The cost of agricultural production risk
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We examine the relative influence of preferences and technology on producers' ex ante willingness to pay for a
reduction in production risk. A risk averse producer pays both an Arrow-Pratt risk premium to stabilize income and
a 'production premium' to stabilize yield. Using soil-nitrate risks as our motivating example, we demonstrate that the
production premium accounts for 40-85% of producers' willingness to pay for risk reduction. These results
demonstrate the relative importance of technology over risk preferences when estimating the costs of agricultural
production risk.