modeling the uncertainty: the farmers behavior in the alentejo region of portugal facing to the new...
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Modeling the Uncertainty: the Farmers Behavior in the Alentejo Region of Portugal facing to the New CAP. Coelho, Luís Alberto Godinho Serrão, Amílcar Joaquim da Conceição UNIVERSIDADE DE ÉVORA PORTUGAL. Contents 1- Introduction 2 - Methodology 3 - Data 4 - Results 5 - Conclusions - PowerPoint PPT PresentationTRANSCRIPT
Modeling the Uncertainty: the Farmers Behavior in the
Alentejo Region of Portugal facing to the New CAP
Coelho, Luís Alberto GodinhoSerrão, Amílcar Joaquim da Conceição
UNIVERSIDADE DE ÉVORAPORTUGAL
Contents
1- Introduction2 - Methodology3 - Data4 - Results5 - Conclusions6 - Bibliography
1 - IntroductionThe uncertainty of the farmer’s income has been one of the greatest concerns of the successive Common Agricultural Policy (CAP) reviews. These policies have looked for stabilizing the farmer’s income through subsidies.
Creation of CAP (1957) Sustainability of the incomes through the prices. Increase of the surplus and growth of the costs. The 1992 Reform Creation of a set of direct aidsStrong orientation for the market Restricting issues of the use of the production factors The 1999 Reform Decrease of market support prices and of financial compensation in crop and livestock activities
The subsidies became one of the main criteria of the farmer’s decisions.
Example:Before 1992 the durum wheat had a small production area in Portugal and the common wheat has the main crop produced in Portugal.
The 1992 CAP review stabilised a subsidy of 297 ECUS/hectare for one maximum area of 59 000 hectares.
The 1999 CAP review stabilised an increased of the durum wheat area to 118 000 hectares in Portugal and the subsidy per hectare has been increasing to € 344.50.
1989 1999 2004 Variation Common wheat 294 526 145 323 35 402 -88% Durum wheat 24 774 74 956 152 044 514% Others cereals 581 577 381 991 275 310 -53% Total of cereals 900 878 602 270 462 756 -49% Values: Hectares
The consequence of the CAP policy was the decrease of the common wheat (with small subsidies) and the durum wheat became the main crop in Portugal.
The mid-term review of the Common Agricultural Policy
(2003)•Decrease in market support prices•Decoupling subsidies from production•Decrease of direct payments for large farms•Possibility of partial implementation of the decoupling subsidies
Main problem for Portugal: Risk of abandonment of the crop production
The Problem
With the mid-term review of the Common Agricultural Policy in 2003, that allows to decoupling total or partially the subsidies from agricultural production, the farmers will start to make agricultural production decisions based on the soils and climatic conditions and the signals revealed by agricultural markets.
This situation can drive a decrease and even the abandonment of agricultural production in the Alentejo Dryland region of Portugal.
Research ObjectivesThis research work have two objectives:
The first one foresees the behaviour of the Alentejo Dryland farmers, when they are confronted with the mid-term of the Common Agricultural Policy with respect to two scenarios:Full decoupling of income payment from agricultural production.The Portuguese Government proposal (some subsidies are linked to beef cattle and sheep production).
The last one evaluates the behaviour of selected farmers facing to the introduction of an area yield crop insurance in the context of the new Common Agricultural Policy.
Area Yield Crop Insurance
•Considered by Halcrow in 1949•It is an income insurance •Indemnities are based on the average production of the total production area
•It allows to minimize damages of unfavorable climatic conditions
•It is included in the "green box" of the World Trade Organization (WTO)
•It prevents problems of Adverse Selection and Moral Hazard
2 - MethodologyThe analysis of the farmers’ behaviour facing to the mid-
term review of the Common Agricultural Policy is based
on the Cumulative Prospect Theory, which is portrayed in
the objective function of a discrete sequential stochastic
programming model.
The objective function
n
0iii
0
-miii ) v(xh ) v(xh V(y)Max
The Value Function
The farmer's preferences for the construction of the value function were elicited by the “trade-off” method (Wakker and Deneffe, 1996).
0 im- if )(-x λ -
n i 0 if xλ )v(x2
1
ωi2
ωi1
i
Principals characteristics: Risk aversion for gains Risk preferred for losses Loss aversion
Decision Weights
nn pf h
mm pf h
1-n i 0 , pf - pf hn
1ii
n
iii
0 i m-1 , pf - pf h1-i
m-i
i
m-ii
Probability Weighting Function
The farmer's preferences for the construction of the probability weighting function were elicited by the certainty equivalent method.
