3. Resilience and the OECD Framework for Risk Management in Agriculture

The previous chapters explored the concept of resilience and how it relates to agriculture, and identified a range of policies, practices, and strategies that have been linked to improved resilience. Many of the resilience-enhancing measures identified in the literature review are also best practices for farm risk management generally (OECD, 2011[1]). In fact, there is increasing awareness that risk management is a natural entry point for the mainstreaming of resilience strategies (Howden et al., 2007[2]; Keating et al., 2014[3]; Braimoh et al., 2018[4]). Risk management strategies and techniques are powerful tools to enhance resilience, and resilience principles can also enrich traditional risk management approaches by integrating a long-term focus, prioritising improved risk managing capacities, and recognising policy trade-offs.

This chapter seeks to orient this work within the context of the OECD risk management framework as a way for countries to streamline resilience into their already-existing risk management programmes. To this end, the OECD risk management framework is briefly reviewed before describing how it can be adapted to inform resilience policy.

The OECD has found that an efficient and effective policy approach to risk management in agriculture will take into account the interactions and trade-offs between different risks, on-farm strategies and policies, and offer differentiated responses to different types of risk. Specifically, the OECD holistic framework for analysing risk management policies in agriculture – hereafter risk management framework – distinguishes normal business risks (to be borne and managed by farmers) from larger risks permitting efficient market solutions (such as insurance systems and futures markets) and catastrophic risks requiring public engagement (OECD, 2009[5]; OECD, 2011[1]).These ideas are represented in Figure 3.1. Given the frequency and magnitude of income losses of different risks, different policies or strategies are more appropriate for responding to each of three categories of risks. These optimal policies and strategies are indicated along the “good governance” diagonal.

The holistic framework for managing risk in agriculture recommends that specific risks be segmented into different layers in order to determine the optimal risk management strategy. However, if this approach is adopted in a way that does not consider trade-offs and interactions, then it risks both biasing decision-making toward the short-term, and also short-sightedly focusing on managing well-known risks at the expense of new risks and uncertainties: farmers and policy makers may consider only specific risks, and take measures that only consider the next occurrence of a given event. Moreover, interpreting the framework’s layers too rigidly risks creating the impression that farmers or government bear sole responsibility for managing risks within a given layer, when there may be complementary measures all agents can implement to reduce vulnerability and exposure to risk.

A number of factors suggest that the risk profile faced by farmers is shifting, which has implications for “good” risk governance. Farmers are operating in an increasingly uncertain environment. Despite having access to risk management tools and better information on risk profiles, the economic impact of disasters has continued on an upward trend, with high-impact events occurring more frequently (Bevere et al., 2018[6]; OECD, 2014[7]). Moreover, the frequency and intensity of extreme events is projected to increase under climate change scenarios (Hoegh-Guldberg et al., 2018[8]; OECD, 2014[9]). These circumstances can be represented by a shift in the distribution of the impacts of adverse events, with high impact events occurring more frequently, implying higher costs in terms of direct impacts to the sector, as well as the cascading effects of business interruption (Figure 3.2). If countries continue with a “business-as-usual” approach to risk management, a greater share of the risk management burden will likely shift on to governments.

The challenge lies in ensuring that risk management frameworks do not transfer responsibility for losses that should be managed by farmers (through on-farm strategies or market tools) to government. Instead, risk management frameworks should recognise the need to manage risks for the long-term. Farms must be able to cope with the next adverse event, but also the subsequent one, as well as concurrent shocks. At the same time, as has already been highlighted, the strategies that target improved resilience largely overlap with best practices for risk management purposes, suggesting not that the framework itself is inappropriate, but that the manner in which it is applied needs to be adjusted. The gaps in the framework as a tool for resilience analysis are reviewed below, before proposing a revised application of the framework that addresses these gaps.

Although the resilience literature review touched on many aspects that are relevant in the risk management context, some of the key conclusions were:

  • Taking ex ante measures against possible shocks over a long-term time frame is key to improved resilience.

  • There are trade-offs and interactions between the different risk management tools and policies that should be acknowledged.

  • Participatory processes involving a wide range of stakeholders are key to the development of new policy approaches and frameworks.

  • On-farm strategies, and the individual farmer’s overall capacity to manage risk, can play a critical role in reducing risk exposure to catastrophic events, particularly over the long-term.

  • Public goods and no-regret policies are integral to agricultural risk management.

  • The concept of general resilience emphasises a system’s ability to respond to any risk, which translates to a capacity to be flexible in the face of uncertainty.

These findings inform a gaps analysis of the current framework:

  • The framework could place greater emphasis on preventative or ex ante actions (such as risk mitigation efforts, risk assessment, and research on potential adaptation and transformation measures).

