How Do Agricultural Producers Respond to Uncertain Prices?

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Research by AAEA members in AJAE

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Many agricultural policy instruments are predicated on the idea that agricultural producers dislike uncertainty in the price at which they will have to sell their output. As a consequence, a lot of public funds have historically been spent, both in the United States and abroad, on programs aimed at either reducing price volatility or insuring producers against price volatility.

In a new article released in the American Journal of Agricultural Economics (AJAE) titled “Producer Attitudes toward Output Price Risk: Experimental Evidence from the Lab and from the Field,” authors Marc Bellemare from the University of Minnesota, Yu Na Lee from the University of Guelph, and David Just from Cornell University test the theory of producer behavior in the face of price risk in two experimental labs at U.S. Universities as well as in the field with farmers in Peru.

Bellemare says, “First and foremost, we found that the presence of price volatility itself does not cause producers to produce any less than in situations of price certainty. This is contrary to conventional wisdom in agricultural economics. What we did find is that our experimental subjects do tend to produce less on average as the amount of price volatility itself increases, but only in situations where there was already some price volatility. Lastly, we found that the prevailing neoclassical economic theory of behavior in the face of risk and uncertainty fails to explain our subjects' behavior, and so it may well be a stretch to base agricultural policy on that theory.”

If you are interested in setting up an interview with Bellemare, please contact Allison Scheetz in the AAEA Business Office.

ABOUT AAEA: Established in 1910, the Agricultural & Applied Economics Association (AAEA) is the leading professional association for agricultural and applied economists, with 2,500 members in more than 60 countries. Members of the AAEA work in academic or government institutions as well as in industry and not-for-profit organizations, and engage in a variety of research, teaching, and outreach activities in the areas of agriculture, the environment, food, health, and international development. The AAEA publishes two journals, the American Journal of Agricultural Economics and Applied Economic Perspectives & Policy, as well as the online magazine Choices and the online open access publication series Applied Economics Teaching Resources. To learn more, visit http://www.aaea.org.

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Allison Scheetz
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