Risk Management in Agriculture: A Holistic Approach

The sources of risk in agriculture are numerous and diverse and any production decision by a farmer must take into account these many uncertainties. Different strategies and market instruments can be used and developed, however, and it is in this context that the OECD project on Risk Management in Agriculture has sought to analyse potential government action and policies.

The conceptual framework developed by OECD is holistic in its approach and is based on three axes: the types of risk involved, farmer strategies, and government policies. Any analysis and policy advice must look at the following interactions:

• Sources of risk at the individual farmer/farm level are not independent.
• Risk management strategies are part of the overall farm business management strategy, and they include a variety of decisions that affect the on-farm production, financial and production portfolios and the use of market instruments (futures, insurance, contracts…), as well as access to government programs and policies.
• The types of risk according to characteristics such as their frequency and the magnitude of the damage determine to some extent if they can be managed at the farm level (normal risk layer) or require market instruments (insurance or market layer), or there is a market failure.
• Government policies and action should be based on explicit objectives to improve efficiency and distribution.
  Several policy guidelines have emerged. For example, policy actions should be designed to facilitate the exploitation of correlation among different types of risks; farmers should have a variety of instruments at their disposal; information sharing should be improved; and policies should be targeted to specific objectives in order to be efficient and minimally distorting.

Risk Management in Agriculture - a Holistic Conceptual Framework (PDF)

Farmers are exposed to risks associated with output and input prices, production, and risks associated with income from non-farm sources. Are some more relevant than others? What is the correlation amongst them? How does variability differ when measured at the individual or the aggregate level? How are these risks perceived by producers?

An Assessment of Risk Exposure in Agriculture: A Literature Review (PDF)

There are agricultural policies that seek to reduce risk either by reducing the incidence of risk or by mitigating the consequences on farm household income. An analysis based on information from the OECD PSE database, WTO notifications on domestic support commitments, and other OECD work offers an overview of risk-related measures in OECD countries and selected emerging economies.

An Overview of Risk-Related Policy Measures (PDF)

The following components are part of this ongoing project:

• A thematic review on risk management in agriculture
• Farm level analysis of risk management strategies and policies
• Aggregate model analysis of exogenous risk and price volatility
  In the last trimester of 2010, a conference will take place to analyse the work to date.

• Income Risk Management in Agriculture, OECD 2001 (PDF)
• Producer Support Estimates (PSE) database
• The challenge of decoupling agricultural support