Further risk management toolkit for EU agriculture not warranted

A concern about increased price volatility facing EU farmers marks virtually every statement on the challenges facing the CAP post 2013, with the presumption that new instruments to address this challenge should be part of the CAP reform proposals. Income insurance and ‘contractualisation’ (greater use of written contracts and new collective bargaining powers for producer organisations) are the new tools most often mentioned in this context. A new report by Stefan Tangermann published by the International Centre for Trade and Sustainable Development punctures these claims and flatly concludes that intensified risk management instruments for EU agriculture are not warranted.

His argument is based around five points.

  • Farmers may well face greater price volatility in the future, but there is little that can be done to dampen volatility of agricultural prices on international markets. While use of trade policy can help to limit the transmission of world price volatility into the EU market, this is always at the expense of trading partners including developing countries and so should be avoided.
  • However, price volatility in the coming period will most likely involve price spikes around an increasing trend or, at least, a higher price level than before. This does not threaten farm incomes and indeed will benefit farmers. He points out that the dairy ‘crisis’ in late 2008/2009 most usually cited in support of new instruments occurred between years of unusually high prices.
  • The stabilising role of direct payments which he assumes will be continued at much their current level into the next CAP financing period. Currently almost one third of factor income in EU agriculture is made up of totally reliable government payments which make a very substantial contribution to stabilising farm income.
  • The well-known problems of adverse selection and moral hazard as well as the symmetric nature of agricultural risks which are often seen as market failures preventing the emergence of private insurance markets do not disappear when schemes are publicly-funded or subsidised. The result is that, in countries where such schemes have been introduced, they tend to quite costly. There is also evidence that publicly-funded schemes crowd out private risk management solutions which adds to their cost.
  • Risk-related policies have the potential to distort production and trade. Where risk is reduced, farmers will tend to expand risky production activities, and overall resources employed in agriculture are also likely to expand when farming becomes a less risk-prone business. Even if empirical research, for now, suggests that these effects are relatively minor.

He considers that, even if in spite of these criticisms, an enhanced risk management toolkit were to be included in Pillar 2, it would be likely to do relatively little harm because of the way it would be constrained by budgetary limits.

He concludes that government policy could do more to empower farmers to manage risk, and that there will continue to be a role for disaster payments in the face of catastrophic risks. Here he recommends that “a strong dose of ex ante rules for criteria to be applied and procedures to be followed in responding to catastrophic risks would make a lot of sense”.

The real losers from price volatility are not European producers, who have a range of options open to them to transfer and cope with risk, but poor consumers in developing countries whose options, faced with a significant price spike in staple foods, are much more limited. Greater attention to the design of social safety nets and their funding therefore is warranted.

Tangermann is right to emphasise that risk management must primarily remain the responsibility of producers and the food chain as a whole. The lesson from the 2009 dairy ‘crisis’ was not the increased volatility of agricultural markets, but rather the total unprepardeness of farmers and the rest of the dairy food chain for this volatility. Having grown up in the protected nest of market price support for so long, risk mangement strategies and institutions had never been required and thus never came into being. This has got to change.

However, drawing the line between normal volatility and unexpected catastrophic risk will always be difficult. Responding to natural disasters (floods, drought, disease outbreaks) is now covered by state aid derogations and (since the 2008 Health Check) by the  possibility for Member States to use Pillar 2 funding to subsidise premiums for insurance against such production risks.

What is now proposed is that the state aid derogations would be extended to subsidies for premiums insuring also against market risk, provided they adhere to WTO Green Box rules for such payments.  Despite the powerful arguments made by Tangermann against any extension of risk management instruments in the post-2013 CAP, such insurance may have a role in helping farmers to cope with catastrophic risks and avoid that taxpayers end up paying for the totality of losses . In that context, it may actually make sense for the EU to  encourage experimentation at Member State level by allowing financial participation in subsidising such schemes to be reimbursed under Pillar 2 (an argument I made in a paper last year).

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