Factors Compared Between Each Cluster

Age is a demographic characteristic that is expected to affect a producer’s attitude toward risk and insurance. Smith and Baquet hypothesized that producers who are older are usually more risk averse, and may be more likely to purchase livestock revenue insurance.

However, age was found to be insignificant in their study. On the other hand, Black and Dorfman found that older producers were less likely to purchase insurance. Older producers typically have lower levels of debt (more wealth) and, consequently, are more able to self-insure against losses in their beef cattle operations. Since there is likely to be a high correlation between age, risk attitude, and wealth, different combinations of these factors will be observed.

If the impact of age on a producers’ preference is positive, then risk attitude may also play an important role. On the other hand, if the impact on preference for a product is negative, then wealth may be more important. Older producers are expected to choose products with lower premiums since their level of wealth will usually allow them to absorb a portion of the risk of beef cattle price fluctuations. Older farmers are expected to prefer insurance products that are marketed in person or by telephone to Internet marketing.

Education level can also impact preferences because producers who are more educated often have better management skills. Producers with higher levels of education are expected to have a better understanding of the products, and they are also expected to be more willing to adopt new technology. On the other hand, producers who are more educated are likely to have off-farm employment, which may have a negative impact on preferences (Black and Dorfman).

Smith and Baquet found a positive relationship between the choice of insurance coverage and education level. Producers are categorized based upon whether they have less than a high school education, a high school diploma, some college or technical school, a four-year degree, or a graduate degree. Producers who are more educated are expected to prefer paying lower premium levels since they commonly have off-farm employment, which provides the ability to absorb a portion of the risk associated with price declines. More educated producers are expected to prefer either telephone or Internet method of marketing to in person because these methods are more convenient for individuals who have off-farm employment. They are also expected to be more comfortable using computers and the Internet.

Farming experience refers to the number of years a producer has been operating a farm. The impact that this factor may have on preferences for a product may also be positive or negative. Producers who have more farming experience can be considered to have better management skills than producers with less experience. In this case, more experienced producers are more likely to purchase an insurance policy. In addition, farming experience and age are positively correlated. This suggests that producers with more farming experience may be interested in insurance because of their greater aversion to risk. Producers with more farming experience may be willing to pay higher premiums in order to increase coverage.

Herd size is expected to have a positive relationship with participation in livestock revenue insurance. Producers with large herds usually depend more on the income that comes from livestock than producers with small herds. For this reason, they may prefer to purchase insurance products that give them the maximum protection. Also, herd size may impact decisions by influencing the transaction costs per head of insured cattle. If fixed costs are associated with insuring, then costs per head will be lower for farms with larger herds (Smith

and Baquet). Smaller producers may not consider the time and information required to purchase a product worthwhile. Producers with larger herds are expected to prefer paying higher premiums to guarantee the maximum possible price for their calves. Producers with larger herds are able to use livestock revenue insurance to cover a portion of their herd, while utilizing other strategies for the remainder of the herd. Producers with larger herds are expected to show a preference for products that are marketed through the Internet, so that the time required for purchasing a policy may be further reduced.

Purebred producers often react differently to market changes than commercial producers because they usually receive a premium for selling breeding stock. Purebred producers are expected to be less likely to purchase insurance. These producers may prefer policies with shorter lengths so that they have the time to observe calves and determine if they can be sold as breeding stock.

Debt-to-asset ratio is expected to have an impact on producers’ purchase decisions and preferred level of coverage. Producers with higher debt-to-asset ratios are more likely to purchase insurance to reduce the risk of loss. On the other hand, producers with little or no debt are commonly able to self-insure against losses. Producers with higher levels of debt will purchase a policy with a premium and deductible that at least covers their necessary break-even income. Several studies (Black and Dorfman, Smith and Baquet, and Pennings and Leuthold) have found a positive relationship between debt-to-asset ratios and selection of various risk reducing strategies. These producers may select lower premiums if the guarantee is enough to ensure that the debt can be paid. Producers with higher debt-to-asset ratios may prefer policies with longer lengths so that revenue can be guaranteed far in advance.

The primary source of income for a producer influences his or her demand for insurance as well as the type of policy preferred. Producers who receive the majority of their income from farming are expected to purchase insurance more frequently. This reduces income variability over time. Producers with other sources of income are not affected as much by fluctuations in cattle prices. They are able to take on more risk. Producers who depend mostly on income from farming are likely to prefer higher premiums so that they can insure the maximum price for their calves.

A producer’s risk attitude is measured by his self-characterization. Producers were asked to characterize their risk attitude relative to other investors. They were given the following three choices: a) I tend to take on substantial risk in my investment decisions (risk prone), b) I neither seek nor avoid risk in my investment decisions (risk neutral), or c) I tend to avoid risk when possible in my investment decisions (risk averse). Producers who characterize themselves as risk averse are expected to be more likely to purchase insurance. Risk averse producers are willing to trade a higher level of expected returns for a reduction in risk.

Therefore, they are expected to pay higher premiums so that they are fully protected in the event of a major price decline. Risk attitude is also expected to be correlated with age. As age increases, the aversion to risk may also increase. Producers who are very risk averse will also prefer a longer policy length so that income is less variable over time.

Marketing strategies may have either a positive or negative impact on a producers’

preference for a product. Producers who primarily utilize auction markets to sell their cattle are expected to be more likely to purchase insurance. These producers can use insurance to stabilize income from livestock. Producers with smaller herds usually use auction barns to market a large portion of their calves. Smaller producers may prefer a policy with a lower

premium in order to guarantee a moderate level of income. Producers who currently use other marketing strategies such as video auctions, private buyers, or select sales may be less likely to purchase insurance. These producers already receive prices above the cash market price.

However, some may see livestock insurance as a means of diversifying strategies. Producers who utilize forward pricing are likely to purchase insurance on a portion of their herd. These producers may prefer shorter policy lengths since they are able to stabilize income with other strategies.

Enterprise diversification involves producing more than one enterprise so that the risk of loss is reduced. Producers with multiple enterprises are less likely to purchase insurance because they are, on average, exposed to less risk. Producers with several enterprises usually depend less on their income from livestock. These producers are likely to purchase a product with a lower premium so that they can be protected from drastic price changes.