  • The framework should place a greater emphasis on potential trade-offs and how to assess them. This includes intertemporal trade-offs, for example, between current outcomes (reducing farm income variability via measures that reduce/mitigate risk) and future outcomes (resilient farmers with better – and more diversified – stocks of natural and physical capital, as well as greater financial reserves), and trade-offs between measures that help producers to manage risks (e.g. by reducing risk exposure) and policies to support a more resilient sector (e.g. facilitating normal structural change and adaptation to a changing climate).

  • The framework does not provide guidance for how stakeholders within countries can develop a common understanding to define the boundaries between the different risk layers.

  • The framework needs to be more explicit in outlining the potential role of government in facilitating risk reduction in all the layers, while simultaneously emphasising the necessity of increased farmer responsibility for risk management decision-making.

  • The current framework does not explicitly recognise the need to inform responses for unknown risks.

Thus, while the current framework is a valuable starting point for risk management policymaking and analysis, it is in need of a reorientation if it is to be used for purposes of improving resilience.

To address these gaps, a revised “Risk Management for Resilience” framework should include considerations for both the processes through which risk management policies and approaches are developed, and additions to the content of that framework that place more emphasis on the roles of both farmers and governments in preventing and mitigating risk, and in building the capacity to manage risk across all layers. Accordingly, five new dimensions for conceptualising risk management for resilience are proposed, comprised of three considerations for improved “Processes” and two “Content” additions to the responsibilities of stakeholders.

Although a given policy option may be effective in helping farmers to manage the next occurrence of a given adverse event, it may actually worsen their ability to cope with other kinds of shocks, or else it may not enhance their capacity to cope with repeated exposure to shocks. In order to make decisions that will position farms to respond under conditions of general uncertainty, the decision-making framework should be shifted toward ex ante thinking for the medium- or long-term. By making decisions for longer time horizons, actors are more likely to consider any “knock-on” effects from their immediate actions, and also take into account both the potential occurrence of events currently considered to be unlikely in the short-term and the possibility of successive or concurrent shocks. This shift implies a greater focus on prevention, including a serious consideration of the potential need to ex ante adapt or transform farming systems. At the farm level, this means reducing exposure to repeated events, diversifying income streams, developing human capital to be able to respond to any risk, planning for multiple possible future contingencies, and cultivating a talent for entrepreneurship to take advantage of the opportunities that future conditions may bring. At the policy level, this means making investments today that can withstand projected future conditions, taking a proactive approach to risk management by reducing exposure and vulnerability, and enacting supportive policies with a view toward the future of the sector.

Decision-making for the long-term requires a careful assessment of the costs, benefits, and trade-offs of any given policy or approach. This means that additional planning and ex ante efforts may be required – risk assessments (including about potential unknown risks) should be carried out periodically, risks should be communicated to stakeholders, actors should make contingency plans, and research into risk management strategies or tools should consider future, as well as current, risks.

Because resilience thinking focuses on managing risk for the medium- and long-term, each policy or decision clearly implies trade-offs in time, scale, target risk, and even outcome. With respect to time, certain approaches may be appropriate for the short-term, but actually reduce the long-term viability of farms or the sector as a whole (for example, as a consequence of common resource decline). Considering scale, certain initiatives may strengthen farm resilience, but not address vulnerabilities at other stages of the value chain, resulting in bottlenecks and negative feedbacks. For target risks, it may be the case that emphasising management of a particular risk may lock farms into a particular response path and limit their ability to respond flexibly to future, unforeseen risks. Looking at outcomes, governments face budgetary constraints that limit the amount of resources that can be spent on building resilience – is there better value for money in focusing on helping farms absorb risks, adapt to them, or transform their operations entirely? This focus on trade-offs is particularly relevant when stakeholders consider potential paths toward confronting the future – that is, whether to adapt or transform in response to future risks. A decision to continue down one path or the other will require a careful assessment of the costs involved, as well as the potential benefits or future opportunities that may arise, keeping in mind the possible need to make irreversible investments. In assessing these trade-offs, actors should consider that certain investments or policies may imply foregoing efficiencies or revenues in the short-run for the sake of improved outcomes in future time periods. An important challenge for government is to create the incentives to balance this trade-off, giving more weight to long-term resilience.

The decisions taken will depend on the context, and there are bound to be drawbacks and clear winners and losers regardless of the path chosen. The point is to acknowledge these trade-offs and then determine if the most resilience-enhancing policy is worth the costs at that point in time (and then to reassess in future iterations). Moreover, in cases where there are clear losers, it may be more cost-effective to consider compensating them rather than to continue in an undesirable state.

