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WP 4 Alberto Garrido & María Bielza Universidad Politécnica de Madrid- Spain

Review of historic, current and developing private, public and public-private risk management Instruments. WP 4 Alberto Garrido & María Bielza Universidad Politécnica de Madrid- Spain. Objectives of WP4.

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WP 4 Alberto Garrido & María Bielza Universidad Politécnica de Madrid- Spain

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  1. Review of historic, current and developing private, public and public-private risk management Instruments WP 4 Alberto Garrido & María Bielza Universidad Politécnica de Madrid- Spain

  2. Objectives of WP4 • To review historic, current and developing RMIs in (non-) European countries. Also programs that have failed are included. • Specifically, it looks at: • their performance (participation, loss ratio). • their economic impact (incentives, risk reducing effects, budgetary expenses)

  3. Deliverables and links to other WPs • Deliverable: a comprehensive and fully updated report on risk management tools in agriculture • Serve as a framework, guide, reference and comparison of the RMIs analysed in the other WPs.

  4. Description of work • Update literature on historic, current and developing (private, public and public-private) RMIs by using: • Literature • Internet • Experts • Interpret results towards (crisis) risk management opportunities in the European Union

  5. Syllabus • Conceptual problems • A taxonomy of risks • Risk Management Instruments • Instruments evaluation • The opportunities for prospective (crisis) risk management in the European Union.

  6. Conceptual problems • Risks vs. crises • Short vs. long term risks • Private vs. Public hazards/risks

  7. Conceptual problems (Risks vs. Crises) • Risks • With production factors (personal, financial, input,..) • Production risks (yield variability) • Price risks And • Crises: • Natural disasters: drought, floods, excessive rain, frost, hail, storms, earthquakes… • Diseases and pests affecting animal or plant health or contamination in the food chain . • Economic factors having short-term but significant effects on farm income. • Unforeseeable disruption of market access.

  8. Conceptual problems (Long vs. Short term) “Contrary to more long-term and often predictable structuralproblems, a crisis is characterised by an abrupt shock with high intensity negative consequences. However, a short-term crisis may result in long-term structural problems” (EC, 2005)

  9. Conceptual problems – Short vs. Long run risksNumber of holdings (1000) Source: Eurostat (2006)

  10. Conceptual problems -- Private vs. Public risk consequencesThe costs of foot-and-mouth disease in the UK (2001-05) (1000 €) Source: The Economist(July 27, 2002)

  11. A taxonomy of risks • 6 key characteristics with implications for the development of RMI and public involvement • What risks do farmers care about?

  12. A taxonomy of risks • 6 characteristics and 6 hazards 5 most difficult to predict – 1 easiest to predict

  13. A taxonomy of risks – What risks do farmers care about? 1 --ranked first NA: Not addressed

  14. RM Instruments • Combating the hazard, reducing vulnerability or increasing resilience?

  15. RM Instruments evaluation • Taxonomy of methods: • Welfare analyses • Cost-Benefit Analyses • Financial evaluations • Socio-economic evaluations • Psychological evaluations

  16. RM Instruments evaluation • Indicators RMI of success: • Usage rates • Innovation / renovation • Welfare gains • Subsidies’ dependency • Equity • Degree of market distortions • Low vulnerability to asymmetric information • Environmental effects

  17. RM Instruments evaluation – Reality • Very few ex – post analyses • Excessive reliability on Utility/financial measures • Overwhelming majority of simulation and normative models • Robust results on decoupling and market distortions (OECD leads the work) • Overwhelming attention to US insurance (adverse selection and moral hazard)

  18. RM Instruments evaluation - Synthesis • Few farmers use (directly) futures markets • RMIs tend to be complementary • Decoupled measures of support: • Risk effects, large • Wealth effects, small • Non-trade distorting

  19. RM Instruments evaluation – Insurance Synthesis • Insurance • Needs government support to take-off • Dependent on subsidies • Not clear evidence about adverse selection/moral hazard • Needs to improve loss adjustment procedures • Is best developed in 3-legged partnerships (insurance companies, farmers and government)

  20. RM Instruments evaluation – Insurance Synthesis • Trends: • US: revenue insurance, high coverages, increasing reliance on subsidies, livestock insurance • Canada: Stabilisation funds, targets ‘reference margins’, heavily subsidised • Spain: MPCI for all kinds of crops, yield insurance for fruits and winter crops, livestock insurance, whole-farm insurance.

  21. RM Instruments evaluation – Insurance Synthesis Ratio Subsidies/Insured K & Insured K in Spain

  22. The opportunities for prospective (crisis) risk management in the European Union (10 points) • Some risks originated in the farm sector may have massive consequences for non-farm sectors. • Risks created by agricultural and environmental policies will be very difficult to address. • Contingent-state contracts, futures/options and other index derivatives have limited potential • A diverse set of Risk management instruments should target multiple risk sources

  23. The opportunities for prospective (crisis) risk management in the European Union • Co-operatives or growers associations could become more active players • Instruments with greater coverage levels come with lower subsidies efficiencies. • Farmers need of large menus of instruments, and be given the option to use combinations of these • Stabilisation funds could help farmers reduce their revenue instability.

  24. The opportunities for prospective (crisis) risk management in the European Union • Market-based instruments must grow. • As compared to the measures of support, insurance is relatively cheap in terms of the protection it provides (in Spain 1 € of premium subsidies provide coverage to 40€ of total liability).

  25. Deliverables and planning • Month 10: Interim I (for 1st joint meeting) • Month 17: Interim II (for 2nd joint meeting) • Month 24: Interim III (for 3rd joint meeting) • Month 30: Interim IV (for 4th joint meeting and preparation closing workshop) • Month 33: Review risk management, final report • Month 35: Scientific paper

  26. Main points for discussion • What types of farm risks are to be taken into account (personal risks, financial risks, catastrophes that affect all sectors...) • Evaluation • Methods • Indicators • Variables • The public/private role in developing new RMIs

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