γγ
γ
p)(1δpδpf(p)
Main characteristics:
δ – Attractiveness
γ – Diminishing Sensitivity
ConstraintsSimplified Model
Variables Constrains
Initial Choices
State of Nature 1
State of Nature 2
State of Nature 3
State of Nature 4
State of Nature 5
sign
Right hand side
Initial Choices A00 <=> B0
State of Nature 1 A10 A11 <=> B1
State of Nature 2 A20 A22 <=> B2
State of Nature 3 A30 A33 <=> B3
State of Nature 4 A40 A44 <=> B4
State of Nature 5 A50 A55 <=> B5
Where: Aij are the matrices of technological coefficients of the constraints and Bj are the vectors of the right hand side of the constraints.
The constraints describe the environment in that the farmers developed their crop and livestock activities in all their components: production (crop and livestock), financial, commercial and taxes.
Main characteristics of the model
•Modeling the animal feeding (three technologies of beef cattle and two of sheep)
•Possibility to buy and to sell straw and hay•Partition of the subsidies in production subsidies and
decoupled subsidies•Possibility to constitute loans for financing the farm
activity•Possibility to subscribe the area yield crop insurance •Free variables (net income and income before taxes) •The net income by state of nature are transferred to
the objective function•Non linear objective function with two components
(negative part (losses) and positive part (gains)) •The Model was solved by an optimization software
called “MINOS PROGRAM”, because it allows to program the objective function in FORTRAN.
3 – Data
• The development of an optimization model is extraordinarily demanding in terms of data.
• The data and other information can be collected from studies and research works, Government Agencies and European Union.
• The main information source was obtained through interviews to a set of farmers in the Alentejo dryland region.
• These farmers were selected by a nonprobabilistic judgmental sampling.
• The interviews, besides they intended to determine the farmers’ risk attitudes, allowed collecting same farm specific data to develop farmer’s optimization model.
Parameters of the Value Function Positive function Negative function
Farms 1 1 2 2 2 / 11 0.3927 0.6150 1.5202 0.4157 3.87
2 0.7522 0.5267 0.8242 0.5518 1.10
3 2.4550 0.3785 2.6771 0.3632 1.09
4 0.6060 0.5722 1.0497 0.4800 1.73
5 0.7402 0.5069 1.0549 0.5112 1.43
6 1.7967 0.4328 2.4738 0.4425 1.38
7 1.4796 0.4629 2.2301 0.3044 1.51
8 0.4683 0.6215 1.6270 0.3869 3.47
9 1.5488 0.4346 1.9669 0.3980 1.27
Arithmetic mean 0.5057 0.4282 1.87
4 – Results The behavior of farmers face the risk
0 im- if )(-x λ -
n i 0 if xλ )v(x2
1
ωi2
ωi1
i
0 im- if )(-x λ -
n i 0 if xλ )v(x2
1
ωi2
ωi1
i
The value functions are used to estimate the probability weighting functions, whose values are represented in the following table:
Parameters of the Probability Weighting Function Positive function Negative function
Farms 1 1 2 2
1 1.2407 0.5584 1.3280 0.3627
2 1.1619 0.5762 0.7262 0.6728
3 1.2930 0.3629 1.7574 0.5154
4 0.9341 0.6956 1.4751 0.5969
5 1.4149 0.6600 0.7753 0.6612
6 1.9035 0.5839 1.0478 0.4886
7 1.3532 0.5720 1.5046 0.3766
8 1.0159 0.5155 1.3549 0.4936
9 1.3788 0.4948 1.0584 0.4511
Arithmetic mean 1.2996 0.5577 1.2253 0.5132
γγ
γ
p)(1δpδpf(p)
γγ
γ
p)(1δpδpf(p)
Description Farm1
Farm2
Farm3
Farm4
Farm5
Farm6
Farm7
Farm8
Farm9
Crop Activities
Durum Wheat 323.7 124.6 35.6 148.0 234.1 75.2 107.5 147.9 267.5
Sunflower 27.0 49.6 45.0 67.5
Oats 13.3 50.0 95.0
Oats/Vicia 20.9 7.9 14.6 6.6 19.8 57.0
Pastures 513.4 300.0 100.0 270.0 120.0 500.0
Set-aside 328.7 150.5 29.8 145.4 226.1 75.2 107.5 220.1 215.0
Total Area 1200.0 690.0 180.0 570.0 600.0 200.0 260.0 1020.0 550.0
Livestock Activities
Beef Cattle 400 150 90 450
Sheep 1080 625
Farm Income
State of Nature 1 -1 354 13 047 2 322 -2 776 -30 877 -8 150 -5 407 2 745 -25 435
State of Nature 2 32 246 27 526 9 023 6 455 -16 419 -3 239 -0 416 36 478 -13 662
State of Nature 3 77 777 46 501 17 733 27 334 15 897 5 626 11 105 82 405 19 907
State of Nature 4 115 220 64 066 22 511 44 171 40 557 13 172 21 900 108 641 48 120
State of Nature 5 119 211 67 940 23 450 45 431 42 489 16 302 24 902 112 923 55 045
RESULTS Production activity of farmers before the New CAP
Notes: Crop activities in hectares, livestock activities in animal units and monetary values in Euros. Source: Model Results.
