Managing Risk in Agriculture

Managing Risk in Agriculture

Policy Assessment and Design You do not have access to this content

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Author(s):
OECD
Publication Date :
30 June 2011
Pages :
256
ISBN :
9789264116146 (PDF) ; 9789264116092 (print)
DOI :
10.1787/9789264116146-en

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This book examines the implications of risk management for policy in agriculture.  Opening with a chapter on risk management principles and guidelines for policy design in agriculture, the book goes on to look at quantitative analysis of risk and then at policy in various countries.

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    Foreword
    The agricultural policy reform process in many OECD countries seeks to implement less distorting forms of support while improving farm incomes. These reforms have increased the exposure of farmers to price risks, particularly where price support has been reduced. At the same time, food security and adapting to climate change are increasingly important priorities for policy makers around the world. These and other factors indicate the growing awareness of the need for agricultural risk management. Several countries are thus implementing programmes to manage risk. These programmes include financial contributions to risk market instruments (e.g. insurance and future contracts), payments that partly cover the producers’ risks (e.g. revenue insurance programme, counter-cyclical payments, ad hoc assistance), and, in some cases, market interventions. The United States’ 2008 Farm Bill included a new average Crop Revenue Election (ACRE) programme; Canada’s Growing Forward policy framework has four components on business risk management; Australia is currently revising its drought policy; Mexico has expanded its programmes on price hedging in recent years, the European Union’s Health Check opened the possibility of using EU funds to support some risk management policies (crop insurance and mutual funds), and a new EU risk management toolkit is under discussion. India and, more recently, China are implementing crop insurance programmes with government support. Interactions between risks, strategies and government programmes need rigorous analysis, to which this publication hopes to contribute.
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    Risk management principles and guidelines for policy design in agriculture
    The design of policies for risk management in agriculture raises multiple challenges from generating good information on types of risks and tools available to deal with these, to creating incentives to encourage farmers to adopt a pro-active risk management strategy. The design of the institutional framework for the governance of catastrophic risks is crucial to delineate the boundaries of responsibility between farmers, government and other stakeholders. Based on experiences in several OECD countries and analytical work, this chapter provides a set of principles and guidelines for good policy design.
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    A policy framework for risk management in agriculture
    The holistic framework for risk management analysis focuses on the interactions and trade-offs between different risks, policies and strategies. It also structures the analysis around three layers of risk that deserve a differentiated policy response: normal, insurable and catastrophic risks. Following this approach, this chapter synthesises several pieces of analytical work and policy experiences from OECD and is organised around four principal ideas: empowering farmers to manage normal risks, enhancing the functioning of risk markets, steering disaster assistance, and disentangling income support from income stabilisation.
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  • Expand / Collapse Hide / Show all Abstracts Quantitative analysis of risks and strategies

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      Risk exposure at the farm level
      Risk assessment is a necessary first step to develop a good risk management strategy. It is important that this assessment be made at the relevant risk and management levels. In the case of agriculture, this implies the assessment of risks at farm level. This chapter uses valuable farm-level data to analyse the risk exposure of individual farms in nine countries. The data reveal that many farmers benefit from some correlations to manage their risk, including natural hedging between prices and yields, and simultaneous changes in output and input prices. Imperfect correlations between prices and yields of different commodities allow farmers to diversify their portfolio of activities and to use this diversification as a risk management strategy.
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      Risk management strategies and policies at the farm level
      The net impact of government policies will depend on the adjustment by farmers of their risk management strategies. This chapter uses a microeconomic model to simulate responses by farmers to different risk-related policies: intervention prices, a fixed more decoupled payment, such as the Single Farm Scheme in the European Union, and a payment triggered under exceptional circumstances. It is found that the responses of farmers have strong implications on the ability of different policy instruments to reduce farming risk and increase their well-being. Crowding-out effects on diversification and other strategies may offset initial reductions in income variability.
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      Exogenous risk and price variability
      Price variability is mainly the result of developments in the commodity markets in responding to supply and demand forces and market adjustment processes. Although farmers cannot influence this type of risk, they need to manage it. This chapter analyses how different exogenous factors, such as yields, the price of oil or some macroeconomic variables, can generate price volatility. Monte Carlo simulations, using the AGLINKCOSIMO model, show that although the exogenous factors considered in the model are not responsible for all potentially observed price variability, they can contribute to an important share of it. High volatility can occur exceptionally due to exogenous shocks if they happen in specific patterns.
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  • Expand / Collapse Hide / Show all Abstracts Policy assessment

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      Managing droughts and bio-security in Australia
      Drought is the main focus of risk management policy in Australia, a risk that could increase due to climate change. This chapter assesses the objectives and instruments of Australia’s national drought policy framework using the OECD holistic approach which considers interactions between all sources of risk, farmers, strategies and policies. The Australian public-private partnership approach to bio-security is also analysed. This policy analysis is part of a larger report structured around three layers of risk – normal, market and catastrophic – that require differentiated policy responses.
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      Comprehensive business risk management policies in Canada
      Defining the boundaries between the different layers of risk (normal, market and catastrophic) is a major policy challenge analysed in this chapter. In Canada, the risk management system is overcrowded with policies and there is a lack of clarity concerning which risks fall under the management responsibility of farmers. Government policies include AgriInvest, AgriInsurance, AgriStability, AgriRecovery and ad hoc measures. The analysis of AgriStability in particular provides insights on the economics of agricultural income stabilisation policies. This policy analysis is part of a larger report structured around three layers of risk – normal, market and catastrophic – that require differentiated policy responses.
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      Towards ex ante policies for catastrophic risks in the Netherlands
      The main risk-related policies in the Netherlands are implemented within the EU Common Agricultural Policy. Dutch policies focus on the management of catastrophic risks by promoting public-private partnerships, such as Livestock Veterinary Fund, to manage the costs of livestock epidemics. Mutual insurance companies that specialise in the coverage of specific types of risks are also encouraged and, recently, a subsidised multi-peril yield insurance was launched in the context of the new Health Check framework. This policy analysis is part of a larger report structured around three layers of risk – normal, market and catastrophic – that require differentiated policy responses.
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      The adverse events framework and collective action in New Zealand
      Agriculture in New Zealand has operated with no policy interventions on the markets and only limited government support. Risk management policy has focused on the prevention of pest and disease incursions. Assistance related to natural catastrophes is delivered within the Adverse Events Framework programme, while the government contributes to knowledge and information systems to support private risk management efforts. This policy analysis is part of a larger report structured around three layers of risk – normal, market and catastrophic – that require differentiated policy responses.
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      The public-private insurance system in Spain
      The main risk-related policies in Spain are implemented within the EU Common Agricultural Policy. The Spanish risk management system is dominated by public insurance and two main policy issues: the contribution of the public/private insurance partnership and their information sharing arrangement to improve market efficiency; and the role of the insurance system as a device for catastrophic assistance. This policy analysis is part of a larger report structured around three layers of risk – normal, market and catastrophic – that require differentiated policy responses.
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