Ranking Wheat Producing Provinces from a Systematic Risk Perspective and Measuring Risk Compensation in Iran: A Capital Asset Pricing Model (CAPM)

Risk is considered as a negative factor in producing agricultural products. Yet, the presence of risk is not restraining producers from production as long as the generated revenue is proportional to the perceived risk and thereby, the cost of the risk is compensated. The purpose of this study is to measure systematic risk of wheat production in Iran's provinces, and evaluate how the risk is offset in these regions.

According to Markowitz, there is a tradeoff between risk and returns in considering alternative investment by rational investors. That is, investors expect higher returns for accepting higher risk in considering any investment. Capital Asset Pricing Model (CAPM) is an equilibrium model based on this theory which measures systematic risk of an investment (activity) and shows how an asset is priced according to its perceived risk. Thus, this model can be used to examine the systematic risk of producing wheat in different regions and the relationship between the risk of producing this crop and the expected price to generate appropriate returns to compensate the undertaken risk by producers. According to Sharp, by regressing the returns of an investment on the returns of market portfolio, the systematic risk factor for such investment is obtained. The risk factor which takes different values from zero to greater than one is a measure of systematic risk of an activity relative to the risk of overall portfolio. This risk factor is used to compute the returns required to compensate the risk associated to the activity.

Results reveal that Yazd province with 0.45 beta coefficient is the least risky province and Mazandaran province with 1.26 beta coefficient is the riskiest province for wheat production in Iran. In fact, based on the results, 20 percent of the wheat producing provinces are classified as high risk in production of this crop. Ardebil, Zanjan and Alborz provinces with systematic risk coefficient of 0.96, West Azerbaijan and Isfahan with systematic risk coefficient of 0.90 are grouped as risky ones. Gilan, Semnan and Hormozgan with systematic risk factor of 0.73 and Bushehr and North Khorasan provinces with systematic risk factor of 0.72 that have similar risk factor are classified as other risky zones. As the results indicate, with 15 percent risk-free rate on investment in the country, wheat producers expect a minimum return of 18 percent in producing wheat in Iran. On the other hand, if the risk-free rate of return on investment rises to 20 percent, wheat producers expect a minimal rate of 19.5 percent. Based on these calculations, prices of this product, and consequently the generated revenues, are in such a way that the returns offset the risk of wheat production in 14 provinces. From this point of view, wheat production in Kurdistan province has the best condition while the production of wheat in the southern province of Kerman shows the worst situation. In addition, results revealed that uncompensated risk in most of the provinces is the result of low yield per hectare and consequently, high average cost in these regions. Thus, focusing on improving productivity is suggested for the specified provinces.

According to the results, uncompensated risk in most of the provinces is the result of low level of yield per hectare and consequently, high level of average cost in these regions. Therefore, it is expected that in the long run, crops with higher yield will be replaced for the wheat and this crop will gradually be removed from the cultivation plan in such provinces. Since wheat is a strategic crop in Iran and to guarantee its production, improving productivity of this product is recommended for the specified provinces.