BUSINESS RISK MANAGEMENT PROGRAMS AND ON-FARM CAPITAL INVESTMENT

Abstract

Business risk management (BRM) programs can help reduce the risk inherent in the agricultural industry that is associated with income variability. These programs are commonly in the form of insurance (production insurance, net margin insurance, etc.). There is a vast literature on investment decision under risk and uncertainty, but there exists a gap in the empirical analysis of the effects risk-reducing Canadian BRM programs have on investment. This paper examines the relationship between Canadian BRM programs and on-farm capital investment. This is done using theory and empirical analysis motivated by the risk-balancing framework put forward by Gabriel and Baker (1980). Previous papers have researched BRM programs using the risk-balancing approach, but do not look at investment separately from other factors that influence the level of financial risk (Uzea et al. 2014; de Mey et al. 2014). Analysis of repeated cross-sectional data from the Farm Financial Survey is conducted. Results show that there exists a significant and positive correlation between Canadian BRM programs and the decision to invest. Results also show that BRM program participation is positively correlated with higher levels of financial risk. Understanding the effects of BRM programs on investment is essential for designing and directing Canadian agricultural policy with implications for long-term farm productivity.