A key challenge for governments is to ensure that all stakeholders clearly understand and take responsibility for managing risks to their assets. The literature suggests that an iterative and participatory approach can help to achieve this outcome by allowing all actors to contribute to the process, assess available information, consider the likely consequences of certain actions, suggest possible alternative strategies and accept the outcomes of those decision-making processes. Under such an approach, policy makers, researchers, farmers, other industry leaders, and financiers would meet and analyse the probabilities and likely consequences of various adverse events. Potential mitigating responses could be analysed, and the costs and benefits would be communicated to all stakeholders. Risks and responses could be ranked and compared to find places where synergies might exist, or to demonstrate that certain responses are not cost-effective or are counter-productive in an environment of general uncertainty. This approach also helps stakeholders come to a common understanding of the risk environment and a collaborative definition of the boundaries between the different risk layers – the thresholds defining instances when governments will intervene should be clearly defined and communicated, and farmers can use this knowledge to better prepare their own risk responses. Furthermore, because the risk landscape shifts over time (and new information periodically becomes available), this process should be ongoing. With periodic re-assessments, actors will be able to analyse the effectiveness of past actions, make adjustments and head off actions that seem to lock in particular response paths, analyse new information on developing risks, share findings on new approaches to confront risks, and reallocate resources as needed.

The optimal risk response in the original framework is based on the probability distribution of income losses, with small but frequent risks dealt with at the farm level, rare and catastrophic events managed through public policies, and risks falling between these two layers covered by market tools. While this segmentation is still relevant for resilience objectives, it should not be interpreted too rigidly – different stakeholders can play a role in managing a given risk. In particular, farmers can take proactive actions to either avoid or mitigate both catastrophic and marketable risks. At the most basic level, there are certain strategies that have been shown to enhance resilience to all risks, such as income or crop diversification, improved contingency planning and increased savings or financial safety nets. Beyond these, however, there should be a greater emphasis on farmer entrepreneurship and human capital development. Farmers need to be able to access information, interpret it, and use it to make farm management decisions under risk and uncertainty. Similarly, farmers need technical, financial and management skills – to identify and integrate resilience-enhancing innovations into their operations, manage risk, and build their capacities to respond to and adapt to adverse events. Soft skills are also important – flexibility and entrepreneurial skills to try out new approaches and take advantage of opportunities to adapt and transform their operations in response to risk.

In order for farmers to build their resilience to risk, they need an enabling environment where they can access information and acquire the necessary capabilities and skills. Public investments in general services for the sector should build resilience and farmers’ capacities to absorb, adapt and transform in response to risk – and contribute to productivity and sustainability – under a wide range of future scenarios, including through research about risks and innovations in new technologies or risk management strategies, or extension and capacity building efforts. Governments can also help farmers make informed decisions about how to manage risk. For example, government-run early warning systems can help producers to make decisions based on the latest-available information, and ongoing research can give insights into optimal farm decisions for the medium- and long-term. Periodically updated risk assessments are particularly vital in this sphere, as the circumstances surrounding farming are not static, and new contingency plans, investment strategies, and research programmes will be needed as the risks inherent in a changing climate become better understood. Government-run web portals could play a role in facilitating farmer-to-farmer exchanges and acting as collection points for best practices, enabling both bottom-up and top-down knowledge dissemination. All of these policies must be underscored by an overall enabling environment – farmers need to be able to count on the provision of basic services and functioning markets as a foundation for their holistic risk management strategy.

Taken altogether, the “Risk Management for Resilience” framework encompasses the original risk management framework, but with these additional dimensions that: encourage stakeholders to take a long-term focus, recognise the trade-offs inherent in certain policy choices, emphasise a participative policymaking process, encourage farmers to build their resilience capacities, and highlight the role for “no-regret” policies.

Adding the content dimensions (on-farm resilience capacity and no-regret policies) to the three-layer framework gives a visual representation of how these ideas should be considered as all contributing to the risk management system (Figure 3.3). While the good governance actions are retained along the diagonal, the cross-cutting farm level and public good actions represented in the top and bottom rows indicate that these activities are relevant to effectively manage risk at all levels. By considering the role of these actions in conjunction with current risk management strategies under a process that considers time frame, trade-offs, and participatory approaches, a more resilient sector can be achieved.

Although the framework offered here represents an extension of existing approaches to risk management, implementing this approach may require substantial revisions in relevant policy frameworks. As countries move to make these adjustments, findings from previous OECD work on water policy reform and climate change mitigation and adaptation may provide useful insights.

First, policy makers and sector actors should introduce such reform initiatives when the confluence of exogenous conditions creates a unique window of opportunity, as timing has been found to be a critical factor in the success of previous reform efforts. These factors include the recent experience of a crisis or emergency (such as a flood or severe drought), a stable economy, a political environment conducive to the reform, and advances of past reform efforts (Gruère, Ashley and Cadilhon, 2018[10]).

