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Can Risk Reducing Policies Reduce Farmer's Risk and Improve Their Welfare?

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  • Anton, Jesus
  • Giner, Celine
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    Abstract

    This paper develops an analytical model able to represent the decisions of an individual risk averse farmer facing variability in both prices and yields. A comprehensive set of stylised risk reducing policy measures is represented. A calibration of the model is used to run Monte-Carlo simulations and to obtain optimal responses. The main focus is the interaction between policy measures and market strategies in terms of impacts on production, welfare and risk. Risk reducing strategies that cover different sources of risk, such as price and yield variability, may be complementary for the farmers. Counter-cyclical area payments create incentives to bring land into production and their capacity to reduce farming risk is mitigated by the potential crowding out of substitutive market strategies. They are found to be more transfer efficient in terms of profit, but the impact on the farmer's welfare depends on the trade-off between optimal farm return and farm income variability reflected in the farmer's risk aversion. The policy package set up by the government matters because measures interact between each other, particularly when market mechanisms are available. In general, it is found that market mechanisms are better suited for reducing the relevant risk of farmers. Optimal policy mix crucially depends on the government objective, and there can be a trade off between risk reduction and farmers' welfare.

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    File URL: http://purl.umn.edu/24578
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    Bibliographic Info

    Paper provided by European Association of Agricultural Economists in its series 2005 International Congress, August 23-27, 2005, Copenhagen, Denmark with number 24578.

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    Date of creation: 2005
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    Handle: RePEc:ags:eaae05:24578

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    Related research

    Keywords: risk; welfare; policy; insurance; counter-cyclical; Agricultural and Food Policy; Risk and Uncertainty; D81; Q12;

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    1. David A. Hennessy & Bruce A. Babcock & Dermot J. Hayes, 1995. "Budgetary and Resource Allocation Effects of Revenue Assurance: Summary of Results, The," Center for Agricultural and Rural Development (CARD) Publications 95-bp7, Center for Agricultural and Rural Development (CARD) at Iowa State University.
    2. Holthausen, Duncan M, 1979. "Hedging and the Competitive Firm under Price Uncertainty," American Economic Review, American Economic Association, vol. 69(5), pages 989-95, December.
    3. Anton, Jesus & Mouel, Chantal Le, 2004. "Do counter-cyclical payments in the 2002 US Farm Act create incentives to produce?," Agricultural Economics, Blackwell, vol. 31(2-3), pages 277-284, December.
    4. Just, Richard E., 2003. "Risk research in agricultural economics: opportunities and challenges for the next twenty-five years," Agricultural Systems, Elsevier, vol. 75(2-3), pages 123-159.
    5. Lin, William W. & Dismukes, Robert, 2005. "Risk Considerations in Supply Response: Implications for Counter-Cyclical Payments' Production Impact," 2005 Annual meeting, July 24-27, Providence, RI 19304, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
    6. John Duncan & Robert J. Myers, 2000. "Crop Insurance under Catastrophic Risk," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 82(4), pages 842-855.
    7. Allan W. Gray & Michael D. Boehlje & Brent A. Gloy & Stephen P. Slinsky, 2004. "How U.S. Farm Programs and Crop Revenue Insurance Affect Returns to Farm Land," Review of Agricultural Economics, Agricultural and Applied Economics Association, vol. 26(2), pages 238-253.
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    Cited by:
    1. Fabienne Femenia & Alexandre Gohin & Alain Carpentier, 2010. "The Decoupling of Farm Programs: Revisiting the Wealth Effect," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 92(3), pages 836-848.
    2. Donnelly, Kallie & Noel, Jay E., 2006. "Optimal Market Contracting in the California Lettuce Industry," 2006 Annual meeting, July 23-26, Long Beach, CA 21461, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
    3. Rauh, Stefan & Berenz, Stefan & Heissenhuber, Alois, 2007. "ABSCHATZUNG DES UNTERNEHMERISCHEN RISIKOS BEIM BETRIEB EINER BIOGASANLAGE MIT HILFE DER MONTECARLO-METHODE (German)," 47th Annual Conference, Weihenstephan, Germany, September 26-28, 2007 7588, German Association of Agricultural Economists (GEWISOLA).
    4. Fabienne Féménia & Alexandre Gohin, 2010. "Faut-il une intervention publique pour stabiliser les marchés agricoles ? Revue des questions non résolues," Review of Agricultural and Environmental Studies - Revue d'Etudes en Agriculture et Environnement, INRA Department of Economics, vol. 91(4), pages 435-456.

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