Risk perception and risk management in aquaculture the importance of political risk
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Risk perception and risk management in aquaculture – the importance of political risk. Presentation, FAME Workshop 08.06.07 Ole Jakob Bergfjord NILF/SDU. Overview. Background About the survey Results Risk sources Risk management Futures markets Elicitation of risk aversion

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Risk perception and risk management in aquaculture the importance of political risk

Risk perception and risk management in aquaculture – the importance of political risk

Presentation, FAME Workshop 08.06.07Ole Jakob Bergfjord

NILF/SDU


Overview

Overview

  • Background

  • About the survey

  • Results

    • Risk sources

    • Risk management

    • Futures markets

  • Elicitation of risk aversion

  • Conclusions and implications


Background

Background

  • Risky business (wealth and bankrupcies), yet no similar studies conducted

  • NILF research program ”Risk and risk management” – earlier work in agriculture enables us to compare results

  • Useful both for governments and industry

  • Implications for policy?


About the survey

About the survey

  • Conducted by email and phone during the fall 2005.

  • Based on registry of license ownership – not optimal, but the best list available

  • In total 38 respondents (of appx 100). Limited data set, but quite representative, so the main conclusions appear to be quite robust.


Risk attitude

Risk attitude


Risk attitude1

Risk attitude

  • The most risk averse response (1 or 7) most common among farmers

  • More optimistic firms take and accept more risk, otherwise no differences due to size or other demographic factors

  • All in all, fish-farmers appear to be relatively risk tolerant


Risk sources

Risk sources


Risk sources1

Risk sources

  • Future salmon prices – as expected – the most important risk source

  • Otherwise, many ”political” risk factors considered to be important

  • Perception of risk sources not correlated with size, optimism etc


Risk management

Risk management


Risk management1

Risk management

  • ”Obvious” strategies most important. Reasonable, as these have other purposes than risk management.

  • Also: Simple to use, does not require external assistance

  • Large companies use more sophisticated tools – as expected


Futures markets

Futures markets

  • Futures markets for salmon are established, backed by banks and creditors who would like fish farmers to hedge prices


Futures markets1

Futures markets

  • Limited interest, information is needed

  • Hypothesis: Could be used for gambling more than hedging


Futures markets2

Futures markets


Futures markets3

Futures markets

  • 0 and 1 most common answers – median 1.

  • Also indicates limited risk aversion

  • Again, little correlation with size etc


Elicitation of risk aversion

Elicitation of risk aversion

  • Use the reported willingness to pay for futures contracts, and the following basic assumptions:


Elicitation of risk aversion1

Elicitation of risk aversion

  • Negative exponential utility function =>


Elicitation of risk aversion2

Elicitation of risk aversion

  • Absolute risk aversion: A(w) = 1.25E-07

  • Multiply by wealth to get relative risk aversion (RRAC): 0.625

  • Bernoulli’s “everyman’s utility function” assumes a RRAC of 1.0, and Anderson and Dillon (1992) propose a rough classification of relative risk aversion levels based on this:0.5 Hardly risk averse1.0 Normal/somewhat risk averse2.0 Rather risk averse3.0 Very risk averse4.0 Extremely risk averse


Conclusions

Conclusions

  • Limited dataset, yet some robust conclusions

  • Low risk aversion compared to agriculture, yet different for different areas (for instance use of insurance)

  • ”Expected” results from questions about risk sources and risk management strategies


Implications

Implications

  • Bad news for providers of external risk management services? (In particular with the current consolidation)

  • Message to governments: Uncertainty about changing regulatory framework is important – no matter if current regulations are considered favourable or not


Implications1

Implications

  • ”Food for thought”

    • Policy makers often state ”risk reduction” as policy objective – yet often end up increasing the risk?

    • ”Protective policies” as a source of risk for external parties? (Creditors, investors etc)


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