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Alternative Specifications of Reference Income Levels in the Income Stabilization Tool

In: Agricultural Cooperative Management and Policy

Author

Listed:
  • Robert Finger

    (Wageningen University
    Bonn University)

  • Nadja El Benni

    (University of Applied Sciences HTW Chur
    ETH Zurich)

Abstract

In this chapter, different approaches for the specification of reference income levels in the income stabilization tool (IST) are analyzed. The current proposal of the European Commission suggests a 3-year average or a 5-year Olympic average to specify the farm-level reference income that is used to identify if and to what extent a farmer is indemnified in a specific year. Using Monte Carlo simulations, we investigate the impact of income trends on indemnification if these average-based methods are used in the IST. In addition, we propose and investigate a regression-based approach that considers observed income trends to specify reference income levels. Furthermore, we apply these three different approaches to farm-level panel data from Swiss agriculture for the period 2003–2009. We find that average-based approaches cause lower than expected indemnification levels for farmers with increasing incomes, and higher indemnifications if farm incomes are decreasing over time. Small income trends are sufficient to cause substantial biases between expected (fair) and realized indemnification payments at the farm level. In the presence of income trends, average-based specifications of reference income levels will thus cause two major problems for the IST. First, differences between expected and realized indemnification levels can lead to significant mismatches between expected and real costs of the IST. Second, indemnity levels that do not reflect farm-level income losses do not allow achieving the actual purpose of the IST of securing farm incomes. Our analysis shows that a regression-based approach to specify reference income levels can contribute to bound potential biases in cases of decreasing or increasing income levels.

Suggested Citation

  • Robert Finger & Nadja El Benni, 2014. "Alternative Specifications of Reference Income Levels in the Income Stabilization Tool," Cooperative Management, in: Constantin Zopounidis & Nikos Kalogeras & Konstadinos Mattas & Gert Dijk & George Baourakis (ed.), Agricultural Cooperative Management and Policy, edition 127, chapter 0, pages 65-85, Springer.
    • Handle: RePEc:spr:comchp:978-3-319-06635-6_4
    DOI: 10.1007/978-3-319-06635-6_4
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    Citations

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    Cited by:

    1. Loughrey, Jason & Hennessy, Thia, 2016. "The Common Agricultural Policy and Farmers’ Off-farm Labour Supply," 160th Seminar, December 1-2, 2016, Warsaw, Poland 249796, European Association of Agricultural Economists.
    2. Edward Knapp & Jason Loughrey, 2017. "The single farm payment and income risk in Irish farms 2005–2013," Agricultural and Food Economics, Springer;Italian Society of Agricultural Economics (SIDEA), vol. 5(1), pages 1-15, December.
    3. Bazzani, Guido M. & Spadoni, Roberta, 2021. "Generating cropping schemes from FADN data at the farm and territorial scale," Economia agro-alimentare / Food Economy, Italian Society of Agri-food Economics/Società Italiana di Economia Agro-Alimentare (SIEA), vol. 23(3), December.
    4. Thomas Slijper & Yann de Mey & P Marijn Poortvliet & Miranda P M Meuwissen, 2022. "Quantifying the resilience of European farms using FADN," European Review of Agricultural Economics, Oxford University Press and the European Agricultural and Applied Economics Publications Foundation, vol. 49(1), pages 121-150.
    5. ZGAJNAR, Jaka, 2016. "Simulation Model Based On Iacs Data; Alternative Approach To Analyse Sectoral Income Risk In Agriculture," Review of Agricultural and Applied Economics (RAAE), Faculty of Economics and Management, Slovak Agricultural University in Nitra, vol. 19(1), pages 1-9, April.
    6. Jason Loughrey & Fiona Thorne & Thia Hennessy, 2016. "A Microsimulation Model for Risk in Irish Tillage Farming," International Journal of Microsimulation, International Microsimulation Association, vol. 9(2), pages 41-76.
    7. Severini, Simone & Biagini, Luigi & Finger, Robert, 2019. "Modeling agricultural risk management policies – The implementation of the Income Stabilization Tool in Italy," Journal of Policy Modeling, Elsevier, vol. 41(1), pages 140-155.

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