Abstract
Risk management in agriculture is important on several grounds: even if reducing farming risk does not always improve farmers’ welfare, failure to manage risks has direct repercussions on farmers’ incomes, market stability, and potentially food security. The two main risks faced by farmers — yield volatility and price volatility — are expected to rise due to changing weather patterns and tightening demand/supply fundamentals. Further, particular features such as the Common Agricultural Policy (CAP) of the European Union has been undergoing reforms that have significantly reduced the extent of market interventions. Tighter budgets, environmental factors, and trade considerations have resulted in an increased market orientation of the CAP. All in all, as market effects are gradually introduced, more of the actual risk will be in the hands of farmers/investors. This chapter therefore needs to be read in conjunction with the chapter on agricultural financial markets.
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Notes
For a synthesis of risk-management literature, see B. Barnett and K. Coble (2008), “Poverty traps and index-based risk transfer products”, World Development 36(10): 1766–1785 (retrieved: http://www.agriskmanagementforum.org/sites/agriskmanage-mentforum.org/files/Documents/Poverty%20Traps%20Index-Based%20Risk%20Transfer.pdf).
See further, M. Vassalos, C. A. Dillon, and T. Coolong (2013), “Optimal land allocation and production timing for fresh vegetable growers under price and production uncertainty”, Journal of Agricultural and Applied Economics 45(4): 683–699 (retrieved: http://ageconsearch.umn.edu/bitstream/157391/2/jaae595.pdf).
See, for example (extensive literature to be found in relevant chapter), R. Kappel, R. Pfeiffer, and J. Werner (2010), “What became of the food price crisis in 2008?”, Aussenwirtschaft 65(I): 21–47, Zurich (retrieved: http://www.nadel.ethz.ch/publikationen/food_price_crisis.pdf).
See, for example, A. Tarasov (2013), “Impact of interest rates on the decision to insure in agricultural production”, Studies in Agricultural Economics 115: 1–7 (retrieved: http://dx.doi.org/10.7896/j.1226).
The index is based on Pacific Ocean surface temperatures measured by the National Oceanic and Atmospheric Administration. Increases in the sea surface temperatures are a good indication of an El Nino weather pattern that brings torrential rain and catastrophic flooding to parts of northern Peru. See further on this topic, J. R. Skees and B. Collier (2010), “New approaches for index insurance: ENSO insurance in Peru”, in R. Kloeppinger-Todd and M. Sharma, eds, 2020 Vision for Food, Agriculture, and the Environment, Focus 18 Innovations in Rural and Agriculture Finance (Washington, DC: International Food Policy Research Institute).
See for a recent evolution, R. Cai, J. D. Mullen, J. C. Bergstrom, W. D. Shurley, and M. E. Wetzstein (2013), “Using a climate index to measure crop yield response”, Journal of Agricultural and Applied Economics 45(4): 719–737 (retrieved: http://ageconsearch.umn.edu/bitstream/157314/2/jaae582.pdf).
See further, M. Brunette and S. Couture (2013), “Risk management behavior of a forest owner to address growth risk”, Agricultural and Resource Economics Review 42(2): 349–364 (retrieved: http://ageconsearch.umn.edu/bitstream/155526/2/ARER%2042x2%202013%20Couture.pdf).
An extensive series of articles was issued by Bloomberg in September 2013 (http://go.bloomberg.com/special-reports/report/doomed-crops-record-profits) at a point in time when the farm bill 2013 (the House legislation is H.R. 2642; Senate is S.954) was under review and crop-insurance claims were up due to planting delays (http://www.bloomberg.com/news/2013-09-17/u-s-crop-insurance-claims-jump-amid-planting-delays-usda-says.html). See further, J. L. Novak (2013), “2013 farm bill: Does passage depend on long-dead philosophers?”, Journal of Agricultural and Applied Economics 45(3): 375–379 (retrieved: http://ageconsearch.umn.edu/bitstream/155459/2/jaae453life5b.pdf).
By O. A. Ramirez, C. E. Carpio, and R. M. Rejesus (2011), “Can crop insurance premiums be reliably estimated?”, Agricultural and Resource Economics Review 40(1): 81–94.
J. B. Hardaker, R. B. M. Huirne, and J. R. Anderson (1997), “Coping with risk in agriculture”, book review, Journal of Agricultural and Applied Economics 29(2): 437–438 (retrieved: http://ageconsearch.umn.edu/bitstream/15067/1/29020437.pdf).
Leveraging refers to the producer’s use of debt to finance the operation. Increasing the degree of leverage increases the likelihood that in a year of low farm returns the producer will be unable to meet his or her financial obligations and heightens the potential for bankruptcy. Thus, in general, highly leveraged producers operate in an environment of greater financial risk than do producers who choose a less highly leveraged farm structure. Increasing the farm’s leverage (that is, borrowing) increases the capital available for production, allowing expansion of the business, but it also entails incurring a repayment obligation and creates the risk of loan default because of the risks inherent in the farming operation. Because of these many factors, a farmer’s use of debt to finance the operation interacts with both the production and marketing risks faced by the producer. See P. J. Barry and C. B. Baker, “Financial responses to risk in agriculture”, in Peter J. Barry, ed., Risk Management in Agriculture (Ames: Iowa State University Press, 1984), pp. 183–199.
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© 2014 Luc Nijs
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Nijs, L. (2014). Agricultural Risk Management and (Crop) Insurance. In: The Handbook of Global Agricultural Markets. Palgrave Macmillan, London. https://doi.org/10.1057/9781137302342_4
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DOI: https://doi.org/10.1057/9781137302342_4
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