Income Stabilisation in a Changing Agricultural World: Policy and Tools

This paper attempts to draw conclusions regarding Risk Management instruments (RMI) for potential development or expansion in the EU (Garrido and Bielza, 2007). Using data from EU countries, compiled in the course of two EU research projects about RMIs, we perform a cross-sectional analysis of the role of agricultural insurance and ad hoc payments. Tests of comparisons of means of key insurance data reveal the impact of insurance policies and the degree of competitiveness in supply side. While the presence of subsidies explains differences across EU member states' (MSs) insurance data, the degree of competitiveness is not a differentiating factor. In the last part of the paper, we rate a number of RMIs on the basis of a number of criteria. We conclude that RMIs on EU scale should be flexible enough to accommodate very diverse risk contexts, farmers’ demands and ongoing national programmes. Our conclusions may be useful in defining RMIs within the scope of European Agricultural Policy, and as an extension of similar studies (Cafiero et al. 2005; European Commission (2006a).

Revisiting the demand of agricultural insurance: The case of Spain

We use the actual insurance records of 52,300 farmers and 11 years to estimate two sets of insurance demands. We define measures of insurance's expected returns, variance and third moment, based on observed insurance data, and infer the expected returns for those farmers that have never had an indemnity. We estimate several probit models and count models for the insuring vs non-insuring strategies, in which the economic returns of insurance and its two measures of dispersion enter as explanatory variables. Results show that farmers' insurance strategies are largely explained by their actual insurance experience as captured by these three variables. Individuals with loss rations greater than 1 do not show more responsiveness that those facing more balanced premium charges. Results show that adverse selection may not be a major source of inefficiency in the Spanish insurance system.Agricultural insurance, insurance demand models, Spain, Risk and Uncertainty, G22, Q12, Q14,

Evaluating the Potential of Whole-Farm Insurance Over Crop-Specific Insurance Policies

Since 1996, different formats of whole-farm insurance (WFI) have been launched in North America and Spain. Their rationale is to pool all farm's insurable risks into a single policy that provides cheaper coverage against the farm's revenue losses. We evaluate the gains of moving from a situation of full insurance coverage delivered by crop-specific policies to WFI. Based on the records of individual farmers gathered by the Spanish Agricultural Insurance Agency (ENESA), we select two representative farms in Valencia that have consistently purchased insurance during 1993-2004 for three crops (apricots, plums and wine grapes). WFI is designed to deliver exactly the same expected revenue than does the combined effects of three crop-specific multiple-peril insurance policies, covering from the same risks. We carry out Monte-Carlo simulations to compare crop-specific insurance with WFI, looking at premium differences, farms' revenues, and farmers' utilities (DARACRRA). From ENESA's database we evaluate the parameters of the yield distribution functions, the eligible losses distribution functions and their correlation. Results show that WFI is slightly superior to crop-specific insurance. Premia are 20% cheaper, and certainty equivalents slightly larger. Yet, the left tail of the revenue distribution is only weakly reduced by either insurance strategy, due to crop risks that are not covered by either policy. The main conclusion is that, if crop-specific insurance is sufficiently mature, farmers would benefit from WFI and Governments would enhance the efficiency of their insurance subsidies.agricultural insurance, whole-farm insurance, simulation, crop risks, Spanish agriculture, Risk and Uncertainty, Q14, G, Q18,

Latin American Agricultural Trade: The Role of the WTO in Sustainable Virtual Water Flows

International agricultural trade has been growing significantly during the last decade. Many countries rely on imports to ensure adequate food supplies to the people. A few are becoming food baskets of the world. This process raises issues about the food security in depending countries and potentially unsustainable land and water use in exporting countries. In this paper, we analyse the impacts of amplified farm trade on natural resources, especially water. Farm exports and imports of five Latin America countries (Brazil, Argentina, Mexico, Peru and Chile) are examined carefully. A preliminary analysis indicates that virtual water imports can save valuable water resources in water-short countries, such as Mexico and Chile. Major exporting countries, including Brazil and Argentina, have become big exporters due to abundant natural resource endowments. The opportunity costs of agricultural production in those countries are identified as being low, because of the predominant green water use. It is concluded that virtual water trade can be a powerful tool to alleviate water stress in semi-arid countries. However, for exporting nations a sustainable water use can only be guaranteed if environmental production costs are fully reflected in the commodity prices. There is no basis for erecting environmental trade tariffs on exporters though. Setting up legal foundations for them in full compliance with WTOs processes would be a daunting task.farm trade, water, blue water, green water, global sustainability, food production, global food demand, water pricing, WTO, International Relations/Trade, Resource /Energy Economics and Policy,

An innovative option contract for allocating water in Inter-Basin Transfers: the case of the Tagus-Segura Transfer in Spain

The Tagus-Segura Transfer (TST), the largest water infrastructure in Spain, connects the Tagus basin’s headwaters and the Segura basin, one of the most water-stressed areas in Europe. The need to increase the minimum environmental flows in the Tagus River and to meet new urban demands has lead to the redefinition of the TST’s management rules, what will cause a reduction of transferable volumes to the Segura basin. After evaluating the effects of this change in the whole Tagus-Segura system, focusing on the availability of irrigation water in the Segura, the environmental flows in the Tagus and the economic impacts on both basins; we propose an innovative two-tranche option contract that could reduce the negative impacts of the modification of the Transfer’s management rule, and represents an institutional innovation with respect to previous inter-basin water trading. We evaluate this contract with respect to spot and non-market scenarios. Results show that the proposed contract would reduce the impact of a change in the transfer’s management rule on water availability in the recipient area

