Should farmers invest in financial assets as a risk management strategy? Some evidence from New Zealand

Nartea, Gilbert; Webster, J.; Pellegrino, J.

Nartea, Gilbert; Webster, J.; Pellegrino, J.

Abstract

Off-farm investment as a risk management strategy is not widespread among New Zealand sheep and beef farmers. This study explores the potential for risk reduction by the diversification of farm asset portfolios to include financial investments such as industrial equities and government bonds of various types. Results show that the negative correlations between long-run rates of return on farm assets and financial investments could result in a significant reduction of risk if equities and bonds were included in farm investment portfolios. However, when combined with information about attitudes to risks, it does not seem likely that farmers would adopt such strategies purely in order to stabilise incomes. Deregulation of the New Zealand economy in the mid 1980's had little impact on farmers' optimal allocation of their assets.

Keywords

risk management; diversification; portfolio theory; off-farm investment; financial assets; NZ farmland; stochastic efficiency analysis; Agricultural Economics & Policy

Date

2003

Type

Conference Contribution - Published (Conference Paper)

Citation

Nartea, G. V., Pellegrino, J. M., & Webster, P. (2003). Should farmers invest in financial assets as a risk management strategy? Some evidence from New Zealand. In Proceedings of the 14th International Farm Management Congress. England: International Farm Management Association.