has also been relatively widely explored, but unlike fertilizer, the results vary widely across crops and locations.
References
Just, R.E. and R.D. Pope. 1978. Stochastic Specification of Production Functions and Economic Implications. Journal of Econometrics 7:67–86.
Pope, R.D. and R.A. Kramer. 1979. Production Uncertainty and Factor Demands for the Competitive Firm. Southern Economic Journal 46(2):489-501.