jesús antón, oecd trade and agriculture
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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. 1. OECD Work on Risk Management in Agriculture. Synthesis Report - PowerPoint PPT PresentationTRANSCRIPT
Jesús Antón, OECD Trade and Agriculture
Annual Workshop of ERCA Research Network on SPAA. Ottawa 25 November 2011
Risk Management in Agriculture:Risk Management in Agriculture:Assessing household level risk, Policy Assessing household level risk, Policy
layering and analytical challengeslayering and analytical challenges
OECD Trade & Agriculture 2
1. OECD Work on Risk Management in Agriculture1. OECD Work on Risk Management in Agriculture
OECD Trade & Agriculture 3
OutlineOutline
•Why using Household level data...
– ...for risk assessment?
– ...and modelling response?
•Risk layering and good policy
•Analytical challenges
Why Using farm household level Why Using farm household level data for risk analysis?data for risk analysis?
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Aggregate ≠ Individual riskAggregate ≠ Individual risk
Most farmers are exposed to higher yield risk than the aggregate level
UK Italy Estonia Spain Australia Canada
98 96 96 78 84 74
Yield risk is higher than price risk… but not in all countries
Percentage of farms exposed to higher yield variability than aggregate mean
*Wheat for UK, Estonia, Australia and Canada Barley for Italy and Spain
UK Italy Estonia Spain Australia Canada
11 72 68 91 51 7
Percentage of farms exposed to higher yield variability than price variability
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Key role of interactions on Risk AssessmentKey role of interactions on Risk Assessment
Full attention to the interactions between risks, strategies and policies
– Correlations, diversification, government’s programmes
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Endogenous pro-active risk management strategies: Endogenous pro-active risk management strategies: Interesting results from Interesting results from Stochastic simulation modelStochastic simulation model
)1(
)~()~(
)1(
U
)1/(1)]~()1[( EUCE
ip~
iq~
iLg
uncertain output price of crop i uncertain yield of crop i cost adjustment factor for crop i
area of land allocated to crop i
transfer from government or benefit from risk market strategy level of coverage decided by farmer
Representative farmer maximize his expected utility of profits
degree of CRRA
initial wealth
Farmer’s welfare is computed as certainty equivalent of profit
ic
),~,~(~)(*]*)~*~[(~1
iii
n
iiiii qpgcLLLRLcqp
uncertain variable costc~
revenue from livestock operation (applicable for only Australia)LR
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a) Are Minimum Intervention prices effective?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
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b) Support to Insuranceb) 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
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c) Crowding out of BRM policies c) Crowding out of BRM policies
Accounting Change in CV of Income (without crowd out)
Simulated Change in CV of income (with crowd out)
Change in Diversification
Change in share of land insured
Agri-Insurance -23.5% -0.5% -4% +33%
Agri-Stability -33.4% -9.0% -18% -16%
Agri-Invest -0.7% -1% 0%
Agri-Recovery +2.5% -8% -0.2%
Lagged Agri-Stability
-1.4% -4.9% -18% -16%
Impacts of some BRM programs in a sample of Saskatchewan farms
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d) AgriStability by tierd) AgriStability by tier
Certainty equivalent income (change in CAD)
CV of income
(change in percentage)
Change in diversificati
on index (Initial = 100)
Minimum income
(change in CAD)
Change in the share of land insured (change in percentage
points)
Overall change
Contributing factorsChange in
meanChange in variability
Total impact 3 769 3 728 40 -5.9 -31.9 8 224.2 -5.4Contribution of the coverage of
TIER 2 70-85% of reference
margin
335 418 -83 2.6 -6.8 -4 887.7 -1.1
TIER 3up to 70% of
reference margin
2 488 2 336 151 -8.6 -6.6 -2 804.7 -21.3
TIER 4 negative margin
946 973 -27 0.1 -18.6 15 916.6 17.0
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Improving AgriStabilityImproving 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
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e) Crowding-out effectse) 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
Risk Layering and good policyRisk Layering and good policy
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Governance of Catastrophic Risk 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
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Catastrophic RisksRare, high damage &
systemic
Marketable RisksMiddle range
Normal RisksSmall damage but
frequent
On farm strategies
Market tools
Ex-ante Policies
Ex-post Policies
Good policy responseGood policy responseProbability
Higher income loss
On-farm strategy- Diversification-Saving
On-farm strategy- Diversification-Saving
Market tools- Forward contract- Private insurance
Market tools- Forward contract- Private insurance
Disaster Assistance Policies - Ex-ante/ Ex-post payment - Subsidized insurance
Disaster Assistance Policies - Ex-ante/ Ex-post payment - Subsidized insurance
Good Governance
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...to RM Policy Overcrowding in Canada......to RM Policy Overcrowding in Canada...
Catastrophic Risks Marketable Risks Normal Risks
On farm strategies
• Production and income diversification • Financial management
Market tools• Forward contracting• Use of cooperatives
Ex-ante Policies
Ex-post Policies
Ad Hoc disaster AidAd Hoc disaster Aid
Tier 1: Saving acc. AgriInvest
Tier 1: Saving acc. AgriInvest
Wheat BoardWheat Board Public Insurance Public Insurance
(AgriInsurance)(AgriInsurance) Public Insurance Public Insurance
(AgriInsurance)(AgriInsurance)
AgriStability countercyclical payment AgriStability countercyclical payment Tier 4 Tier 3 Tier 2 Tier 4 Tier 3 Tier 2 Negative margin 30-100% loss 15-30% loss Negative margin 30-100% loss 15-30% loss
AgriStability countercyclical payment AgriStability countercyclical payment Tier 4 Tier 3 Tier 2 Tier 4 Tier 3 Tier 2 Negative margin 30-100% loss 15-30% loss Negative margin 30-100% loss 15-30% loss
AgriRecoveryAgriRecovery
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...plus supply management......plus supply management...
Catastrophic Risks Marketable Risks Normal Risks
On farm strategies
• Production and income diversification • Financial management
Market tools• Forward contracting• Use of cooperatives
Ex-ante Policies
Ex-post Policies
Ad Hoc disaster AidAd Hoc disaster Aid
Tier 1: Saving acc. AgriInvest
Tier 1: Saving acc. AgriInvest
AgriRecoveryAgriRecovery
Supply Management Supply Management
Arrangements Arrangements (dairy, eggs and poultry)(dairy, eggs and poultry)
Supply Management Supply Management Arrangements Arrangements
(dairy, eggs and poultry)(dairy, eggs and poultry)
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Main Policy Messages for CanadaMain Policy Messages for Canada
a)Improve the definition of the boundaries between programs and layers of risk: enhance farmer’s pro-active strategies
b)Improve the delivery and target of AgriStability: not effective for normal nor catastrophic risk
c)Develop an ex ante framework for catastrophic risk covering AgriInsurance, AgriRecovery... and avoiding proliferation of ad hoc
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Analytical Challenges and Areas for research on RiskAnalytical Challenges and Areas for research on Risk
1.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
2.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?
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OECD Trade and AgricultureOECD Trade and Agriculture
THANK YOU!www.oecd.org/agriculture/policies/risk