Complexity, uncertainty and risk: Agriculture

1. Complexity, uncertainty and risk: Agriculture John Mumford Centre for Environmental Policy, Imperial College London 22 January 2007

2. Overview • Agriculture is an extensive industry • 2.6 billion people • Risks relate to production and price • Weather, pests, markets • Long-term and short-term factors • Natural events and human interventions • Continuous risks • Pest induced losses • Single event risks • Quarantine failure

3. Scale of introduced pests • US losses estimated at $137 billion/yr • 50,000 species since Columbus • Major new pests continue to arrive • Particularly pests of the natural environment • Response to risk can be expensive • ISPM15 costs around $2 bn/yr

4. Asian longhorned beetle • Pallets and wood packaging from China since 1996 • Potential N American losses over $100 bn/year • Wide impacts: Amenity trees, timber, tourism, maple syrup • $75mn eradication in US completed in 2005 • Now followed by Emerald ash borer

5. Pallets and packaging • Wooden pallets - Asian longhorn beetle • Heat treated at $1 for each pallet; certification • Only 2-3% were treated previously • Approximately 2 billion new pallets/yr for international routes • Reliable monitoring and enforcement? US – 005 HT

6. Emerald ash borer is current news in the US! (Sep 2006) Chicago Tribune 16 Sep 2006 Front page Trees doomed in bid to stop pest ….chewing up more than 2,800 ash trees around the spot where the emerald ash borer first was found in Illinois. ….nearly double the total number of trees taken out by the Asian longhorned beetle, another imported pest that ravaged the North Side of Chicago in the late 1990s. ….next on Evanston, Wilmette and Winnetka, cutting into the leafy canopy of three other areas where the ravenous ash borer has turned up since June. ….again and again across Illinois, home to more than 130 million ash trees.

7. Emerald ash borer, from 2002

8. New pest records in Europe First records of new arthropods (left) and plant diseases (right) in Europe by decade. Smith, 1997

9. Inflection due to action? ? ? First records of new arthropods (left) and plant diseases (right) in Europe by decade from 1900. Smith, 1997

10. Quantifying the risk • Interceptions reflect post-intervention risk • Sample of what gets through control • ~25,000 interceptions/year in US • Majority in baggage (~6% has something) • Cargo, ~1 interception per $3mn worth • 4% of postal parcels • 1 in 400 air passengers fined in NZ • How is the catch/effort changing? • How to measure effort? • How to interpret catch?

11. Baggage interceptions > cargo in US 250-300 more interceptions/year on both cargo and baggage

12. US imports ($mn) fruits/vegetables FAOStat

13. Variable inspection efficiency 30, then 27 inspectors 36 inspectors USDA

14. Insurance in agriculture • Risk assessment • Catalogue risk factors and distribution • Loss assessment • Loss and responsibility post facto • Moral hazard • Define compliance and enforcement • Compensatory factors • Allowance for natural variation in risk factors • Attribution • Free riders, and share of risks amongst stakeholders

15. Israel Citrus Marketing Board • Centralised control for fruit flies • Levy on growers for expected cost • Board insures with private insurer • Covers any extra cost of additional control • Pays compensation for control failures • Levy and insurance rates adjusted • Insurance acts as a short-term overdraft • Annual term

16. US All-risk farm insurance • Proposed by Franklin in 1788 • Multiperil (hail, drought, pest risks) since 1930s • Government agency (USDA Risk Management Agency – www.rma.usda.gov) • Private insurers act as agents for government backed crop insurance • 1.2 million policies in operation; 10,000+ loss adjusters • Good actuarial data for risk assessment, annual review • Well prescribed mitigation practices

17. Crop indemnity USDA RMA

18. Crop indemnity USDA RMA Drought Drought Hurricanes Hurricanes

19. US All-risk farm insurance • Loss assessment set against discounted recent average yields (for example, ~90% of past 3 years) • Loss set against average for region or farm, group risk cover is less uncertain and cheaper • Compulsory or voluntary, may depend on externalities • Government, grower cooperatives, private insurers

20. Crop insurance basis • Actual production history • Farmer sets % of average yield and price • Group risk plan • Farmer chooses % of county average yield as threshold • Dollar plan • Farmer insures against a threshold of a preset $ value of production, not yield directly • Tends to be for high value crops with high price/quality effects from pests or weather • Catastrophic coverage • Pays 55% of established price on yield losses in excess of 50% www.rma.usda.gov

21. Short-term yield variance Pioneer Hi-Bred International Inc, 2004

22. Short-term yield variance USDA Economic Research Service 2006

23. Quarantine failure • Poor actuarial data for risk assessment • Exotic pest risks • Often poorly prescribed mitigation practices • Priority is set against potential range of loss • Pooled response agreements • Government, and sometimes import bonds • Generally no compensation due to moral hazard, • political exceptions (citrus canker, FMD)

24. Interstate Pest Control Compact Green=in Compact http://pestcompact.org/

25. Interstate Pest Control Compact • 37 parties belong • Fund raises 10% on per state basis and 90% on ag/forest production basis • Range from RI $2366 to CA $174,469 to cover $1mn total • Assessments as needed to keep fund around $1mn • State can apply for central funds to support action in another state • 28 claims since 1969 • Approximately $1mn in total paid out http://pestcompact.org/

26. Bioterrorism criteria • Pathogen properties • survival; toxic; multi-host; virulent • Production and dissemination • easy growth; transmissible • Detection • difficult and non-traceable • Controls • No chemicals or resistant varieties • Impact • Psychological; quarantine; yield and control Schaad et al., 2006

27. Risk classes for pests • Management actions are in classes • Describe risk in classes? • Frequency of events • Impacts by interest • A method used in DEFRA Non-native Species Risk Assessment Scheme • Based on system from ERMA New Zealand

28. Description of frequency

29. Descriptions of impacts

30. Descriptions of impacts

31. Fisheries insuranceEC PRONE Project • Two parties • Fishing industry and regulator • Shared role and responsibility • Industry is the principal beneficiary • Two major variables • Accepted fishing effort (industry) • Agreed enforcement effort (regulator) • Share of premium? • Maybe relate to sensitivity of axis

32. Long-term yield collapse ICES, 2002, 2005

33. Premium set against agreed catch and enforcement

34. What to insure? • Stock collapse • Single event covers the whole industry • Like quarantine failure or nuclear cleanup • May not be responsive, all or nothing • Catch per effort • Continuous performance assessment • Affects individuals • Like crop loss, or mileage based car insurance • Allows mitigation and feedback