RESULTS Model Results with the new CAP– Total Decoupling Payments Description Farm
1Farm
2Farm
3Farm
4Farm
5Farm
6Farm
7Farm
8Farm
9
Crop Activities
Barley 43.9 20.7 63.8 48.6 36.1 67.5
Oats 136.8 34.8 27.9
Sunflower 105.3 2.6 67.5
Oats/Vicia 64.6 64.5 46.0 1.7 142.3
Pastures 824.2 442.0 111.0 270 120.0 786.0
Set-aside 69.1 107.0 2.3 236.2 394.9 200.0 260.0 27.7 415.0
Total area 1200.0 660.0 180.0 570.0 600.0 200.0 260.0 1020.0 550.0
Livestock Activities
Beef cattle 400 150 74 450
Sheep 182 74
Farm Income
State of Nat. 1 21 944 34 916 6 303 25 745 12 765 9 926 17 319 24 857 2 534
State of Nat. 2 56 484 40 806 11 773 26 485 13 706 9 926 17 319 58 986 9 224
State of Nat. 3 78 991 48 962 15 538 31 729 20 454 9 926 17 319 74 399 17 986
State of Nat. 4 94 223 54 808 18 300 36 644 26 751 9 926 17 319 85 680 26 199
State of Nat. 5 103 949 56 754 19 438 36 890 27 089 9 926 17 319 90 030 32 337Notes: Crop activities in hectares, livestock activities in animal units and monetary values in Euros. Source: Model Results.
RESULTS Model Results with the new CAP– Partial Decoupling Payments Description Farm
1Farm
2Farm
3Farm
4Farm
5Farm
6Farm
7Farm
8Farm
9
Crop Activities
Barley 43.9 14.1 27.9 53.8 36.1 67.5
Oats 136.8 27.9
Sunflower 105.3 2.6 67.5
Oats/Vicia 64.6 64.5 31.3 62.1 39.6 142.3
Pastures 824.2 442.0 133.0 286.2 193.0 786.0
Set-aside 69.1 107.0 1.6 193.8 313.6 200.0 260.0 27.7 415.0
Total area 1200.0 690.0 180.0 570.0 600.0 200.0 260.0 1020.0 550.0
Livestock Activities
Beef cattle 400 150 90 450
Sheep 1006 564
Farm Income
State of Nature 1 21 944 34 916 5 576 17 164 7 472 9 926 17 319 24 857 2 534
State of Nature 2 56 484 40 806 13 347 21 805 10 819 9 926 17 319 58 986 9 224
State of Nature 3 78 991 48 962 16 437 27 481 17 172 9 926 17 319 74 399 17 986
State of Nature 4 94 223 54 808 18 820 30 725 22 088 9 926 17 319 85 680 26 199
State of Nature 5 103 949 56 754 19 903 32 139 23 186 9 926 17 319 90 030 32 337Notes: Crop activities in hectares, livestock activities in animal units and monetary values in Euros. Source: Model Results.
RESULTS New CAP and Area Yield Crop Insurance – Total Decoupling
Description Farm 1
Farm 2
Farm 3
Farm 4
Farm 5
Farm 6
Farm 7
Farm 8
Farm 9
Crop Activities
Barley 154.8 43.9 19.8 66.6 82.3 67.8 99.7
Sunflower 99.3 2.6 67.5
Oats/Vicia 123.3 64.5 44.1 2.7 150.7
Pastures 754.4 442.0 113.9 270.0 120.0 758.2
Set-aside 68.2 107.0 2.2 233.4 395.0 200.0 260.0 43.3 382.8
Total area 1200.0 660.0 180.0 570.0 600.0 200.0 260.0 1020.0 550.0
Livestock Activities
Beef cattle 400 150 82 450
Sheep 182 87
Farm Income
State of Nat. 1 28 273 36 371 6 228 27 367 15 405 9 926 17 319 25 520 4 562
State of Nat. 2 61 867 42 216 12 661 28 132 16 480 9 926 17 319 61 423 10 353
State of Nat. 3 74 408 47 448 15 568 29 889 18 714 9 926 17 319 72 888 15 007
State of Nat. 4 91 548 53 294 18 339 35 019 25 072 9 926 17 319 84 600 25 701
State of Nat. 5 101 837 55 240 19 631 35 277 25 427 9 926 17 319 89 370 31 963
Notes: Crop activities in hectares, livestock activities in animal units and monetary values in Euros. Source: Model Results.