Bayesian Credibility for GLMs

We revisit the classical credibility results of Jewell and B\"uhlmann to obtain credibility premiums for a GLM using a modern Bayesian approach. Here the prior distributions can be chosen without restrictions to be conjugate to the response distribution. It can even come from out-of-sample information if the actuary prefers. Then we use the relative entropy between the "true" and the estimated models as a loss function, without restricting credibility premiums to be linear. A numerical illustration on real data shows the feasibility of the approach, now that computing power is cheap, and simulations software readily available

THE EFFECTS OF SPOT WATER MARKETS ON THE ECONOMIC RISK DERIVED FROM VARIABLE WATER SUPPLY

Water availability in semiarid regions commonly exhibits patterns of extreme variability. Even in basins with large infrastructure development, some users are subject to low levels of water reliability, incurring economic losses during periods of scarcity. More flexible instruments, such as voluntary exchanges of water among users, may help users reduce their risk exposure. Recent changes in the Spanish water Law have given an initial impulse to allow for lease-out contracts of water use rights. This paper analyses, from theoretical and empirical standpoints, the effect that establishing water markets has on the economic risk caused by water availability variations. The empirical study is performed on an irrigation district of the Guadalquivir Valley (Spain) with fair levels of average water availability but a high probability of periods of extreme scarcity. A non-linear programming model is used to simulate irrigators' behaviour and derive water demand functions. Another spatial equilibrium model is used to compute market exchange and equilibrium. These programming models are combined with statistical simulation techniques. It is shown that the probability distribution of profits for a representative irrigator is modified if water exchanges are authorised, resulting in unambiguous risk reductions. Results also suggests that if the market would be extended to several irrigation districts and users, each characterised by different hydrological risk exposure, the occurrence of extremely low benefits events would become more unlikely. In sum, it is shown that exchanging water in annual spot markets allows for the reduction of farmers' economic vulnerability caused by the variability of water supply across irrigation seasons.Resource /Energy Economics and Policy,

Modelling Spot Water Markets Under Uncertain Water Supply

Water availability in semiarid regions usually exhibits patterns of extreme variability. Even in intensively controlled basins, some users are subject to low levels of water reliability, and more vulnerable to periods of extreme scarcity. To reduce their risk exposure more flexible instruments, such as voluntary exchanges of water among users, are required. Recent changes in the Spanish water Law have given an initial impulse to allow for leases of water use rights. Properly designed and monitored, this instrument provides some flexibility to water management, and may increase the economic use efficiency as well as mitigate the adverse economic effects of droughts. This paper looks at the risks and uncertainty dimensions of water markets, which have not been paid much attention in the literature. It analyses, from theoretical and empirical standpoints, the role that uncertainty plays in market participants' decisions and its impact on gains from trade. Two models have been developed to carry out the empirical application. One is a stochastic and two-stage discreet programming model which simulates irrigators behaviour and the other is a spatial equilibrium model to compute market exchange and equilibrium. Water market price endogeneity is solved by an iterative process, which characterise price uncertainty from the results obtained from the spatial equilibrium model. Hydrological risk is characterised at the irrigation farm level through the variation of the water allowances served for irrigation. The application is performed on eleven irrigated farms in a district of the Guadalquivir Valley (Southern Spain. It is shown how water availability uncertainty reduces farmers' benefits because of the fact that they must take ex-ante decisions. However, if market participation is allowed once water allowances become known, even at an uncertain price, the benefit losses are partly mitigated. From a methodological standpoint, these results suggest that the agricultural water market benefits estimates found in the literature may be undervalued as a result of omitting the option to participate in the market in the mix of possible strategies. Exchanging water in annual spot markets allows for the reduction of farmers' economic vulnerability caused by the variability and uncertainty of water supply within an irrigation season.uncertainty, farm modelling, water markets, water supply, Resource /Energy Economics and Policy,

Revenue Insurance as an Income Stabilization Policy: An Application to the Spanish Olive Oil Sector

Various forms of revenue insurance have been applied in Canada and in the US with relative success. In this paper different combinations of traditional agricultural policies and revenue and yield insurance are analysed for the Spanish olive oil sector. Taking a database containing about half million Spanish olive growers during 8 campaigns, five possible policies are studied and the results are examined according to different criteria including average revenue and its variability, growers utility gains, taxpayers cost and the transfer efficiency of support. The policies analysed are: (1) non-intervention; (2) the policy currently in force in Spain that combines a production aid with a yield insurance; (3) a revenue insurance, only; (4) revenue insurance combined with a production aid; and (5) an aid per tree in combination with revenue insurance. The methodology is based on Monte-Carlo simulations performed on about 100 groups of growers that have been grouped according to their expected yields and variability. Assuming and estimating olive oil price and yields correlations for each group of growers, the analysis allows for consistent policy comparisons at a very disaggregate level. Using the results for all analysed groups, policies are ranked based on the above criteria at the provincial and national levels. Results show that the current regime of EU production aids of olive oil eliminates the advantage of extending the current yield insurance to a revenue insurance. It is also shown that the level of support delivered by production aids cannot be reached with revenue insurance even with completely subsidised premiums. Finally, it is shown that the policy that combines tree aids with revenue insurance exhibits good results for all examining criteria.Agricultural policy, revenue insurance, olive oil sector, Risk and Uncertainty,