Environmental good production in the optimum activities portfolio of a risk averse-farmer

Abstract

An analytical framework is proposed for analysis of environmental good production by farmers in the case of price uncertainty. Environmental good production contracted by means of agri-environmental agreements is treated as a riskless option in the farmer’s production activities portfolio. It is shown that agri-environmental agreements aiming at biodiversity competing with beef production are likely to increase management intensity on the non-enrolled land, and that the effect of the payments for these agreements on the number of hectares enrolled is ambiguous. It is also demonstrated that an increase in the output price variability and/or a decrease in the level of decoupled subsidies will induce an increase (decrease) in the area enrolled in agreements aiming at biodiversity competing with (complementary to) beef production. The obtained results are illustrated by means of efficient frontiers generated using mathematical programming farm level models of suckler cow farms in Monts du Cantal, in France.