Community Research and Development Information Service - CORDIS

FP6

INCOME STABILISATION — Result In Brief

Project ID: 6613
Funded under: FP6-POLICIES
Country: Netherlands

Cutting the risk for European farm income

An EU-funded project has produced a comprehensive report on how risk management tools may be applied to the European agricultural sector and the potential impact on farming.
Cutting the risk for European farm income
Farming income tends to be prone to fluctuations because of random effects involving weather, disease and market price, for example. European farmers have so far been protected from unexpected losses by a compensation mechanism through the Common Agricultural Policy (CAP). However, there is increasing pressure to apply more private or part-private market solutions to these circumstances.

As a possible solution to income problems for farmers, the 'Design and economic impact of risk management tools for European agriculture' (Income Stabilisation) project has analysed the opportunities offered by different risk management tools for stabilising farm incomes. Taken into account were income support eligibility, disaster relief schemes and developments in international risk management markets.

Steps taken by Income Stabilisation to provide this analysis included a detailed account of risks encountered by farmers in the past as well as projected future risks. Also important was a review of European farmers' perceptions of risk and an account of the economic impact of viable risk management schemes.

The report showed that tools that took into account the problem of asymmetric information – that is where some parties have more information than others – and public sector involvement led to undesirable incentives. Predictably, the notion of 'risk' varied significantly with country but overall, price and weather uncertainty were the most feared scenarios. On modelling the impact of risk management, substantial on-farm volatility remained and diversification appeared to be limited.

The Income Stabilisation findings show that improvement of tools for instability of income management is necessary for a normal level of on-farm enterprise risk. Rules should be set at European level for crisis risk, however, while avoiding premium subsidies.

Income Stabilisation has provided the Commission with a range of viable risk management schemes as well as guidelines for their implementation. The report is particularly pertinent in the environment of an enlarging EU and changing views on seemingly random disaster compensation.

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