Assessing the costs of risk management tools: A crop insurance scenario based on a stochastic partial equilibrium model approach

Following the move from a situation of stable, administratively determined prices and production linked subsidies to freely moving prices and decoupled subsidies, risk is of increasing concern within the EU agricultural sector. Also, significant increases in global market prices have further contributed to volatility. There are increasing interests in developing programmes aiming at providing assistance in risk management, which already exist in other countries such as the US on a large scale. The operation of these programmes is similar to insurance to some extent and therefore entails complex design issues. At the same time, these programmes generally involve policy support due to the presence of systematic risks within the sector. Thus, careful assessment is required. This paper examines a hypothetical scheme that provides protection against crop yield falls within the UK using the stochastic FAPRI-UK and EU-GOLD modelling system. The two key aspects investigated are the level of aggregation and the definition of reference. The choice of level of aggregation is closely related to the trade-offs between programme cost and its effectiveness in risk reduction. Furthermore, the definition of reference also has implications on programme costs and their variability.