RESULTS New CAP and Area Yield Crop Insurance – Partial Decoupling
Description Farm 1
Farm 2
Farm 3
Farm 4
Farm 5
Farm 6
Farm 7
Farm 8
Farm 9
Crop Activities
Barley 154.8 43.9 16.8 29.6 49.3 67.8 99.7
Sunflower 99.3 2.6 67.5
Oats/Vicia 123.3 64.5 37.5 65.8 54.8 150.7
Pastures 754.4 442.0 124.1 3072 220.0 758.2
Set-aside 68.2 107.0 1.6 167.4 275.9 200.0 260.0 43.3 382.8
Total area 1200.0 690.0 180.0 570.0 600.0 200.0 260.0 1020.0 550.0
Livestock Activities
Beef cattle 400 150 90 450
Sheep 1080 693
Farm Income
State of Nature 1 28 273 36 371 5 631 17 454 8 368 9 926 17 319 25 520 4 562
State of Nature 2 61 867 42 216 13 322 22 409 12 329 9 926 17 319 61 423 10 353
State of Nature 3 74 408 47 448 16 123 26 847 16 033 9 926 17 319 72 888 15 007
State of Nature 4 91 548 53 294 18 732 30 299 20 787 9 926 17 319 84 600 25 701
State of Nature 5 101 837 55 240 20 017 31 789 22 070 9 926 17 319 89 370 31 963
Notes: Crop activities in hectares, livestock activities in animal units and monetary values in Euros. Source: Model Results.
RESULTS Value of the Alternatives
Description Farm 1
Farm 2
Farm 3
Farm 4
Farm 5
Farm 6
Farm 7
Farm 8
Farm 9
Old CAP 4.0506 5.0666 6.3855 1.9482 0.0810 1.7243 1.3252 5.0910 1.1122
New Common Agricultural Policy
Total Decoupling 5.2916 5.6272 6.5627 4.2536 3.3402 4.8515 5.5393 5.7417 4.9544
Partial Decoupling 5.2916 5.6272 6.5584 3.7267 2.9452 4.8515 5.5393 5.7417 4.9544
New Common Agricultural Policy and Area Yield Crop Insurance
Total Decoupling 5.3333 5.6289 6.5736 4.2669 3.3810 4.8515 5.5393 5.7577 5.1393
Partial Decoupling 5.3333 5.6289 6.5613 3.7303 2.9491 4.8515 5.5393 5.7577 5.1393
Source: Model Results.
• Total decoupling of the subsidies from the production is the scenario preferred by the farmers of this study.
• They also preferred the area-yield crop insurance program with the full decoupling of subsidies.
5 - Conclusions • The total decoupling of the subsidies leads to the decrease of
the sheep and crop (durum wheat) production, as well as the abandonment of farmers’ activities without livestock production;
• The Portuguese Government proposal allows keeping sheep production;
• The farmers want to subscribe the area yield crop insurance program since the Government pays a part of the premium;
• The introduction of the area yield crop insurance allows a small increase of crop production, when it is compared with the scenario without insurance;
• When the insurance is introduced in the Portuguese Government proposal leads to the increase of sheep production, when it is compared with the scenario without insurance; and,
• The area yield crop insurance can constitute a way to prevent the decrease of the agricultural production facing to the new Common Agricultural Policy.
6 - Bibliography
Hardaker, J., R. Huirne and J. Anderson. 1997, Coping with Risk in Agriculture, Wallingford: CAB International.
Kahneman, D. and Tversky, A. 1979, Prospect theory: an analysis of decisions under risk. Econometrica 47, 263-291.
Gonzalez, R and G. Wu, 1999, On the Shape of the Probability Weighting Function, Cognitive Psychology 38, 129-166.
Miranda, Mario J. (1991). “Area -Yield Crop Insurance Reconsidered”, American Journal of Agricultural Economics 73, 233-242.
Quiggin, J.C. 1982, A theory of anticipated utility. Journal of Economic Behavior and Organization 3, 323-343.
Tversky, Amos; Daniel Kahneman, 1992, Comulative Prospect Theory: an analysis of decision under uncertainty, Journal of Risk and Uncertainty 5, 297-323.
Wakker, Peter and Daniel Deneffe, 1996, Eliciting von Neumann-Morgenstern Utilities when Probabilities are Distorted or Unknown, Management Science, 42, 1131-1150.