Managing Risk in Agriculture: A Holistic Approach

OECD, 2009

Content

• Assessment of the sources of risks (with risks differing across countries and types of production)
• Discussion of private and public risk management tools
• Overview of implementation of risk management tools in OECD countries

Findings

• Production and output price risks most relevant to farming (more than e.g. risks from input prices that are highly variable but less decisive for farm income).
• Price risks are higher for crops than for livestock, and higher for perishable crops (fresh fruits, vegetables) than for commodity crops, such as cotton, maize, wheat and soybeans.
• There is no clear trend in agricultural risks over last decades, nor clear evidence that climate change is increasing agricultural risks.
• Price risks are easier to pool (through futures, options or other contractual arrangements) than production risks. Factors that facilitate pooling of price risks include 1) less information assymmetry and 2) greater availability of economic actors whose risk is negatively correlated with that of farmers and who may thus enter into contracts.
• A natural price stabilization exists: lower prices lead to less production, which raises prices. Public price stabilization thus incurs extra costs as it partially replaces this natural mechanism.
• There is significant interaction between public and private risk management (e.g. insurance subsidies may increase farm specialization).
• Insurance markets tend not to work without subsidies (problems: missing information to calculate the correct premium, information assymmetry between insurer and farmer, correlation of risks across farmers, ex-post disaster relief by governments reducing demand). But this does not justify subsidies.
• A possible role of governments is to reduce ‘tail risks’ (extremely unlikely, extremely high obligations for insurers), e.g. by contracts with re-insurers. Subsidies may also be justified to cope with the risk from contagious animal diseases, so that farmers notify outbreaks early.
• Many countries have privileged tax averaging schemes for farmers (taxing at average rate of income over several years; special saving accounts that can be accessed in case of need, with money in these accounts taxed only once used).

Comment

• Farmers' income risk is readily used to justify government intervention. However, little has so far been done to analyze this risk in the EU (including farm and off-farm income) and to evaluate the effectiveness of public risk management. This study provides an overview of worldwide research on the issue, but much more EU-specific research will be needed before any EU-support for risk management can be considered desirable in the long run.