Description
Contract number: 6613
Project acronym: Income Stabilisation
Project name: Design and economic impact of risk management tools for European agriculture
Priority: 1.1 (8.1B.1.1): Modernisation and sustainability of agriculture and forestry, including their multifunctional role in order to ensure the sustainable development and promotion of rural areas.
Project Period: 36 months (April 2005 – April 2008).
List of participants:
Wageningen University, the Netherlands (coördinator)
Agricultural Economics Research Institute, the Netherlands
Rheinische Friedrich-Wilhelms-Universität, Germany
Universidad Politecnica de Madrid, Spain
Szkola Glowna Gospodarstwa Wiejskiego Poland
Szent István University, Hungary
NV Interpolis, the Netherlands
Total costs (1000 Euro): 1139 Euro
Commission funding (1000 Euro): 867 Euro
Project main goals: The strategic objective of the research project is to analyse the potential of different risk management tools for stabilising farm household incomes in the European Union. More practically, this translates into the following operational goals:
- To quantify the risk exposure of farm households in (a selection of) established and new Member States of the European Union. Risks are quantified for selected crops and livestock commodities through analyses of individual farm data (FADN), completed with analyses of off-farm income from OECD (Organisation for Economic Co-operation and Development) and ERS (Economic Research Service) data. Analyses provide insight into the volatility of farmers’ risk exposure and into the chance of facing catastrophically low price, production or income levels.
- To analyse the impact of future World Trade Organisation (WTO) and Common Agricultural Policy (CAP) policy scenarios on farmers’ risk exposure and risk management opportunities. For this, first the viable future scenarios are defined, followed by farm-level simulation of the impact of these scenarios on income volatility and crisis risk. The impact of future scenarios on risk management opportunities including income support policies is described qualitatively; a quantitative impact analysis follows under objective 5 (i.e. WP6) in which the economic impact of prospective risk management instruments is quantified.
- To review historic, current and developing risk management instruments, both within European Union Member States as well as in non-EU countries. There is a broad focus ranging from on-farm risk management strategies to risk-sharing strategies. For the risk-sharing strategies, private instruments as well as public and public-private partnership instruments are considered. The review is based on reported results in literature completed with up to date views from experts. Results describe (1) risk management instruments that have been successful and instruments that have been a failure; (2) major characteristics of these instruments such as risks covered, loss ratios, participation rates and degree of risk reduction achieved; (3) reported budgetary implications, if any; (4) reported incentive issues for all parties involved; and, most importantly, (5) given the lessons learned, the opportunities for prospective (crisis) risk management in the European Union.
- To analyse farmers’ perceptions of risk exposure and (new) risk management instruments. The analysed risk exposure from objective (1) does not necessarily correspond with the perceived risk exposure by farmers. Also, what may be perceived as successful and promising risk management instruments in non-EU countries may not work well in European Member States. For these reasons, a set of policy options for crisis/risk management tools in the European Union (objective 6) requires a profound analysis of farmers’ perceptions about these issues. The analyses apply to various Member States, farm types and commodities.
- To quantify the economic impact of prospective risk management instruments for the European Union, both at farm level and at the level of (EU and national) governments. In order to perform these analyses a whole-farm model is developed which provides insight into the impact of (new) instruments on farm income volatility and farm crisis risk. Building on the simulation model developed under objective (2), the budgetary expenses of public and public-private instruments are calculated.
- To synthesise the previous work into a set of policy options for (crisis) risk management in the European Union. Given farmers’ current and future (perceived) risk exposure, the experience of other countries and the economic impact of a selected number of risk management instruments, this part of the project provides the Commission with a list of viable risk management instruments including recommendations for designing and implementation issues.
- To verify the results of the project group with a broader group of stakeholders and to fine-tune the list developed under the previous objective where necessary. This will be achieved by organising a well-structured workshop in one of the new Member States (Poland). During the workshop several techniques are used to optimally elicit people’s opinion about the project outcomes.
Key issues:
(1) A quantified insight into farmers’ risk exposure, historically and for expected future circumstances.
(2) A fully updated view on major private, public and public-private risk management instruments in other countries, with a focus on budgetary expenses, loss ratios, incentive structures, interest by farmers and lessons learned for the European Union.
(3) A measurement of farmers’ perceptions of (current and future) risks and risk management opportunities.
(4) An analysis of the whole-farm impact of future risks and prospective risk management instruments on a farmer’s income volatility and chance of catastrophically low incomes, i.e. crises.
(5) An analysis of the budgetary consequences of (new) risk management instruments for national governments and the European government in an enlarged European Union framework.
(6) A list of concrete policy options for (crisis) risk management, including recommendations for designing and implementation issues.
Expected impact:
The strategic impact of the project lays in the fact that we put efficiency at the core of our policy recommendations. Efficient risk management enhances the international competitiveness of the European Union. Efficiency is attained by putting the incentive theory central. “Incentives” do not only relate to farmers’ behaviour (e.g. motivate responsible self-risk management, no motivation of farming too risky crops or of farming in too risky areas), but also to insurance and reinsurance companies (e.g. no rent seeking behaviour towards governments). In addition, also governments should get the right incentives. For instance, if governments do not have any financial role in major catastrophic risks, there could be a moral hazard problem in government behaviour since many catastrophes (for example losses from floods) can be either prevented or magnified by government policies (or lack thereof). A further strategic goal addressed by the project is the viability of rural areas. Proper risk management enhances farmers’ resilience (or sustainability) after calamities.
Coordinator contact details:
Prof. dr Ruud B.M. Huirne (coordinator) & Dr Miranda P.M. Meuwissen (daily coordinator)
Institute for Risk Management in Agriculture & Business Economics
Wageningen University
Hollandseweg 1
NL-6706 KN Wageningen, The Netherlands
Tel: 31 317 484065
Fax: 31 317 482745
E-mails: ruud.huirne@wur.nl; miranda.meuwissen@wur.nl