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Article 1:

Risk management






Research objective:
The general objective of this study is to incorporate procurement
and marketing decisions into a single hedging model, considering
risk factors typically faced by firms in the agribusiness industry.
There are three specific objectives.
The first objective is to develop an analytical model for deriving
hedge ratios to reflect the needs of end-users, with a focus on
hedge horizon and input-output price correlations. The second
objective is to build a stochastic simulation model which includes
multiple risks on the input side as well as multiple output
products. Finally, several case studies are conducted to examine
and contrast hedging strategies between sectors of the
agribusiness industry.
Research approach:
The study includes an analysis and comparison of alternative
hedging strategies among several stages of the vertical
agribusiness industry. Risk management techniques are
evaluated with a focus on futures contracts and, in some cases,
considering forward contracting arrangements. The method of
evaluation for optimal strategies will be the familiar meanvariance framework.
The analytical model is developed to address questions of the
hedge horizon and to account for the correlation between input
and output prices. In addition, a stochastic simulation model is
built to illustrate hedging with multiple futures contracts. The
model is extended to analyze business cases within the
agribusiness industry.

There are several approaches to the problem of finding optimal

hedge ratios, including risk-minimizing and utility-maximizing
techniques. It is important to recognize that estimating hedge
ratios is an empirical, as well as a theoretical, issue.
The risk-minimizing approach to finding hedge ratios uses the
coefficient of regression, also given by the formula H=-( sf /
2f). Here, H is the risk-minimizing hedge ratio, which is the ratio
of the covariance between cash and futures markets to the
variance of the futures.
Research Findings:
Risk management is an important function in the agribusiness
industry, including producers, traders, and processors. Firms
typically hedge their exposure to price risk in futures and options
markets to protect profit margins and, in some cases, to secure
access to supplies or output markets. The traditional approach is
offsetting an exposure in the underlying commodity by taking an
equal and opposite position in a closely related derivative
contract. The goal of the strategy is to match increases
(decreases) in the value of the underlying position with decreases
(increases) in the value of the derivative. With perfect
correlations, this strategy would lead to a neutral outcome.

Article 2:
Risk management strategies by Australian farmers
Research objective:
To examine the issues of farming risks and risk management
strategies in Australia.
Research approach:
It is duplication of case studies conducted under the same title. It
reviewed various literatures and consequently undertook survey
Research findings:
It was generally found that Australian farmers, especially those in
marginal cropping areas, have to cope with various types of risk.
Climate variability was considered as the most important source
of risk by farmers in each case study. Other important sources of
risk included financial, government policy, and marketing risks.
The Australian farmers rank these risks rather differently to
farmers in other countries, where climate variability is probably
not as significant as a source of risk as it is in Australia. For
example, price or marketing risks were perceived as the most
important source of risk by a group of Dutch farmers (Meuwissen
et al. 2001). Similarly, a nationwide survey of New Zealand
farmers revealed that marketing risks were ranked as very
important by all farmers (Martin 1996). In America, crop price
and yield variability were the top-rated sources of risk by many
farmers (Patrick and Musser 1997; Knutson et al. 1998; Harwood
et al. 1999; Hall et al. 2003). Australian farmers, like their peers
overseas, e.g. American farmers (Patrick et al. 1985; Jose and
Valluru 1997), Canadian farmers (AAFC 1998), Dutch farmers
(Meuwissen 2001), and New Zealand farmers (Martin 1996), use
a range of strategies to manage the various sources of risk that
affect their farming businesses. In the Australian case, such
strategies included diversifying activities, using minimum tillage

and practicing long fallows as methods of conserving soil

moisture, maintaining high equity in the farm, using farm
management deposits to level out cash flow and reduce tax, and
making off-farm investments. They also thought marketing
should be left to experts, and only part of farm production
should be sold at any one time. In conclusion, management of
risk is an important activity for farmers worldwide. Different
farmers confront different situations and their experience and
preferences toward risk have a major effect on decision-making
in each given situation. The management task facing farmers is
to choose a combination of strategies that best suits the unique
conditions of their particular farm and personal circumstances.

Article 3:
Sources of Risk and Risk Management Strategies: The Case
of Smallholder Farmers in a Developing Economy.
Research objective:
The aim of this research is to examine the sources of risk for
smallholder farmers in central and northeast regions of Thailand
and their risk management strategies. It also correlates the
farmers socioeconomic characteristics to their perceived sources
of risk and their favored risk management strategies to gain an
in-depth understanding of their choices.
Research approach:
The sources of risk and their preferred risk management
strategies is obtained from face to face interview of 800 farmers
,400 each in the central and north east regions of Thailand.
The information on the sources of risk and risk management
strategies perceptions obtained from the respondents using a
five-point Likert scale were analyzed in two steps. First,
exploratory factor analysis (EFA) was used to capture the
information on the interrelationships among the set of variables.
This technique enabled the researcher to manage and reduce the
number of original variables into a smaller group of new
correlation dimensions (factors),which are linear combinations of
the original variables.(28, 29) The Kaiser-Meyer-Oklin (KMO)
method measured the appropriateness for factor analysis of both
data sets. The KMO index varies from 0 to 1, with results of 0.6
or greater suitable for factor analysis. The latent root criterion
(eigenvalue > 1) was estimated to identify how many factors in
each data set to extract. After the number of factors had been
identified, the orthogonal (varimax) rotational method was
performed in order to minimize the number of variables that have
high loadings on each factor. A factor loading of 0.4 was
employed as a cut off criterion to determine the inter correlation
among the original variables. In addition, Cronbach Alpha was

employed to evaluate the internal consistency of each factor. The

relationships between the socioeconomic variables and the
perception of risk sources and risk management strategies of the
smallholder farmers were also analyzed. Multiple regression was
employed to evaluate the influence of farm and farmer
characteristics on the smallholder farmers risk perception and
risk management responses. Diagnostic tests were carried out to
verify that there was no violation of the multiple regression
Research Findings:
The survey results showed that the uncertainty of input prices
and product prices have become increasingly worrying among
smallholder farmers in the central and north-east regions.
The production risks related to diseases and pests affecting
plants and animals, excess rainfall and natural disasters such
as floods were ranked third, fourth and sixth, among the farmers
in the central region with mean scores of 3.70, 3.59 and 3.47,
Institutional risks related to changes in Thailands economic and
political situation and changes in national government laws and
policies were ranked third and fourth, among the north-east
region farmers, respectively. This finding revealed that
smallholder farmers were concerned about the effect of the
political conflicts in Thailand on their farm operation.
Unexpected variability of yields was ranked the fifth most
important source of risk in both regions. In addition, the financial
risks associated with changes in interest rates and high levels of
debt were considered as quite important by all farmers. Sources
of risk that obtained low mean scores included changes in
technology and breeding, changes in land prices, risk from
theft, changes in the situation of farm families and unable to
meet contracting obligations. Comparisons of risk perception

between the farmers in the central and north-east regions

showed significant differences in most sources of risk. This
interesting finding might be attributable to the fact that sources
of risk vary depending on the farms geographical condition, farm
type, the environmental impact and the countrys political and
economic situation. Evidently, the small farm business may be
affected in different ways by changes in these sources of risk.