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ARS Home » Plains Area » Mandan, North Dakota » Northern Great Plains Research Laboratory » Research » Publications at this Location » Publication #349596

Title: Estimating economic efficiency under risk for agricultural cooperatives

item Pokharel, Krishna
item FEATHERSTONE, ALLEN - Kansas State University
item Archer, David

Submitted to: Southern Agricultural Economics Association Annual Meetings
Publication Type: Proceedings
Publication Acceptance Date: 1/17/2018
Publication Date: 1/17/2018
Citation: Pokharel, K.P., Featherstone, A.M., Archer, D.W. 2018. Estimating economic efficiency under risk for agricultural cooperatives. Proceedings of the Southern Agricultural Economics Association Annual Meeting, February 2-6, 2018, Jacksonville, FL.

Interpretive Summary: Agricultural cooperatives have faced challenges in recent years due to fluctuations in commodity prices, increased competition, and consolidations. Price fluctuations and uncertain market conditions introduce risk to these cooperatives. Since agricultural cooperatives are more concerned about potential losses than gains, downside risk is an appropriate measure of risk. Accounting for downside risk, the costs and revenue efficiencies for Agricultural cooperatives in the United States were estimated. Including downside risk increased cost and revenue efficiencies. This is important to managers of agricultural cooperatives in identifying ways to improve performance.

Technical Abstract: This study examined the impact of downside risk on cost efficiency (CE) and revenue efficiency (RE) for a sample of agricultural cooperatives. Downside risk is an appropriate measure of risk as it accounts for loss below the target return level regardless of individuals’ risk preference. The semi-variance of return on equity was used a measure of downside risk. CE and RE were estimated using data envelopment analysis (DEA) with traditional inputs and outputs and then re-estimated adjusting for downside risk. The average CE and RE scores were higher with the inclusion of downside risk than the scores with only traditional inputs and outputs. The DEA method without accounting for risk overestimates inefficiency and may misguide managers to improve performance.