Roy, Kayla D.

Spaulding, Aslihan D.

Tudor, Kerry W.

Winter, J. Randy

English

Research Papers in Economics

Aslihan D. Spaulding1, Kayla D. Roy2, J. Randy Winter3, Kerry W. Tudor3
Illinois State University – Department of Agriculture – Normal, IL 61790
1Associate Professor of Agribusiness – adspaul@ilstu.edu
2Graduate Student
3Professor of Agricultural Economics
Poster prepared for presentation at the Agricultural & Applied Economics Association 2010 AAEA,CAES, & WAEA Joint Annual Meeting, 
Denver, Colorado, July 25-27, 2010
Copyright 2010 by Spaulding, Roy, Winter, and Tudor. All rights reserved. Readers may make verbatim copies of this document for non-
commercial purposes by any means, provided that this copyright notice appears on all such copies.
Risk Management Strategies of Illinois FarmersRisk Management Strategies of Illinois Farmers
Aslihan D. Spaulding, Kayla D. Roy, J. Randy Winter, Kerry W. Tudor
Campus Box 5020, Normal, IL 61790         adspaul@ilstu.edu
BACKGROUND
RESULTS
METHODOLOGY
Ginder, Matt,Aslihan D. Spaulding, Kerry W. Tudor, and J. Randy Winter. 
(2009), “Factors Affecting Crop Insurance Purchase Decisions by Farmers 
in Northern Illinois.” Agricultural Finance Review, Vol. 69 No.1, pp. 113-125.
Knight, T.O., and K. H. Coble. (1997). “Survey of U.S. Multiple Crop 
Insurance Literature Since 1980.” Review of Agricultural Economics, 19, 
128-156.
Makki, S.S. and Somwaru, A. (2001), “Farmers' participation in crop 
insurance markets: creating the right incentives.” American Journal of 
Agricultural Economics, Vol. 83, pp. 662-7.
Miller, Alan, Craig Dobbins, James Prichett, Michael Boehlje and Cole 
Ehmke (2004). Risk Management for Farmers. Purdue University. 
Department of Agricultural Economics Staff Paper 04-11. 
Salant, Priscilla and Don Dillman (1994). “How to Conduct Your Own 
Survey.” John Wiley & Sons, Inc.
SAS Institute Inc., SAS 9.1, Cary, NC.
Sherrick, B.J., P.J Barry, P.N. Ellinger, and G.D. Schnitkey. (2004), “Factors 
Influencing Farmers' Crop Insurance Decisions.” American Journal of 
Agricultural Economics, 86(1): 103-114.
Smith, N., Robert Dismukes, and James Novak. (2007).Crop Insurance 
Issues. The 2007 Farm Bill: Policy Options and Consequences. February 
2007.
REFERENCES
 To be successful, farmers must manage several types of risk, 
including those inherent to production, marketing, financing, and 
human resources. A variety of risk management tools and 
practices have been developed to help farmers mitigate the wide 
range of production and financial risks that result from diseases, 
insects, and weather (Smith et al., 2007).
A great deal of research has been conducted regarding crop 
insurance purchase decisions, election, and coverage levels. 
Knight and Coble (1997) published “Survey of U.S. Multiple Peril 
Crop Insurance Literature Since 1980” which provided a 
framework of 17 years worth of data and research regarding crop 
insurances' growth since its conception. Much research has been 
done around the topic of crop insurance since Knight and Coble's 
(1997) study; some have even expanded on the topic further, 
finding the risk factors that affect purchase decisions.
 Makki and Somwaru (2001) analyzed Iowa corn growers' 
decisions to participate in crop insurance and their insurance 
selection from 1995-1999. They found that risk tolerance, 
price, Federal subsidy, expect payout, and the availability of 
alternative insurance all played a major role when electing crop 
insurance.
 Miller et al. (2004) identified sources of risk for producers, 
categorizing them into production, marketing, financial, legal, and 
human risk. They identify several strategies in order to overcome 
some of those risks.
Marketing Strategies: They recognize forward contracting as a 
means of overcoming some marketing risks; forward 
contacting is a method they identify as a way to lock in 
prices. Through forward contracting, producers are able to 
side step unstable basis levels, margin calls, premiums, 
and the minimum 5,000 bu. contract are all eliminated.
Production Strategies: Diversification, geographic dispersion, 
variety selection, drainage, the use of cultural practices 
best suited to particular areas, etc. are all identified as 
possibly strategies.
Financial Strategies: Carrying reserves of cash and the ability 
to adjust investments and withdrawal decisions are all 
means of tackling financial risks.
 Makki and Somwaru (2001), Miller et al. (2004), Sherrick et al. 
(2004), and Ginder et al. (2009) all examined the risk factors 
associated with running a daily farm operation. 
 This study re-examines those factors, but at a more in-depth 
level, and examines how they are viewed by Illinois producers. 
