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Risk Mitigation in Agriculture: Are we asking the right questions?. Sarthak Gaurav, Ph.D. Scholar, IGIDR ‘Risk Mitigation in Agriculture’ 11 th Aug, 2009, Ahmedabad. Returns from Farm and Off-farm Activity 2002-03.

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risk mitigation in agriculture are we asking the right questions

Risk Mitigation in Agriculture: Are we asking the right questions?

Sarthak Gaurav, Ph.D. Scholar, IGIDR

‘Risk Mitigation in Agriculture’

11th Aug, 2009, Ahmedabad

returns from farm and off farm activity 2002 03
Returns from Farm and Off-farm Activity 2002-03

Source: Calculated from unit level data NSS, 59th Round, Situation Assessment Survey of Farmers

agrarian crisis
Agrarian Crisis
  • Deceleration in production and productivity
  • Waning profitability and poor returns
  • Limited off-farm opportunities
  • Marginalization of land holdings
  • Decline of public investment in irrigation and other infrastructure
  • Indebtedness to informal credit sources
  • Failure of research and extension
  • Do agricultural risks affect the risk averse farmers’ and farm households’ resource allocation & welfare?
  • Are the effects of risk and its management strategies heterogeneous?
  • Impact on decision making and behaviour?
  • Is variability of yield and prices a significant source of income risk ?
green revolution blues
Green Revolution Blues
  • Crop production became more sensitive to weather (rainfall) and price changes since mid 60s
  • > 90% of increase in production variance at national level due to changes in inter-district production covariance (Walker 1989)
  • Area shifts to HYVs led allocation of ‘riskier and inferior’ land to other riskier crops where CV is high (also population pressure)
growth and instability
Growth and Instability

HYV/fertilizer/modern purchased input intensive farming

  • Higher income risk for the farmer:
  • Increase in Yield Variance (high CV)
  • Increase in Covariance of yields of different crops and regions
  • Decrease in area-yield correlation
people respond to incentives do farmers
People Respond to Incentives..Do Farmers?
  • Weaker supply response in last 50 years
  • Non-price factors dominate over price factors
  • Rabi crops respond better to P increases than Kharif
  • Adjustments by varying non-land inputs
  • Acreage shifts from food grains to non-food grains
  • High Regional Variations in Irrigation and Yield
yield risk price risk affair
Yield Risk- Price Risk Affair

Stage 1: farmers allocate land based on Pe

Stage 2: yield is determined on basis of other inputs, agro-climatic variables, bio-physical factors and farmer characteristics, given acreage

  • Yield depends on Price (inputs and output)
  • Negative Correlation b/w Yield and Price makes reduction in revenue variance difficult
yield risk price risk and income in icrisat villages 1975 76 1983 84
Yield Risk, Price Risk and Income in ICRISAT Villages (1975/76-1983/84)

Source: Anderson and Hazell 1989

evidence on yield risk
Evidence on Yield Risk
  • Yield Variability > Price Variability by 4
  • Yield Variability Main Reason for Income Instability
  • In 49 out of 59 un-irrigated districts yield variation exceeds price variation (1956-1974 data) Walker and Ryan (1990)
  • Credit Market Imperfections interact with land and labour market imperfections
true welfare effects
True Welfare Effects
  • Impact on Consumption (direct and indirect)
  • Non-separability of production and consumption decisions
  • Different impact on different categories of rural households- landless agricultural labourers and deficit farmers are worst off
the risk averse homo economicus
The Risk Averse Homo economicus
  • Low income farmers are Risk Averse
  • This leads to inefficiency of resource use (MVP> Factor Price); sub-optimal decisions
  • Cropping Patterns to safeguard family security. Forget Profits; safety-expected profit tradeoff
  • Reduction of input levels (risky output, certain Input costs)
  • Laggards, Delays in Innovation and Adoption of New Tech
measuring risk attitudes
Measuring Risk Attitudes
  • Risk Aversion (Moscardi and de Janvry 1977, Dillon and Scandizzo 1978, Rosenzweig and Binswanger1993, Townsend 1994, Morduch 1995, …)
  • Direct Elicitation Methods/Experimental Gambling (Binswanger 1980,…);Disaster Avoidance (Roumasset 1976)
  • How close to real farming & real losses?
  • Do we factor in the constraints & interlinks?
contingent markets are imperfect public policy
Contingent Markets are Imperfect: Public Policy?
  • traditional Informal mechanisms fail in case of covariate shocks and disastrous losses
  • impose costs in terms of equity and sustainability
  • natural disasters/cats may trigger involuntary defaults
innovations can add to the risk
Innovations can add to the Risk!
  • increased input costs might depress net farm income
  • ‘worst-case’ gross output might go up, while ‘worst-case’ net farm income falls vis-à-vis traditional scenario e.g. Bt Cotton Seeds
  • profitability, land tenure and info asymmetry matters
  • changing technology and market conditions can add to uncertainties in product & factor markets