Aside from taking advantage of a window of opportunity, previous reform efforts also highlighted the importance of three key elements underpinning success: (i) developing a knowledge base in anticipation of a window of opportunity for the reform, (ii) the need to set evidence-based goals while ensuring that any new policy can be adjusted as needed; and (iii) the importance of working with stakeholders and government officers to facilitate policy changes (Gruère and Le Boëdec, 2019[11]). In addition, effective reform processes were characterised by five essential conditions:

  • Support evidence-based problem definition, reform objective setting and impact evaluations; diagnose the current situation and the direction of change. In this case, the target objectives could include an evidence based risk assessment and a more cost-effective approach to disaster risk management with greater emphasis on prevention, or identifying actions needed to implement potential adaptations or transformations likely necessitated under future climate change scenarios.

  • Ensure that governance and institutions are aligned with the policy change; adapt the governance system and the institutions to ensure that they will be able to manage the policy change. This may encompass reviewing how long-term risks are considered in current risk management policy frameworks, how unknown risks are continuously updated in the risk assessment and considering how existing institutions may need to be better aligned to incorporate the management of trade-offs in the resilience approach.

  • Engage stakeholders strategically and build trust between local policy authorities and farmers, and to foster dialogue at key stages of the reform process. Governments could engage early with farmers to discuss the necessary evolution of polices in response to more diverse and increasing risks, and arrive at a common understanding of the sets of risks and the risk management responsibilities and thresholds for intervention.

  • Rebalance economic incentives to enable policy change. This would include possible compensation mechanisms to cope with short-term economic losses resulting from policy changes, while balancing efficiency and distributional concerns. Due to parabolic discounting in particular, farmers may need some encouragement to adopt a longer-term perspective. In addition, greater emphasis on ex ante risk management approaches may require further consideration of distribution challenges.

  • Define an adjustable smart reform sequencing. This could combine, for instance, a long-term performance objective, flexible implementation options for the reform at local levels, and credible sanctions. In this case, a transition period could be offered with flexibility for farmers, allow a progressive shift towards the revised set of instruments.

Early on in the policy reform process, it may also be necessary for policy makers to devote some additional efforts to identifying and removing or accounting for existing barriers to adopting resilience-enhancing management practices at the farm-level. These barriers could relate to a lack of access to information or low levels of awareness, actual or perceived effects of new practices on performance, cost of adoption, local practices or production context (such as land tenure arrangements where the primary operator does not own the land in question and as such has little incentive to make investments to improve the operation’s long-term resilience), or to existing policies or regulations that may be working at cross purposes (Wreford, Ignaciuk and Gruère, 2017[12]). Producer age, income, and education level may also constrain willingness or capacity to make resilience-enhancing investments or adjust farm management practices.

Finally, in combination with refocusing the dialogue and reforming the policy environment, a crucial component of improving resilience is the adjustment of planning and management practices at the farm level. Consequently, adjustments in policy frameworks will likely need to include efforts to shift farm-level decision-making toward a resilience approach. Behavioural economics offers several insights that can aid policy makers and sector actors in facilitating this transition at the farm level (Box 3.1).

This chapter has revisited the OECD holistic framework for risk management in agriculture and offered a proposal for how it can be refined to better mainstream resilience objectives into existing risk management policy frameworks. This “resilience lens” includes a prescribed approach for analysing, considering and managing risk (process dimensions), and also highlights the importance of complementary strategies and measures on-farm and in the public sector (content dimensions) in reducing the impact of adverse events across all layers. Specifically, this resilience approach to agricultural risk management requires public and private actors to consider the risk landscape over the long term, and to place a greater emphasis on what can be done ex ante to reduce risk exposure and increase preparedness. It highlights the trade-offs inherent in agricultural risk management, including between the interests of different stakeholders and between different measures to manage risk, such as investing in risk prevention and mitigation ex ante and providing ex post disaster assistance. It recommends that governments adopt participatory approaches to define disaster risk frameworks and ensure that all stakeholders are aware of risks and understand their responsibilities for managing risk. It also identifies a role for no-regret (or win-win) policies and appropriate investments in public goods that build the capacities of farmers to manage current risks, as well as to adapt and transform in response to uncertainty and a changing risk environment in the future. Finally, it argues that farmers need to invest in their own capacities to manage risk – for example, entrepreneurship and human capital, and on-farm strategies such as diversifying production and income sources, and savings – to increase their resilience to all types of risks, including catastrophic events. Considerations for adjusting existing policy frameworks and securing buy-in from producers were then provided.

Practical examples of how these ideas are already being mainstreamed into existing risk management policy frameworks follow in Part II.

References

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[7] OECD (2014), Boosting Resilience through Innovative Risk Governance, OECD Reviews of Risk Management Policies, OECD Publishing, Paris, http://dx.doi.org/10.1787/9789264209114-en.

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