Everything from back-up lines of credit, to irrigation and hedging 
are examined in this study, and more importantly, ranked in order 
of effectiveness in reducing risk.
 To find out types of risk management tools, including crop 
insurance, adopted by the farmers in Illinois.
 To find out how effective do farmers believe each risk 
management strategy is in reducing risk.
 To analyze differences and similarities between risk takers vs. 
risk averse farmers in terms of their risk management 
strategies.
 Subsequent to IRB approval, the mail survey method 
following Salant and Dillman (1994) survey principles is used to 
collect data. 
 1st Farm Credit Services and Farm Credit Services of Illinois 
provided access to their current and potential customer database. 
Their database has farmers' contact information as well as farm 
and farmer demographics like their gross farm income, age, 
acres-farmed, and net worth. Random sampling is used to select 
2,000 farmers from their database. 
A donation to St. Jude's Children's Research Hospital is made 
on behalf of the respondents as an incentive to participate.
After two mailings and a reminder postcard in between, the 
response rate was 34%. However, 399 surveys were complete. 
 The data is entered into Excel worksheet and it is analyzed 
using SAS. 
 Risk averse farmer is less likely to purchase crop insurance.
 Risk takers are more likely to use risk management tolls like 
forward contracting, hedging, and options. 
 Very few farmers participated in new programs like BE 
discount, ACRE, SURE, and EU, regardless of risk attitude. 
 Further analysis of data will provide more detailed information 
on relationships between risk management decisions, 
demographics of participants and their risk attitude.
 Further analysis will examine differences and similarities of 
small vs. large farmers and their risk management decisions.  
OBJECTIVES
ACKNOWLEDGMENTS
 Financial support was provided by Illinois Council on Food and 
Agricultural Research, Illinois State University Research Grant, 
1st Farm Credit Services, and Farm Credit Services of Illinois. 
Corn Acres Farmed 545 Male 87%
Soybeans Acres Farmed 419 Female 9%
Wheat Acres Farmed 100 Did not respond 4%
Other Acres Farmed 210
Risk averse 11%
Number of Years Farming 32 years Risk neutral 57%
Risk taker 23%
Average Age 57.8 years Did not respond 9%
Use and Effectiveness of Risk Management Options in Reducing Risk
Risk Management Option Percent Used Weighted Effectiveness
Crop revenue insurance 56% 3.88
Forward contracting 65% 3.86
Financial savings/reserves 47% 3.75
Multiple seed varieties 67% 3.71
Spread crop sales 59% 3.70
Crop share leases 44% 3.65
Multiple crop enterprises 51% 3.58
Marketing contracts 45% 3.48
Farm in multiple locations 48% 3.47
Crop yield insurance 31% 3.42
Hedging  25% 3.10
Government programs 68% 3.06
Production contracts 19% 2.93
Options 23% 2.75
Irrigation 5% 2.67
Backup credit lines 18% 2.65
ACRE 28% 2.55
CAT 7% 1.75
On a scale of 1-not effective; 5-very effective.
14%
30%
16%
12%
16%
13%
6%
12% 12%
8%
45%
17%
34%
28%
10%
4%
6%
18%
Less than 
$50,000
$50,001 to 
$250,000
$250,001 to 
$500,000
$500,001 to 
$750,000
More than 
$750,000
Not 
responded
Farm Operation's
GROSS FARM INCOME NET WORTH TOTAL DEBT
Risk 
Averse
Risk 
Neutral
Risk 
Taker
Did not purchase crop insurance 25% 16% 17%
Purchased crop insurance 70% 83% 77%
Statistically significant at 5% significance level.
Risk Management Option
Risk
Averse
Risk
Neutral
Risk
Taker
ACRE 30% 28% 33%
Backup credit lines 14% 20% 18%
CAT 7% 8% 5%
Crop revenue insurance 55% 61% 58%
Crop yield insurance 32% 32% 34%
Crop share leases 43% 45% 52%
Financial savings/reserves 39% 50% 49%
Farm in multiple locations 52% 50% 49%
Forward contracting 59% 67% 73%
Government programs 70% 69% 76%
Hedging  11% 25% 34%
Irrigation 5% 4% 8%
Marketing contracts 39% 44% 56%
Multiple crop enterprises 34% 55% 58%
Multiple seed varieties 68% 69% 73%
Options 23% 20% 32%
Production contracts 18% 19% 22%
Spread crop sales 52% 63% 60%
All are statistically significant at 5% significance level.
CONCLUSIONS
New Program Participation Overall
Risk 
Averse
Risk 
Neutral
Risk 
Taker
Applied for Biotechnology
Endorsement (BE) discount*
31% 25% 33% 32%
Signed up for Average Crop Election 
Revenue (ACRE)
28% 27% 27% 33%
Applied for Supplemental Revenue 
Assistance (SURE)*
3% 2% 2% 3%
Chose Enterprise Unit (EU) with Crop 
Revenue Coverage (CRC)
30% 36% 32% 29%
Chose Enterprise Unit (EU)  with 
Revenue Assurance (RA)
8% 5% 6% 12%
*Statistically significant at 5% significance level.

Risk Management Strategies of Illinois Farmers

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