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 importance of political risk

  • Background

  • About the survey

  • Results

    • Risk sources

    • Risk management

    • Futures markets

  • Elicitation of risk aversion

  • Conclusions and implications


Background
Background importance of political risk

  • 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 importance of political risk

  • 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 importance of political risk


Risk attitude1
Risk attitude importance of political risk

  • 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 importance of political risk


Risk sources1
Risk sources importance of political risk

  • 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 importance of political risk


Risk management1
Risk management importance of political risk

  • ”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 importance of political risk

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


Futures markets1
Futures markets importance of political risk

  • Limited interest, information is needed

  • Hypothesis: Could be used for gambling more than hedging


Futures markets2
Futures markets importance of political risk


Futures markets3
Futures markets importance of political risk

  • 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 importance of political risk

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


Elicitation of risk aversion1
Elicitation of risk aversion importance of political risk

  • Negative exponential utility function =>


Elicitation of risk aversion2
Elicitation of risk aversion importance of political risk

  • 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 importance of political risk

  • 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 importance of political risk

  • 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 importance of political risk

  • ”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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