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Farmers face multiple, often simultaneous, sources of risk such as weather, market prices and disease, and so a farmer's business strategy must include some form of risk management.
OECD work on risk management in agriculture advises governments on policies that empower farmers to manage their own business risks.
OECD analysis identifies three layers of risk faced by farmers:
- Normal risk is frequent but not too damaging and is typically managed at the farm or household level - for example, small variations in price or yield. General tax, health and social systems help to manage such risks.
- Marketable risks, such as hail damage, have intermediate levels of frequency and magnitude of losses.
- Catastrophic risks are infrequent, but cause great damage for many farmers - flooding, drought or disease outbreaks, for instance. The significant uncertainties associated with these events and the possibility of substantial losses makes it difficult to find market solutions, and there is a good chance of market failure.
A holistic approach
The standard approach to risk management in agriculture is linear. The risk is assessed by the farmer, who then determines a strategy to manage it. Policymakers would then look at this particular risk and this strategy rather than the broader picture. For example, a risk such as price volatility would cause difficulties for the farmer, and with no futures market available for all commodities the government may decide to intervene in prices.
However, agricultural risks are not independent but linked to one another and are part of a system that includes all available instruments, strategies and policies designed to manage risk. Using our example of price volatility, a price hike may have been caused by drought and a price fall by overproduction - themselves both risks that a farmer must manage. To manage in the event of price volatility, a farmer can use a variety of strategies, such as off-farm work, savings or diversification. And government policies could include price intervention but also direct payments to farmers.
OECD analysis calls for a holistic approach to risk management that focuses on the interactions between different types of risks, the strategies undertaken by farmers, and the whole set of government policies that impact on risk management.
Livestock Diseases: Prevention, Control and Compensation Schemes
Livestock diseases are a potentially catastrophic type of agricultural risk. This report gives an overview of the management of this risk, focusing on government policies relating to livestock health systems and compensation scheme designs.
The report includes case studies of Australia, Botswana, Brazil, Canada, France, Germany, Netherlands and Viet Nam.
- A Comparative Study of Risk Management in Agriculture under Climate Change (OECD Food, Agriculture and Fisheries Working Paper No. 58)
Climate change affects the mean and variability of weather conditions and the frequency of extreme events, which to a great extent determines the variability of production and yields. This paper reviews the scientific literature on the impacts of climate change on yield variance and investigates their implications for the demand of crop insurance and effectiveness of different farm strategies and policy measures using crop farm data in Australia, Canada and Spain.
- Risk Management in Agriculture: What Role for Governments? (pdf, 8 pages, 212 KB)
Government agricultural risk management policies should focus on catastrophic risk, especially contingency plans, while farmers should manage normal risk themselves, according to this overview of OECD work.
- OECD Thematic Review of Risk Management in Agriculture
In-depth analysis of risk management systems in five countries:
Drought risk is a key issue for agricultural risk management policy in Australia. This review recommends that Australia improve governance of drought policy, consider developing an insurance market for drought risk and help farmers adapt to climate change.
Agricultural risk management in Canada is overcrowded with policies and unable to signal layers of risk in which farmers should take responsibility for management. Canada should better define its risk programmes and layers of risk: income stabilization payments should focus more on a middle range of risk, while farmers manage normal business risk.
Dutch agricultural risk management policies focus on managing catastrophic risks such as livestock epidemics and climatic disasters. The Netherlands should develop an ex ante policy framework for disaster assistance and a longer-term strategy on insurance.
Agricultural risk management policy in New Zealand is centred on prevention of pest and disease incursions and assistance related to climatic disasters. New Zealand should strengthen a view of farming as a multi-activity enterprise, reduce uncertainty about future environmental regulations and provide better more information on risks.
Spain's agricultural insurance system must evolve to allow more competition, differentiate marketable and catastrophic risks and reduce subsidies for marketable lines. The government should also develop a framework for catastrophic risk and facilitate a wider choice of risk management tools for farmers.
- How Can Policy Underpin Farmers' Risk Management Strategies?
A background note on risk management in agriculture, prepared for the OECD Agriculture Ministerial Meeting in 2010.
- Managing Risk in Agriculture: A Holistic Approach
This publication sets out the OECD framework for risk management in agriculture.
- Farm Level Analysis of Risk and Risk Management Strategies and Policies
Using empirical data from seven countries (Australia, Estonia, Germany, Italy, Netherlands, New Zealand and the United Kingdom), this report analyzes the risk environment faced by farmers.
For more information about OECD work on risk management in agriculture, contact Jesús Antón, Senior Agricultural Policy Analyst, OECD Trade and Agriculture Directorate: firstname.lastname@example.org
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