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Risk Mitigation in Agriculture: Are we asking the right questions?

Risk Mitigation in Agriculture: Are we asking the right questions?. Sarthak Gaurav, Ph.D. Scholar, IGIDR ‘Risk Mitigation in Agriculture’ 11 th Aug, 2009, Ahmedabad. Returns from Farm and Off-farm Activity 2002-03.

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Risk Mitigation in Agriculture: Are we asking the right questions?

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  1. Risk Mitigation in Agriculture: Are we asking the right questions? Sarthak Gaurav, Ph.D. Scholar, IGIDR ‘Risk Mitigation in Agriculture’ 11th Aug, 2009, Ahmedabad

  2. Returns from Farm and Off-farm Activity 2002-03 Source: Calculated from unit level data NSS, 59th Round, Situation Assessment Survey of Farmers

  3. Monthly Per Capita Income and Consumption by Size-Class of Holding: Cash-Flow Crisis

  4. Agrarian Crisis • Deceleration in production and productivity • Waning profitability and poor returns • Limited off-farm opportunities • Marginalization of land holdings • Decline of public investment in irrigation and other infrastructure • Indebtedness to informal credit sources • Failure of research and extension

  5. Agenda • Do agricultural risks affect the risk averse farmers’ and farm households’ resource allocation & welfare? • Are the effects of risk and its management strategies heterogeneous? • Impact on decision making and behaviour? • Is variability of yield and prices a significant source of income risk ?

  6. Green Revolution Blues • Crop production became more sensitive to weather (rainfall) and price changes since mid 60s • > 90% of increase in production variance at national level due to changes in inter-district production covariance (Walker 1989) • Area shifts to HYVs led allocation of ‘riskier and inferior’ land to other riskier crops where CV is high (also population pressure)

  7. Growth and Instability HYV/fertilizer/modern purchased input intensive farming • Higher income risk for the farmer: • Increase in Yield Variance (high CV) • Increase in Covariance of yields of different crops and regions • Decrease in area-yield correlation

  8. People Respond to Incentives..Do Farmers? • Weaker supply response in last 50 years • Non-price factors dominate over price factors • Rabi crops respond better to P increases than Kharif • Adjustments by varying non-land inputs • Acreage shifts from food grains to non-food grains • High Regional Variations in Irrigation and Yield

  9. Yield Risk- Price Risk Affair Stage 1: farmers allocate land based on Pe Stage 2: yield is determined on basis of other inputs, agro-climatic variables, bio-physical factors and farmer characteristics, given acreage • Yield depends on Price (inputs and output) • Negative Correlation b/w Yield and Price makes reduction in revenue variance difficult

  10. Yield Risk, Price Risk and Income in ICRISAT Villages (1975/76-1983/84) Source: Anderson and Hazell 1989

  11. Evidence on Yield Risk • Yield Variability > Price Variability by 4 • Yield Variability Main Reason for Income Instability • In 49 out of 59 un-irrigated districts yield variation exceeds price variation (1956-1974 data) Walker and Ryan (1990) • Credit Market Imperfections interact with land and labour market imperfections

  12. True Welfare Effects • Impact on Consumption (direct and indirect) • Non-separability of production and consumption decisions • Different impact on different categories of rural households- landless agricultural labourers and deficit farmers are worst off

  13. The Risk Averse Homo economicus • Low income farmers are Risk Averse • This leads to inefficiency of resource use (MVP> Factor Price); sub-optimal decisions • Cropping Patterns to safeguard family security. Forget Profits; safety-expected profit tradeoff • Reduction of input levels (risky output, certain Input costs) • Laggards, Delays in Innovation and Adoption of New Tech

  14. Measuring Risk Attitudes • Risk Aversion (Moscardi and de Janvry 1977, Dillon and Scandizzo 1978, Rosenzweig and Binswanger1993, Townsend 1994, Morduch 1995, …) • Direct Elicitation Methods/Experimental Gambling (Binswanger 1980,…);Disaster Avoidance (Roumasset 1976) • How close to real farming & real losses? • Do we factor in the constraints & interlinks?

  15. Contingent Markets are Imperfect: Public Policy? • traditional Informal mechanisms fail in case of covariate shocks and disastrous losses • impose costs in terms of equity and sustainability • natural disasters/cats may trigger involuntary defaults

  16. Innovations can add to the Risk! • increased input costs might depress net farm income • ‘worst-case’ gross output might go up, while ‘worst-case’ net farm income falls vis-à-vis traditional scenario e.g. Bt Cotton Seeds • profitability, land tenure and info asymmetry matters • changing technology and market conditions can add to uncertainties in product & factor markets

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