Risk-Efficient Planting Schedules for Corn in Matalom, Leyte, Philippines

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Risk-Efficient Planting Schedules for Corn in Matalom, Leyte, Philippines Philippine Journal of Development Number 66, First Semester 2009 Volume XXXVI, No. 1 Risk-efficient Planting Schedules for Corn in Matalom, Leyte, Philippines remBerto a. PatindoL, Canesio d. Predo, 1 and rosaLina g. de guzman ABSTRACT The study was conducted to identify risk-efficient cropping schedules for corn farmers in Matalom, Leyte, Philippines using stochastic dominance analysis of simulated yields, given the El Niño Southern Oscillation (ENSO) forecasts during the cropping period. Actual weather data, with missing observations estimated using a weather generating software, were used in constructing weather data sets. These data, together with crop parameters and soil characteristics in the study site, were used as inputs to generate probability distributions of yields during different planting schedules. The simulated yield distributions were classified according to the ENSO phases prevailing during the cropping period. Stochastic dominance analysis was applied on the yield distributions to determine the first-degree stochastic dominance (FSD) set and the second-degree stochastic dominance (SSD) set. Finally, stochastic dominance with respect to a function (SDWRF) was applied on the SSD set to identify risk-efficient schedules at different levels of risk aversion. 1 Remberto A. Patindol is from the Visayas State University, Baybay City, Leyte, Philippines. Email for correspondence: [email protected]. Canesio D. Predo is from the College of Forestry and Natural Resources, University of the Philippines Los Baños but previously with the Visayas State University during the implementation of the ACIAR funded project “Bridging the gap between seasonal climate forecast and decisionmakers in agriculture.” Rosalina de Guzman is with the Philippine Atmospheric, Geophysical and Astronomical Services Administration of the Department of Science and Technology, Quezon City, Philippines. 66 PhiliPPine Journal of DeveloPment 2009 Risk-efficient schedules were identified for each cropping season and under each ENSO phase. It was found out that some June-July schedules (during the first season) and some December schedules (during the second season) are more risk-efficient than traditional schedules. INTRODUCTION Importance of the study One of the most important decisions affecting crop production in rainfed areas is the timing of planting. In most cases, farmers follow traditional planting schedules under the assumption that the conditions during a particular planting period are repeated over the years. Thus, it would not be uncommon to observe farmers in a given locality, for example, to plant corn in the first week of May and repeat this schedule over the years. Risk can be defined in several ways. It may be defined as an expected loss in decision theory, or the probability of loss in some economic applications (Roumasset 1979). Risk can also be viewed in terms of the probability distributions of the outcomes of the action choices or strategies. A strategy may be considered less risky than another if it would be preferred by all risk-averse decisionmakers. Thus, a risk-efficient strategy can be viewed as one that will be preferred by all risk-averse decisionmakers of a particular class of risk aversion (Rothchild and Stiglitz 1970). A risk-efficient strategy can lead to an increase in the mean and/or a reduction in the dispersion about the mean (Pandey 2000). Based on the above definitions and descriptions of risk and risk efficiency, two basic requirements are necessary for risk-efficiency analysis, namely, the probability distribution of the outcomes of the strategies and the risk attitude of the decisionmakers. Recent developments in technology have led to availability of forecasts about El Niño Southern Oscillation (ENSO) phases or episodes. The Oceanic Niño Index (ONI) from the US National Oceanic and Atmospheric Administration (US- NOAA) is a principal measure for monitoring, assessing, and predicting ENSO (NOAA 2007). The ONI is based on sea surface temperature (SST) departures from the average in the Niño 3.4 region, and is defined as the three-month running-mean SST departures in the Niño 3.4 region. Departures are based on a set of improved homogeneous historical SST analyses (Extended Reconstructed SST—ERSST.v2). The NOAA operational definitions for El Niño and La Niña are as follows: El Niño: characterized by a positive ONI greater than or equal to +0.5°C. La Niña: characterized by a negative ONI less than or equal to -0.5°C. PatinDol, PreDo anD De guzman 67 To be classified as a full-fledged El Niño or La Niña episode, these thresholds must be exceeded for a period of at least five consecutive overlapping 3-month seasons. A lot of