RISK MANAGEMENT STRATEGIES TO REDUCE NET INCOME VARIABILITY FOR FARMERS

The most useful and practical strategy available for reducing variability of net farm income is ascertained. Of the many risk management tools presently available, five of the most commonly used are simultaneously incorporated in an empirically tested model. Quadratic programming provides the basis for decision-making in risk management wherein expected utility is assumed to be a function of the mean and variance of net income. Results demonstrate that farmers can reduce production and price risks when a combination strategy including a diversified crop production plan and participation in the futures market and the Federal Crop Insurance Program (FCIP) is implemented.