An assessment of farmer’s exposure to An assessment of farmer’s exposure to risk and policy impacts on farmer’s risk risk and policy impacts on farmer’s risk

management strategymanagement strategy

4 September 20094 September 2009113113thth EAAE seminar EAAE seminar

Shingo Kimura Trade and Agriculture Directorate

OECD Trade & Agriculture Directorate 2

What are the sources of risks that individual farmer is facing and what kind of correlations are they making use of?

- Statistical analysis of risk exposure of individual farm from micro data (crop farm in Germany)

How farmers respond to different risk related measures and what kind of trade-offs that the government and farmer face in terms of risk and welfare?

- Simulation analysis of risk management strategies and policies

Main objectives of the farm level analysis of risk

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An assessment of farmer’s exposure to risk

- Statistical analysis -

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Micro data from Germany

Data source German national FADN data Selection criteria Single crop farms that cultivated more than 50 ha and have more than 60% of production from crops between 1995/96 and 2006/07 (12 years) Sample size A panel of 232 crop farms are identified from 3 regions (77 from North , 41 from Centre/South and 141 from East) Data coverage Yield, output price and planted area for 6 crops Costs, revenue , net farm income and labor inputs for a whole farm Statistical information Mean and variability (distribution of variance-covariance matrices) by each region

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Risk exposure: Yield variability

Higher yield variability at farm level data - Yield is location specific and favorable yield in one place is offset by the unfavorable yield in another place in the aggregated data (= special aggregation bias).

Coefficient of variation of wheat yield

*The bracket indicates the mean plus minus the standard deviation of the coefficient of variation across farms.

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Risk exposure: Price variability

Higher price variability at farm level data, but to less extent - Price is less location specific and the integration of output market equalize the price across locations.- If compared at the aggregated level, price risk may seem larger than the yield risk

Coefficient of variation of wheat price

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Risk exposure: Price-yield correlation

Lower yield-price correlation at farm level data, but still significant (around -0.2).

-Highly negative correlation may not improve the welfare of risk averse farmer because it may reduce the expected revenue.

Coefficient of correlation of wheat price and yieldValues are expressed in negative terms

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Risk management strategies and policies

-Stochastic simulation analysis-

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Stochastic simulation modelStochastic simulation model

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uncertain output price of crop i

uncertain yield of crop i

variable production cost of crop i area of land allocated to crop i

transfer from government or benefit from risk market strategy level of coverage decided by farmer

Farmer maximize his expected utility subject to profit function

degree of constant relative risk aversion (=2) initial wealth (=2664 euro per ha)

Farmer’s welfare is computed as certainty equivalent of profit

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Incentive to use risk market strategy: Crop yield insurance

Proportion of planted area insured

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Risk and welfare impact of risk market strategy: Crop yield insurance

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Comparison of policy impactsComparison of policy impacts

Impacts of 2 euro expected subsidy through different instruments

* Cost of insurance and forward contracting are assumed as 10% and 5%, respectively.

　 Certainty equivalent profit (change in euro)

CV of profit (change in percentage

points) Overall change

Contributing factors

　 Change in mean

Change in variability

Single farm payment 2.00 2.00 0.00 -0.06Subsidy to crop yield insurance premium

0.39 -0.48 0.87 -2.19

Subsidy to forward price 0.03 -0.11 0.14 -0.35

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Interaction between single farm payment and Interaction between single farm payment and crop yield insurance strategycrop yield insurance strategy

* Insurance price premium is assumed to be 3%.

Proportion of planted area insured

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Some preliminary findingsSome preliminary findings Farmer faces higher yield variability, and lower negative

yield-price correlation than it looks at the aggregated data

Farmer is making use of correlations and crop diversification to stabilize income

Participation to risk markets is difficult even for relatively low administrative costs

Interaction between government programme and risk management strategy (e.g., impacts on crop diversification and crowding out of risk market instruments)

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Thank YouThank You

Trade and Agriculture DirectorateTrade and Agriculture Directorate

www.oecd.org/agriculture/policies/riskwww.oecd.org/agriculture/policies/risk

shingo.kimura@oecd.org

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