This is a presentation given at the 89th Annual Conference of the Agricultural Economics Society at the University of Warwick on April 13th 2015. The presentation deals with the important topic of risk management in Agriculture. The research is specifically concerned with identifying the direct profit impacts of forward contracts for spring barley producers in Ireland. A stochastic farm level model is developed to estimate the degree of income risk attached to the production of spring barley at the farm level. This model is based on the methodologies outlined by Richardson et al. (2000). In addition, we provide examples of hypothetical specialist tillage farms to illustrate the likely extent of risk aversion required to enter into a forward contract at alternative prices.

2. J A S O N L O U G H R E Y 1 , F I O N A T H O R N E 1 , T H I A H E N N E S S Y 1
1 . A G R I C U L T U R A L E C O N O M I C S A N D F A R M S U R V E Y
D E P A R T M E N T ,
T E A G A S C R U R A L E C O N O M Y A N D D E V E L O P M E N T
P R O G R A M M E ,
A T H E N R Y , C O . G A L W A Y , I R E L A N D
The Direct Impact of Risk Management
Tools on Farm Income: The Case of
Irelands Spring Barley Producers
8 9 T H A N N U A L C O N F E R E N C E O F T H E
A G R I C U L T U R A L E C O N O M I C S S O C I E T Y
U N I V E R S I T Y O F W A R W I C K
A P R I L 1 3 T H - 1 5 T H 2 0 1 5

3. Outline
• Objective
• Data
• Methodology
• Results
• Conclusion

4. Objective
To Estimate the Direct Impact on Farm
Income from adopting the Forward
Contracting Risk Management tool

5. What is a Forward Contract?
An agreement to buy a commodity at a certain
future time for a certain price
Seifert et al (2004)

6. Data
• Teagasc National Farm Survey 2004-2013
 Retain Farms with five-ten years of data for spring barley
production (animal feed)
 138 Farms with 5-10 years of historical data for spring barley
production (animal feed)
• Teagasc Database of Grain Crop Prices maintained
by Fiona Thorne
• FAO Data on International Crop Yields
• CSO Data on Input Costs and Barley Uses

7. Figure 1: Total Barley Uses by Type
Source: CSO
0
200
400
600
800
1000
1200
1400
1600
1800 1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
000’sTonnes
Year
Cereal Products for Industrial
Use (000 Tonnes)
Cereal Feeding Stuffs (000
Tonnes)
Cereal Losses (000 Tonnes)
Cereal Seeds (000 Tonnes)

8. Figure 2: Historical Harvest Area for Selected Crops
0
50
100
150
200
250
300
Hectares000’s
Year
Winter Wheat
Spring Wheat
Winter Oats
Spring Oats
Winter Barley
Spring Barley

9. Figure 3: Historical Price Trends for Selected Grain Crops
80
100
120
140
160
180
200
220
240
EuroPerTonne
Harvest Year
FEED BARLEY
FEED WHEAT
MALTING BARLEY
MILLING WHEAT
Intervention Prices
Source: Teagasc Database of Grain Crop Prices (Thorne, 2014)

10. Table 1: Census of Agriculture 2010
No. of Producing
Farms
Total Hectares Hectares Per Farm
All Cereals 11,374 273,898 24.08
Spring Barley 9,058 145,960 16.11
Winter Barley 1,499 28,840 19.24

11. FARM LEVEL DATA

12. Figure 4: Number of Observations for Spring Barley [Animal Feed]
2004-2013
49
103
58
47
32
25 22
13
22 19
37
0
20
40
60
80
100
120
0 1 2 3 4 5 6 7 8 9 10
Number of Recorded Years with Spring Barley
Number of Observations
138 Farms with
five or more
observations
represent
approximately
8,700 Spring
Barley growers

13. Methodology
 Multivariate Empirical distribution based on
Richardson et al (2000)
 Use SIMETAR Simulation Program to simulate 500 alternative
price and yield scenarios based on historical data for crop
prices and yields
 Assume that Direct Costs are known at sowing time
 Arrive with 500 alternative Income Scenarios
 Calculate the Direct Profit Impact of Forward Selling
20% of Expected Output (Tonnes)
 The Direct Impact will vary according to the price and yield
scenario

14. Figure 5: CDF of the Simulated Feed Barley Price in 2014
0.000
0.100
0.200
0.300
0.400
0.500
0.600
0.700
0.800
0.900
1.000
90 100 110 120 130 140 150 160 170 180 190 200 210 220 230 240 250
Probability
Price in Euro Per Tonne
PRICE IRFEEDBARLEY
Expected
Deterministic
Price of 157 euro
Actual 2014 Price
Outcome

15. Figure 6: The Interquartile Range of the Cumulative Distribution of the
Simulated Gross Margin per Hectare in 2014
0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
1
-400 -200 0 200 400 600 800 1000 1200 1400
Probability
Euro Per Hectare
Average 25TH Percentile 75th Percentile