people, including farmers, are now paying attention to seasonal forecasts. A farmer can use such forecasts to avert possible damage or, at least, caution the impacts these ENSO episodes could bring on his crops. Eventually, he may select a planting schedule that would be risk-efficient or less risky, given the forecast. One approach that can be used in identifying risk-efficient planting schedules is stochastic dominance analysis. However, this method requires the probability distributions of the outcomes (such as yield) of the different strategies (planting schedules, in this paper). This would imply getting data for each planting schedule over several years. In the absence of actual yield data to be used in the probability distributions, one can generate the probability distributions using simulated yields for each strategy to be evaluated. The simulations can use actual or synthetic weather data that reflect the variability associated with the different ENSO episodes. Objectives of the study This study is an attempt to make use of historical weather data and information about past occurrences of the different ENSO episodes to see if these can be used in selecting cropping schedules that may be less affected by the occurrence of these episodes. Moreover, the study explores the application of the method of stochastic dominance on probability distributions of simulated yields in the choice of risk-efficient planting schedules. The study aims to identify risk-efficient cropping schedules for corn farmers in Matalom, Leyte, Philippines using stochastic dominance analysis of simulated yields given ENSO forecasts during the cropping period. Attitude towards risk In terms of attitude towards risk, a decisionmaker can be classified as risk-averse, risk-preferring, or risk-neutral. According to Fleisher (1990), a risk-averse decisionmaker will forego some possible gains to reduce the probability of losses, while a risk-preferring individual will select a strategy that offers some chance of high returns even if it faces the possibility of incurring low returns or losses. A risk-neutral decisionmaker will select a strategy that will maximize the expected value of the outcomes. 68 PhiliPPine Journal of DeveloPment 2009 Stochastic dominance analysis Several methods are available for risk analysis; among them are the expected utility model and the mean-variance analysis. The expected utility model selects the strategy that maximizes the expected utility of the random variable representing the outcome of the risky strategy or action. However, it requires complete specification of the decisionmaker’s utility function, which is a difficult task. The mean-variance analysis rests on the assumption of normality of the distribution of the outcomes (which few outcomes could satisfy) or a quadratic utility function, which is criticized for implying increasing absolute risk aversion beyond a certain level of wealth (Hanson and Ladd 1991). Stochastic dominance analysis is a nonparametric approach that makes comparisons among the cumulative probability distributions of the outcomes of the different strategies, under limited assumptions on the decisionmaker’s utility function. First-degree stochastic dominance assumes that the decisionmaker has a nondecreasing utility function (Hadar and Russel 1969) while second-degree stochastic dominance assumes a concave utility function (Hanoch and Levy 1969). The assumption of a nondecreasing utility function under FSD implies that the decisionmaker prefers “more” to “less,” while the assumption of a concave utility function implies that the decisionmaker is risk-averse. Thus, risk-efficient strategies in FSD sense will be preferred by those who prefer “more” to “less.” Risk-efficient strategies in SSD sense imply those that will be preferred by risk- averse decisionmakers. Another method, which has a more discriminating power than SSD is the stochastic dominance with respect to a function, proposed by Meyer (1977). The method introduces bounds on the absolute risk-aversion coefficient within an SSD analysis. In this sense, FSD can be considered a special case of SDWRF with bounds of –∞ and +∞. Similarly, SSD is a special case, with bounds, 0 and +∞. Values of the risk aversion coefficients (RAC) are typically categorized into low (0<RAC≤ 0.0001), moderate (0.0001<RAC≤ 0.001), and high (0.001<RAC≤ 0.01), as used in Lansigan et al. (1997) and Patindol (2001). Simulation of yield distributions One basic requirement in stochastic dominance analysis is the set of probability distributions of the outcomes of the different strategies. However, in general, no records of actual yields covering a reasonable length of time are available. Thus, the use of stochastic dominance analysis would not be possible. As a solution to this problem, simulation of the yield distributions covering
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