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© Imperial College London

Complexity, uncertainty and risk: Agriculture

John Mumford Centre for Environmental Policy, Imperial College London 22 January 2007


Overview

n  Agriculture is an extensive industry n  2.6 billion people

n  Risks relate to production and price n  Weather, pests, markets n  Long-term and short-term factors n  Natural events and human interventions

n  Continuous risks n  Pest induced losses

n  Single event risks n  Quarantine failure


Scale of introduced pests

n  US losses estimated at $137 billion/yr n 50,000 species since Columbus

n  Major new pests continue to arrive n Particularly pests of the natural environment

n  Response to risk can be expensive n  ISPM15 costs around $2 bn/yr


Asian longhorned beetle

n  Pallets and wood packaging from China since 1996 n  Potential N American losses over $100 bn/year

–  Wide impacts: Amenity trees, timber, tourism, maple syrup

n  $75mn eradication in US completed in 2005 n  Now followed by Emerald ash borer


Pallets and packaging

n  Wooden pallets - Asian longhorn beetle –  Heat treated at $1 for each pallet; certification –  Only 2-3% were treated previously –  Approximately 2 billion new pallets/yr for international

routes –  Reliable monitoring and enforcement?

US – 005 HT


Emerald ash borer is current news in the US! (Sep 2006) Chicago Tribune 16 Sep 2006 Front page

Trees doomed in bid to stop pest ….chewing up more than 2,800 ash trees around the spot where the emerald ash borer first was found in Illinois. ….nearly double the total number of trees taken out by the Asian longhorned beetle, another imported pest that ravaged the North Side of Chicago in the late 1990s. ….next on Evanston, Wilmette and Winnetka, cutting into the leafy canopy of three other areas where the ravenous ash borer has turned up since June. ….again and again across Illinois, home to more than 130 million ash trees.


Emerald ash borer, from 2002


New pest records in Europe

1900 1920 1940 1960 1980 2000

01

23

45

6

Arth

ropo

d sp

ecie

s pe

r dec

ade

First records of new arthropods (left) and plant diseases (right) in Europe by decade. Smith, 1997

1900 1920 1940 1960 1980 2000

year0

12

34

spec

ies

per d

ecad

e


Inflection due to action?

1900 1920 1940 1960 1980 2000

01

23

45

6

Arth

ropo

d sp

ecie

s pe

r dec

ade

First records of new arthropods (left) and plant diseases (right) in Europe by decade from 1900. Smith, 1997

1900 1920 1940 1960 1980 2000

year0

12

34

spec

ies

per d

ecad

e

? ?


Quantifying the risk

n  Interceptions reflect post-intervention risk n  Sample of what gets through control

n  ~25,000 interceptions/year in US n  Majority in baggage (~6% has something) n  Cargo, ~1 interception per $3mn worth n  4% of postal parcels

n  1 in 400 air passengers fined in NZ n  How is the catch/effort changing?

n  How to measure effort? n  How to interpret catch?


Baggage interceptions > cargo in US

US Border interceptions Q56 pests

0

5000

10000

15000

20000

25000

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

Inte

rcep

tions

per

yea

r

BaggageCargoMail

250-300 more interceptions/year on both cargo and baggage


US imports ($mn) fruits/vegetables

US Fruit/Vegetable Imports

0

2000

4000

6000

8000

10000

12000

14000

16000

18000

200001961

1963

1965

1967

1969

1971

1973

1975

1977

1979

1981

1983

1985

1987

1989

1991

1993

1995

1997

1999

2001

2003

2005

$ M

illio

n

FAOStat


Variable inspection efficiency

Interceptions at Laredo, TX

0

500

1000

1500

2000

2500

3000

2000 2001 2002 2003 2004 2005

36 inspectors 30, then 27 inspectors

USDA


Insurance in agriculture

n  Risk assessment n  Catalogue risk factors and distribution

n  Loss assessment n  Loss and responsibility post facto

n  Moral hazard n  Define compliance and enforcement

n  Compensatory factors n  Allowance for natural variation in risk factors

n  Attribution n  Free riders, and share of risks amongst stakeholders


Israel Citrus Marketing Board

n  Centralised control for fruit flies n  Levy on growers for expected cost n  Board insures with private insurer

n Covers any extra cost of additional control n Pays compensation for control failures

n  Levy and insurance rates adjusted n  Insurance acts as a short-term overdraft n Annual term


US All-risk farm insurance

n  Proposed by Franklin in 1788 n  Multiperil (hail, drought, pest risks) since 1930s n  Government agency (USDA Risk Management

