Jesús Antón, OECD Trade and Agriculture

1. Risk Management in Agriculture: Assessing household level risk, Policy layering and analytical challenges Jesús Antón, OECD Trade and Agriculture Annual Workshop of ERCA Research Network on SPAA. Ottawa 25 November 2011

2. 1. OECD Work on Risk Management in Agriculture Synthesis Report (April 2011) Thematic Review: country studies Australia, New Zealand, Spain, Canada and Netherlands • OECD Workshop on Risk Management in Agriculture (November 2010) • Farm level data analysis: • Risk exposure & Optimal Strategies Aggregate Model Analysis of Exogenous Risk : AGLINK/COSIMO application

3. Outline • Why using Household level data... • ...for risk assessment? • ...and modelling response? • Risk layering and good policy • Analytical challenges

4. Why Using farm household level data for risk analysis?

5. Aggregate ≠ Individual risk Most farmers are exposed to higher yield risk than the aggregate level Percentage of farms exposed to higher yield variability than aggregate mean *Wheat for UK, Estonia, Australia and Canada Barley for Italy and Spain Yield risk is higher than price risk… but not in all countries Percentage of farms exposed to higher yield variability than price variability

6. Key role of interactions on Risk Assessment Full attention to the interactions between risks, strategies and policies • Correlations, diversification, government’s programmes

7. Endogenous pro-active risk management strategies: Interesting results from Stochastic simulation model Representative farmer maximize his expected utility of profits degree of CRRA initial wealth uncertain output price of crop i uncertain yield of crop i cost adjustment factor for crop i uncertain variable cost revenue from livestock operation (applicable for only Australia) area of land allocated to crop i transfer from government or benefit from risk market strategy level of coverage decided by farmer Farmer’s welfare is computed as certainty equivalent of profit

8. a) Are Minimum Intervention prices effective? • Reduce risk rather than Manage risk • Only effective for very low Intervention prices • Beyond certain level, it increases variability: • Less on-farm diversification • less price-yield correlation => less natural hedging

9. b) Support to Insurance • Start-up support • Information databases and sharing arrangements • Public-private partnership • Hard to increase demand • Insurance subsidies • Reduce diversification • Differentiate catastrophic and marketable policies • Hard to deter ex post assistance

10. c) Crowding out of BRM policies Impacts of some BRM programs in a sample of Saskatchewan farms

11. d) AgriStability by tier

12. Improving AgriStability • Simplify the delivery mechanism: • Eliminate the margin adjustments • Link payment directly to income tax declaration • Declaring tax in accrual basis, like other businesses • Make an in-depth evaluation of the effectiveness and targeting • Use available databases • Consider the following changes in policy: • Eliminate stabilization tier 2 and tier 4 • Refocus on Tier 3, addressing the overlap with insurance • Increase participation fee and calculate actuarial premiums

13. e) Crowding-out effects • Government compensation for non-catastrophic risks off-sets pro-active risk management strategies: • Diversification: the main strategy • Market instruments • Contracts / integration • Futures: farmers benefit • Private insurance: asymmetric information • Strongest crowding out from policies that address normal business risk: • Price support, income stabilization, CCP • Weakest crowding out: Fixed highly decoupled payments

14. Risk Layering and good policy

15. Governance of Catastrophic Risk • OECD Governments will always be called on to provide disaster assistance • Political pressure • Be prepared with some ex ante framework • Procedures • Delineation of responsibilities • Triggering criteria • Types or levels of assistance • Examples: • New Zealand • Crop insurance as a disaster assistance device • Farmers pay, transparent trigger, stable budget • Refrain from non-catastrophes, deter ex post assistance and efficient administration

16. Good policy response More government involvement? • On-farm strategy • Diversification • Saving Good Governance Probability • Market tools • Forward contract • Private insurance Disaster Assistance Policies - Ex-ante/ Ex-post payment - Subsidized insurance Higher income loss

17. ...to RM Policy Overcrowding in Canada... Public Insurance (AgriInsurance) Wheat Board Tier 1: Saving acc. AgriInvest AgriStability countercyclical payment Tier 4 Tier 3 Tier 2 Negative margin 30-100% loss 15-30% loss AgriRecovery Ad Hoc disaster Aid

18. ...plus supply management... Supply Management Arrangements (dairy, eggs and poultry) Tier 1: Saving acc. AgriInvest AgriRecovery Ad Hoc disaster Aid

19. Main Policy Messages for Canada • Improve the definition of the boundaries between programs and layers of risk: enhance farmer’s pro-active strategies • Improve the delivery and target of AgriStability: not effective for normal nor catastrophic risk • Develop an ex ante framework for catastrophic risk covering AgriInsurance, AgriRecovery... and avoiding proliferation of ad hoc

20. Analytical Challenges and Areas for research on Risk • Use of micro panel data: • For farm risk assessment and inform the government and the farmer • For simulation models to better understand the interactions between policies and strategies • For estimating the value of risk for farmers (Why governments tend to overestimate?) and the marginal impact of policies / strategies • Economics of governance and institutions • How to make good information prominent? • Risks with externalities and co-funding • Boundaries and how to make most efficient institutions emerge?

21. OECD Trade and Agriculture THANK YOU! www.oecd.org/agriculture/policies/risk Contact jesus.anton@oecd.org