Effective Risk Management Policy choices under Climate Change: An Application to Saskatchewan Crop Sector

There is growing concern about the impact of climate change on agriculture and the potential need for better risk management instruments that respond to a more risky environment. This is based on the widespread assumption that climate change will increase weather and yield variability and will expose farmers to higher levels of risk. But it is not obvious what will be the net impact of those on the distribution of yields and its correlation with weather indexes. Five stylized scenarios for crop yields are built on the basis of the available empirical information: baseline, marginal climate change without adaptation, with adaptation and with misalignment of expectations, and an extreme events scenario. A micro simulation model is calibrated using micro farm level data from the Canadian province of Saskatchewan. Four alternative policy measures are analyzed: three types of subsidized insurance (individual yield, area-yield and weather index) and an ex post disaster payment. Results on insurance uptake, budgetary costs and impacts on diversification, farmers’ welfare and farm income variability, are presented for three different types of farms. The paper goes beyond indentifying the effectiveness of risk management instruments under stylized climate change scenario and analyze the policy decision criteria when policy makers face ambiguous climate change contingencies.