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

examine the impacts of changing market institutions and U.S. agricultural policies on farmers’
behavior at the same time.

The objectives of this paper are 1) apply the GEU model to farmers’ intertemporal
portfolio risk management decisions and compare it with other commonly used additive EU
models as a framework in such decisions. Farmers’ choose from hedging instruments, insurance
products, and government payment programs to maximize utility. 2) investigate the impacts of
intertemporal preferences towards risk, substitution, and time, as well as market institutions and
policy alternatives, on farmers’ risk management behavior based on the GEU model. We are
interested in evaluating the different risk management tools and weighing their roles in risk
management portfolios.

Specifically, the paper proceeds as follows: 1) Section II reviews literature in
agricultural risk management modeling; 2) Section III discusses the model structure; 3) Section
IV introduces the data and the simulation of yields and prices; 4) Section V discusses the
optimization and model comparison results; 5) Section VI presents the impact analyzes of
intertemporal preferences, market institutions, and policy alternatives on risk management
decisions; and 6) Section VIII summarizes findings and draws conclusion.

II. Existing Literature

As a modeling framework, the expected utility (EU) maximization approach has been
applied to producers’ risk analysis in both static and dynamic situations since the 1970s.
However, unlike its counterparts in economics and finance, a large amount of the existing work
only use EU under static scenarios in agricultural economics (Nyambane et al., 2002).

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