Agency – www.rma.usda.gov) n  Private insurers act as agents for government

backed crop insurance n  1.2 million policies in operation; 10,000+ loss

adjusters n  Good actuarial data for risk assessment, annual

review n  Well prescribed mitigation practices


Crop indemnity USDA RMA


Crop indemnity USDA RMA

Hurricanes

Drought

Hurricanes

Drought


US All-risk farm insurance

n  Loss assessment set against discounted recent average yields (for example, ~90% of past 3 years)

n  Loss set against average for region or farm, group risk cover is less uncertain and cheaper

n  Compulsory or voluntary, may depend on externalities

n  Government, grower cooperatives, private insurers


Crop insurance basis

n  Actual production history n  Farmer sets % of average yield and price

n  Group risk plan n  Farmer chooses % of county average yield as threshold

n  Dollar plan n  Farmer insures against a threshold of a preset $ value of

production, not yield directly n  Tends to be for high value crops with high price/quality

effects from pests or weather

n  Catastrophic coverage n  Pays 55% of established price on yield losses in excess of

50%

www.rma.usda.gov


Short-term yield variance

Pioneer Hi-Bred International Inc, 2004


Short-term yield variance

USDA Economic Research Service 2006

US Maize Price

0.00

0.50

1.00

1.50

2.00

2.50

3.00

3.50

1975

1977

1979

1981

1983

1985

1987

1989

1991

1993

1995

1997

1999

2001

2003

2005

$/bu


Quarantine failure

n  Poor actuarial data for risk assessment n  Exotic pest risks

n  Often poorly prescribed mitigation practices n  Priority is set against potential range of loss n  Pooled response agreements

n  Government, and sometimes import bonds

n  Generally no compensation due to moral hazard,

n  political exceptions (citrus canker, FMD)


Interstate Pest Control Compact

http://pestcompact.org/

Green=in Compact


Interstate Pest Control Compact

n  37 parties belong n  Fund raises 10% on per state basis and 90% on

ag/forest production basis n  Range from RI $2366 to CA $174,469 to cover

$1mn total n  Assessments as needed to keep fund around $1mn n  State can apply for central funds to support action

in another state n  28 claims since 1969 n  Approximately $1mn in total paid out

http://pestcompact.org/


Bioterrorism criteria

n  Pathogen properties n  survival; toxic; multi-host; virulent

n  Production and dissemination n  easy growth; transmissible

n  Detection n  difficult and non-traceable

n  Controls n  No chemicals or resistant varieties

n  Impact n  Psychological; quarantine; yield and control

Schaad et al., 2006


Risk classes for pests

n  Management actions are in classes n  Describe risk in classes?

n Frequency of events n  Impacts by interest

n  A method used in DEFRA Non-native Species Risk Assessment Scheme

n Based on system from ERMA New Zealand


Description of frequency

Likelihood and Score Description Frequency

Very unlikely

1

This sort of event is theoretically possible, but is never known to have occurred and is

not expected to occur

1 in 10,000 years

Unlikely 2

This sort of event has not occurred anywhere in living memory

1 in 1,000 years

Possible 3

This sort of event has occurred somewhere at least once in recent years, but not locally

1 in 100 years

Likely 4

This sort of event has happened on several occasions elsewhere, or on at least one

occasion locally in recent years

1 in 10 years

Very likely 5

This sort of event happens continually and would be expected to occur Once a year


Descriptions of impacts

Scale and Score Monetary loss and response

costs Health impact Environment

impact Social impact

Minimal

1 Up to ₤10k /yr

Local, mild, short-term,

reversible effects to individuals

Local, short-term population loss,

no significant ecosystem effect

No social disruption

Minor

2 ₤10k-₤100k

/yr

Mild short-term reversible effects

to identifiable groups, localised

Some ecosystem impact,

reversible changes, localised

Significant concern

expressed at local level

Moderate

3 ₤100k-₤1m /yr

Minor irreversible effects and/or

larger numbers covered by reversible

effects, localised

Measurable long-term damage to populations and ecosystem, but little spread, no

extinction

Temporary changes to

normal activities at local level


Descriptions of impacts

Scale and Score Monetary loss and response

costs Health impact Environment

impact Social impact

Major

4 ₤1m-₤10m /yr

Significant irreversible

effects locally or reversible effects over large area

Long-term irreversible ecosystem

change, spreading

beyond local area

Some permanent change of activity locally, concern expressed over

wider area

Massive

5 ₤10m +

/yr

Widespread, severe, long-

term, irreversible health effects

Widespread, long-term

population loss or extinction,

affecting several species with

serious ecosystem

effects

Long-term social change,

significant loss of employment,

migration from affected area


Fisheries insurance EC PRONE Project

n  Two parties n Fishing industry and regulator n Shared role and responsibility n  Industry is the principal beneficiary

n  Two major variables n Accepted fishing effort (industry) n Agreed enforcement effort (regulator)

n  Share of premium? n Maybe relate to sensitivity of axis


Long-term yield collapse

ICES, 2002, 2005

North Sea Cod Landings

0100200300400

197019741978198219861990199419982002

'000

tonn

es


Premium set against agreed catch and enforcement

020

4060

80100 50

6070

8090

100

0

2000

4000

6000

8000

10000

Premium

EnforcementCatch effort


What to insure?

n  Stock collapse n Single event covers the whole industry n Like quarantine failure or nuclear cleanup n May not be responsive, all or nothing

n  Catch per effort n Continuous performance assessment n Affects individuals n Like crop loss, or mileage based car insurance n Allows mitigation and feedback

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