How Well Do Farmers Tolerate Risk? Part 1

By: Brian Roe, McCormick Professor, Department of Agricultural, Environmental and Development Economics, Ohio State University

Flood and drought.  Late plantings.  Delayed harvesting.  Crazy price swings.  Dangerous working conditions.  Today’s successful farmers may have more in common with professional poker players than with the stolid managers of generations past as crucial decisions balancing risk and reward must be made on a regular basis and, often, on the fly.   

So, has this constant exposure to risk and risky decisions made U.S. farmers better able to tolerate risk than other people?  Or has it gone the other way and made farmers more likely to want to avoid future risks? 

One classic view of risk tolerance is that risk tolerant people seek entrepreneurial activities such as owning a small business or becoming otherwise self-employed.  Several studies over the years have validated this logic – risk seekers seek entrepreneurial activities.

But farming isn’t exactly like other forms of small business ownership and self employment, is it?  Sometimes entering farming is more the outcome of intergenerational inertia than of a free, unfettered choice among all feasible professions.  I would argue that, more than other forms of small business, family ties are crucial to farming entry decisions because they often provide the key knowledge, experience and skills necessary to become a successful farmer.  And that’s not to mention the fact that family ties often provide the access to land and other crucial, expensive assets.  So, while the city kid who loves risk will choose to run a small business rather than take a government job, the farm kid who, deep down, doesn’t really like to take risks, may end up running the family farm even if that safe government job was available. 

Farming is also different in that, for some sectors of farming and some regions of the country, federal and state programs provide some downside risk protection through subsidized insurance products and various program payments.  Do these modest protections blunt the risk enough and keep some folks in farming that would have otherwise left for less risky occupations? 

The question I am interested in is this: when you put all these factors together, does it mean that U.S. farmers, as a group, are more or less tolerant of risk than the rest of Americans?

To answer this question, I asked a question.  Specifically, I asked farmers, small business owners and other people around the U.S. the following:

“How do you see yourself?  Are you generally a person who is fully prepared to take risks or do you try to avoid taking risks?”   Please mark one response below.

Don’t like to take risks                   Fully prepared to take risks
                0 1 2 3 4 5 6 7 8 9 10
                     
                     

I asked this question because, perhaps surprisingly, the answer to this question has proven very effective in predicting a broad range of observed behaviors when used by other researchers.  For example, this question was asked of tens of thousands of Germans as part of a large, ongoing study of the German population.  Researchers have found that it predicts behaviors such smoking, traffic offenses, investment behavior and willingness to migrate and be self-employed.  However, it had never been used with a U.S. population.

Next month, I’ll share with you how I conducted the surveys and give you the answer to the question “Who can better tolerate risk: farmers, business owners or the average American?”  This will coincide with my presentation of these results to the Agricultural and Applied Economics Association Annual Meetings, which are being held in Pittsburgh this year.

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