jesús antón, oecd trade and agriculture

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


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?


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


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


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


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


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


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


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


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


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


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


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


...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


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


...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



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)


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


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?


[email protected]

OECD Trade and AgricultureOECD Trade and Agriculture

THANK YOU!www.oecd.org/agriculture/policies/risk

jesús antón, oecd trade and agriculture

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