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

1. Risk perception and risk management in aquaculture – the importance of political risk Presentation, FAME Workshop 08.06.07Ole Jakob Bergfjord NILF/SDU

2. Overview • Background • About the survey • Results • Risk sources • Risk management • Futures markets • Elicitation of risk aversion • Conclusions and implications

3. 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?

4. 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.

5. Risk attitude

6. 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

7. Risk sources

8. 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

9. Risk management

10. 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

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

12. Futures markets • Limited interest, information is needed • Hypothesis: Could be used for gambling more than hedging

13. Futures markets

14. Futures markets • 0 and 1 most common answers – median 1. • Also indicates limited risk aversion • Again, little correlation with size etc

15. Elicitation of risk aversion • Use the reported willingness to pay for futures contracts, and the following basic assumptions:

16. Elicitation of risk aversion • Negative exponential utility function =>

17. 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

18. 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

19. 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

20. 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)