Systematic and Nonsystematic Risks in Agriculture

Calum Greig Turvey · Herbert Coleman Driver

24 citations0/0 files storedCanadian Journal of Agricultural Economics/Revue canadienne d agroeconomie

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Agricultural economics and policies Economics of Agriculture and Food Markets Agricultural risk and resilience

Abstract

A Farm Sector Capital Asset Pricing Model (FSCAPM) is developed to examine systematic agricultural risks. Beta coefficients are derived for various agricultural activities and portfolios. The results reveal that for many agricultural commodities and crop mixes the amount of systematic risk is high. Moreover, for the majority of commodities and crop mixes examined, farmers are being undercompensated for the level of systematic risk they are accepting. It is suggested that off‐farm investment might be a feasible approach to reducing systematic risk within agriculture. Un modèle simulant le processus de détermination de la valeur de l'actif dans le secteur agricole est développé pour permettre l'étude des risques systématiques dans ce secteur. Les coefficients mesurant le niveau relatif de risque systématique sont ensuite calculés pour différents produits et plans de productions. Les résultats montrent que pour plusieurs pro‐duits agricoles et plans de production, les niveaux de risque systtmatique sont Clevés. De plus, pour la majoritt des produits et plans de production étudiés, les producteurs agricoles ne sont pas rémunérés adéquatement pour prendre ces risques. Finalement, l'investissement de capitaux à l'exttrieur du secteur agricole est présenté comme un moyen pouvant permettre de réduire le niveau de risque systématique dans ce secteur.

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References

1964CAPITAL ASSET PRICES: A THEORY OF MARKET EQUILIBRIUM UNDER CONDITIONS OF RISK*1965The Valuation of Risk Assets and the Selection of Risky Investments in Stock Portfolios and Capital Budgets 1975THE VALUATION OF RISK ASSETS AND THE SELECTION OF RISKY INVESTMENTS IN STOCK PORTFOLIOS AND CAPITAL BUDGETS**This paper is another in a series of interrelated theoretical and statistical studies of corporate financial and investment policies being made under grants from the Rockefeller Foundation, and more recently the Ford Foundation, to the Harvard Business School. The generous support for this work is most gratefully acknowledged. The author is also much indebted to his colleagues Professors Bishop, Christenson, Kahr, Raiffa, and (especially) Schlaifer, for extensive discussion and commentary on an earlier draft of this paper; but responsibility for any errors or imperfections remains strictly his own.[Professor Sharpe's paper, “Capital Asset Prices: A Theory of Market Equilibrium Under Conditions of Risk” (Journal of Finance, September 1964) appeared after this paper was in final form and on its way to the printers. My first section, which parallels the first half of his paper (with corresponding conclusions), sets the algebraic framework for sections II, III and VI, (which have no counterpart in his paper) and for section IV on the equilibrium prices of risk assets, concerning which our results differ significantly for reasons which will be explored elsewhere. Sharpe does not take up the capital budgeting problem developed in section V below.]1952Portfolio Selection 1977A critique of the asset pricing theory's tests Part I: On past and potential testability of the theory 1963A Simplified Model for Portfolio Analysis 1956The Introduction of Risk into a Programming Model 1971

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