Intertemporal Risk Management Decisions of Farmers under Preference, Market, and Policy Dynamics

history of being one of the most available and direct risk management tools for farmers. Crop
insurance, currently facilitated and subsidized by the US federal government, is currently the
most popular tool used by U.S. crop producers to manage yield and/or price risks. In recent years,
the federal government increased its involvement in providing and facilitating risk protection
instrument to farmers through various crop payment programs. The 2002 Farm Bill includes
three major programs to farmers: a loan deficiency payment (LDP), a direct payment (DP), and a
counter cyclical payment (CCP). These payment programs work as price insurance but without
any premium charge. However, the programs are usually offered for a multi-year period.
Provisions require that farmers make the decision on weather or not to participate in the
programs at the beginning of the period.

As new policies and market institutions are constantly developed to improve risk
protection for farmers, the risk management resources in the US changes over time. The
aforementioned programs are revisited and adjusted every few years. In order to effectively
utilize these risk protection programs, farmers need to adjust their expectations as well as risk
management strategies throughout the production process.

Farmers’ decision making and welfare are based on individual preferences in a given
risk and policy environment. In the GEU specification, a decision maker’s expected utility is
subject to changes in three types of preferences: risk aversion, time discounting, and
intertemporal substitutability. His or her intertemporal decisions are determined by the mutual
effects of all these preferences. Uncertainty about consumption is resolved over time and
preference orderings generally imply non-indifference to the way it resolves. The model provides
a possibility to study farmers’ intertemporal risk management decisions while considering their
preferences toward risk, time, and inter-year substitution of consumption. It also allows us to

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