Should Farmers Invest in Financial Assets as a Risk Management Strategy? Some Evidence from New Zealand

20 Pages Posted: 8 May 2008

See all articles by Gilbert Nartea

Gilbert Nartea

University of Canterbury - College of Business and Law

Paul Webster

affiliation not provided to SSRN

Abstract

This study explores the potential for risk reduction by New Zealand farmers through the diversification of their farm asset portfolios to include financial investments such as ordinary industrial shares, government bonds and bank bills. Low correlations between rates of return on farm and these financial assets suggest that significant reduction of income variability might follow their inclusion in farmers portfolios. Stochastic efficiency analysis is used to analyse alternative portfolios of ordinary shares, government bonds and bank bills and New Zealand farmland, using coefficients of absolute risk aversion derived from a negative exponential utility function. The results suggest that those farmers showing high degrees of risk aversion would gain utility by including financial assets in their portfolios. Deregulation of the New Zealand economy in the 1980s appeared to reduce the potential gains from diversification. Bonds rather than ordinary shares are the main contributors to portfolios which maximise utility for individuals classified as somewhat risk averse.

Suggested Citation

Nartea, Gilbert and Webster, Paul, Should Farmers Invest in Financial Assets as a Risk Management Strategy? Some Evidence from New Zealand. Australian Journal of Agricultural and Resource Economics, Vol. 52, No. 2, pp. 183-202, June 2008, Available at SSRN: https://ssrn.com/abstract=1130519 or http://dx.doi.org/10.1111/j.1467-8489.2008.00413.x

Gilbert Nartea (Contact Author)

University of Canterbury - College of Business and Law ( email )

Christchurch, 8140
New Zealand

Paul Webster

affiliation not provided to SSRN

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