16. THE DIRECT PROFIT IMPACT OF
FORWARD SELLING 20% OF
EXPECTED OUTPUT

17. Figure 7: Cumulative Distribution of the Profit Impact of Forward Contracting
[20 Per Cent of Expected Production]
0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
1
-6 -5 -4 -3 -2 -1 0 1 2 3 4 5 6
Probability
Percentage Share of Average Income
AVERAGE IMPACT ON PROFIT OF ENTERING INTO FORWARD CONTRACT AT 140
AVERAGE IMPACT ON PROFIT OF ENTERING INTO FORWARD CONTRACT AT 150

18. Figure 8: Cumulative Distribution of the Profit Impact of Forward Contracting
[20 Per Cent of Expected Production]
0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
1
-2500 -2000 -1500 -1000 -500 0 500 1000 1500
Probability
Average Direct Profit Impact in EURO
AVERAGE IMPACT ON PROFIT OF ENTERING INTO FORWARD CONTRACT AT 140
AVERAGE IMPACT ON PROFIT OF ENTERING INTO FORWARD CONTRACT AT 150
Based on
17.7 ha of
production
and 6.1
Tonnes per
HA

19. RISK AVERSION

20. Farm 1
High Cost
Farm 2
Low Cost
 25 HA of Barley
 Average Yield 7.2 Tonnes Per HA
 25 HA of Wheat
 Average Yield 9.2 Tonnes Per HA
 Decoupled Payments of
€20,000
 Direct Cost Per Tonne of
€100 for Barley and €115 for
Wheat
 Expected Gross Margin
=22,000
 25 HA of Barley
 Average Yield 7.2 Tonnes Per HA
 25 HA of Wheat
 Average Yield 9.2 Tonnes Per HA
 Decoupled Payments of
€20,000
 Direct Cost Per Tonne of
€80 for Barley and €95 for
Wheat
 Expected Gross Margin
=30,000
Hypothetical Farms
Note: In order to qualify for greening under the next round of CAP, the farmer must add a third crop with minimum of
3HA. This is unlikely to affect the risk aversion results. We assume compliance with EFA requirements.

21. Conditions of the Simulation
1. Both Farms must commit 20% of Average Expected Output for each
crop to a Forward Contract
2. Both Farms must choose the Minimum Forward Price at which they
are willing to sell (increments of 5 euro per tonne)
3. The Stochastic Prices and Yields are given by stochastic farm-level
model using SIMETAR
4. The constant proportional risk aversion function of Pratt (1964) is
applied to each outcome
5. Based on Responses to Forward Contract Question, the risk aversion
coefficient is estimated for each farm
6. We Assume Constant Relative Risk Aversion

22. Table 2: Range of Risk Aversion Values under Two
Hypothetical Farms
Farm
Type
Choice of
Forward
Contract Price
Direct
Cost Per
Expected
Tonne
Risk Preference
Classification
Minimum Relative
Risk Aversion
CRRA
Maximum Relative Risk
Aversion
CRRA
High
Cost
1. 155B 165W
2. 150B 160W
3. 145B 155W
4. 140B 150W
100B 115W
Slightly Risk Averse
Slightly Risk Averse
Risk Averse
Risk Averse
0.01
0.22
0.38
0.51
0.21
0.37
0.5
0.6
Low
Cost
1. 155B 165W
2. 150B 160W
3. 145B 155W
4. 140B 150W
80B 95W
Slightly Risk Averse
Risk Averse
Very Risk Averse
Extremely Risk Averse
0.04
0.39
0.74
1+
0.38
0.73
1+
Note: The estimated average expected prices are 157 euro per tonne for Barley and 165 euro per tonne for Wheat. The estimated
minimum prices for Barley and Wheat are 100 euro per tonne and 105 euro per tonne respectively. The estimated maximum prices are
226 euro per tonne and 242 euro per tonne respectively.

23. Concluding Remarks
 Forward Selling 20% of Output may involve a direct impact
of one per cent of expected farm income
 High Competitiveness means less vulnerable to shocks
 More sensitive to the price conditions of the forward contract
 Lower demand for forward contract tools unless the forward price is
relatively high
 More work required on the influence of the Direct
Payments on Income Variability and adoption of forward
contracts
 Does the relatively high presence of livestock offer a good
risk management strategy?
 Does a progressive farmer necessarily forward sell?

24. Thank You
Questions and Comments are Welcome

25. Figure 9: Cumulative Distribution of Average
Gross Margin Euro per Hectare
0
0.2
0.4
0.6
0.8
1
-400 -200 0 200 400 600 800 1000 1200
CumulativeProportionofFarms
Euro Per Hectare
8 Years or More All Farms