Céline Giner and Shingo Kimura OECD Trade and Agriculture Directorate

1. Relative Importance of Different Sources of Risks and their Interactions Céline Giner and Shingo Kimura OECD Trade and Agriculture Directorate Risk Management in Agriculture: Towards Effective Policies 22 November 2010 – OECD Conference Centre

2. Sources of Risk in Agriculture • What are the sources of risk at the individual farm level? Are individual farmers benefiting from a diversified portfolio of risks? • To what extent do exogenous shocks explain the historically observed market price volatility? What can be explained by other factors such as endogenous risk from markets?

3. Two Methodological Approaches

4. Individual Farm Risk: Does it come from weather or markets? 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

5. Farmers May Benefit from Correlations Price and yield move often in opposite direction Percentage of farms with negative price and yield correlation Farmers can diversify their portfolio of commodities and activities Average coefficient of correlation between wheat and barley risks across farms

6. Variance of Income is Reduced Thanks to Correlations and Diversification

7. Systemic Nature of Risks Price risk is correlated across farms through the markets Yield risk can be systemic in some countries Average coefficient of correlation of wheat yield and price across farms

8. Prices and Yields are Linked through Markets Yield shocks: main contributor to price volatility Simulated median variability with AGLINK-COSIMO %

9. Exogenous Shocks can Explain a Significant Shareof Observed Price Variability World Maize Price

10. High Levels of Volatility can be the Result of Coincidence of Several Exogenous Circumstances

11. Conclusions • A significant share of historical price volatility can be explained by exogenous shocks • Prices may also vary due to endogenous market adjustments, but simulated variability is consistent with historical variability • Coincidence of crude oil and weather shocks have potential to generate episodes of high volatility • Holistic approach needed: • Yield and costs risk is as important as commodity price risk to determine farm level income risk • The portfolio of many farmers benefit from: • Natural hedging because prices are high when yields are low • Diversification of returns from different commodities / assets

12. OECD Trade and Agriculture Directorate Thank you! www.oecd.org/agriculture/policies/risk Contacts celine.giner@oecd.org shingo.kimura@oecd.org jesus.anton@oecd.org