céline giner and shingo kimura oecd trade and agriculture directorate
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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. Sources of Risk in Agriculture. - PowerPoint PPT PresentationTRANSCRIPT
Céline Giner and Shingo KimuraOECD Trade and Agriculture Directorate
Risk Management in Agriculture: Towards Effective Policies22 November 2010 – OECD Conference Centre
Relative Importance of Different Sources of Risks
and their Interactions
OECD Trade & Agriculture 2
Sources of Risk in AgricultureSources 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?
OECD Trade & Agriculture 3
Two Methodological ApproachesTwo Methodological Approaches
Micro: Individual Farm Level Risk Aggregate: Risk in the Markets
Profit and income risk:• Prices, yields, costs... off-farm income• Scope for natural hedging and diversification (correlation)
Analytical Framework:• Micro sample data from nine countries • Longitudinal panel data of crop farms (10 years X 100 farms)• Variability and correlations in a farm • Portfolio approach to determine sources of variability
Price risk:• Exogenous sources: weather-related shocks, input prices, macroeconomic environment.• Endogenous sources: the dynamics of the market adjustment processes.
Analytical Framework:• Model markets: AGLINK-COSIMO • 150 forward stochastic simulations• Exogenous factors - historical variability:
- Yields- Crude oil and fertiliser price - Key macroeconomic indicators
OECD Trade & Agriculture 4
Individual Farm Risk: Individual Farm Risk: Does it come from weather or markets?Does it come from weather or markets?
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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Farmers May Benefit from CorrelationsFarmers May Benefit from Correlations
Price and yield move often in opposite direction
UK Italy Estonia Spain Australia Canada
75 36 32 25 72 55
Percentage of farms with negative price and yield correlation
Farmers can diversify their portfolio of commodities and activities
UK Italy Estonia Spain Australia CanadaYield 0.26 0.41 0.33 0.75 0.58 0.42
Price 0.75 0.69 0.67 0.73 0.58 0.59
Average coefficient of correlation between wheat and barley risks across farms
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Variance of Income is Reduced Thanks Variance of Income is Reduced Thanks
to Correlations and Diversification to Correlations and Diversification
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Systemic Nature of RisksSystemic Nature of Risks
Price risk is correlated across farms through the marketsYield risk can be systemic in some countries
Average coefficient of correlation of wheat yield and price across farms
0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 1
UK
Italy
Estonia
Spain
Australia
Canada
Yield Price
OECD Trade & Agriculture 8
Prices and Yields are Linked through MarketsPrices and Yields are Linked through Markets
Yield shocks: main contributor to price volatility
Simulated median variability with AGLINK-COSIMO%
OECD Trade & Agriculture 9
World Maize Price
Exogenous Shocks can Explain a Significant ShareExogenous Shocks can Explain a Significant Shareof Observed Price Variabilityof Observed Price Variability
OECD Trade & Agriculture 10
High Levels of Volatility can be the Result High Levels of Volatility can be the Result of Coincidence of Several Exogenous Circumstancesof Coincidence of Several Exogenous Circumstances
Shocks in yields: frequency of droughts... High
Shocks in input prices:Crude oil crisis High
Correlation of yield shocks: across countries and
commoditiesPositive
Correlation between oil price and yields
Negative: oil spikes
coincide with droughts
Simulated volatility HIGH
OECD Trade & Agriculture 11
ConclusionsConclusions
•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•H
olistic approach needed: – Yield and costs risk is as important as commodity price risk to determine
farm level income risk•T
he portfolio of many farmers benefit from: – Natural hedging because prices are high when yields are low– Diversification of returns from different commodities / assets
OECD Trade & Agriculture 12
Thank you!
www.oecd.org/agriculture/policies/risk
[email protected]@oecd.org
OECD Trade and Agriculture DirectorateOECD Trade and Agriculture Directorate