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Design and economic impact of risk management tools for European agriculture

Final Report Summary - INCOME STABILISATION (Design and economic impact of risk management tools for European agriculture)

Income from farming is rather volatile due to stochastic, i.e. random, factors that affect production and prices. Even though the Common Agricultural Policy (CAP) tried to reduce some of the risks and various tools were used to simulate their probabilities, these factors are likely to change in the near future. Farmers were often compensated for unexpected losses by governments in the past; however, there is currently increasing pressure for more private market solutions or more formal public and private arrangements. Moreover, agricultural insurance products in Europe are less common than in the United States of America or Canada.

In this context, the INCOME STABILISATION project aimed to analyse the opportunities that risk management tools offered for the stabilisation of farm income within the European Union, taking into account the risks' uncertainty, the enlargement of the European Community, the eligibility in income support and disaster relief schemes and the ongoing developments at international risk management markets. The project undertook all necessary activities in order to provide:

1. a detailed analysis of farmers' risk exposure in the past and projected risks in the future,
2. a review of risk management experience and farmers' perception of risk and, finally,
3. proposals in terms of the economic impact of and policy options for viable risk management instruments.

Farm level information from the Farm Accountancy Data Network (FADN) was thoroughly analysed to accomplish the abovementioned objectives. Nevertheless, it was observed that FADN data could only partially provide insight into farm risks. Moreover, an overview of the impact of future World Trade Organisation (WTO) and CAP scenarios on farmers’ risk exposure and risk management opportunities was provided. Increasing levels of liberalisation did not seem to lead to widespread negative effects on the stability of farm income within the European Union, even though vulnerability differed significantly across farm types and Member States.

In addition, historical, current and developing risk management instruments, both within the European Union and in non-European countries, were reviewed and assessed. The analysis demonstrated that some of the available tools allowed to take into account asymmetric information and that the public sector involvement could lead to undesired incentives. The perception of risk by farmers was also examined. The context of risk varied significantly among the different countries; however price and weather uncertainties were identified as the most threatening in all cases. Furthermore, the likely economic effects of the utilisation of various risk management instruments were modelled, in order to identify sustainable strategic options in terms of cost and applicability. Substantial on-farm income volatility remained, in spite of the application of a portfolio of prospective risk management instruments, while on-farm diversification seemed to be limited.

Based on the abovementioned findings infrastructural improvements seemed necessary for normal on-farm enterprise risk. However, for crisis risk, rules had to be set at a European level, while avoiding premium subsidies. Finally, additional targeted recommendations were developed for the Member States of the former Eastern Europe, whose distinctive features were thoroughly examined as part of the INCOME STABILISATION project.