Farm Level Assessment of Farmer s Exposure to Agricultural Risk: Cross-country analysis Shingo Kimura Trade and Agriculture Directorate Fourth meeting of the OECD Network for Farm Level Analysis, 7-8 September 2009
Outline of presentation 1. Description of micro data from 7 countries 2. Assessment of producer s exposure to risks 3. Correlation of agricultural risks across farms 4. Factors that determine income variability 5. Some findings and next steps OECD Trade & Agriculture Directorate 2
Farm level data from 7 countries Country The Netherlands Italy Estonia New Zealand Farm type Crop farms Field crop farms Cereal farms Specialized crop farms Crop farms Crop and livestock farms Sheep and beef farms Major commodity Wheat, barley, oilseed and sugarbeet Wheat, potato and sugarbeet Wheat, barley and oilseed Rice, potato and tomato Wheat, barley Wheat, oilseeds, oats, barley, cattle and sheep Sheep, lamb, cattle and wool Number of samples 232 97 96 91 104 185 100 Length of the data 12 years 6 years 9 years 5 years 8 years 7 years 10 years OECD Trade & Agriculture Directorate 3
Risk exposure: Yield variability Higher yield variability at farm level data across countries - Yield is location specific and favorable yield in one place is offset by the unfavorable yield in another place in the aggregated data (= special aggregation bias). Coefficient of variation of wheat yield Wheat Farm level Wheat Aggregate 0.00 0.10 0.20 0.30 0.40 0.50 Estonia The Netherlands OECD Trade & Agriculture Directorate 4
Risk exposure: Yield variability Coefficient of variation of barley yield Coefficient of variation of oilseed yield Farm level Aggregate Farm level Aggregate 0.00 0.10 0.20 0.30 0.40 0.50 0.60 0.00 0.10 0.20 0.30 0.40 0.50 Estonia OECD Trade & Agriculture Directorate 5
Risk exposure: Yield variability Wheat Barley Oilseed Sugarbeet Rye Rice Potato Tomato Corn Beef cattle Sheep Yield coefficient of variation at the farm-level yield Estonia The Netherlands Italy New Zealand 0.00 0.10 0.20 0.30 0.40 0.50 OECD Trade & Agriculture Directorate 6
Risk exposure: Price variability Higher price variability at farm level data, but to less extent - Price is less location specific and the integration of output market equalize the price across locations. Coefficient of variation of wheat price Farm level Aggregate 0.00 0.10 0.20 0.30 0.40 0.50 0.60 0.70 Estonia OECD Trade & Agriculture Directorate 7
Risk exposure: Price variability Price coefficient of variation at the farm-level yield Estonia The Netherlands Italy New Zealand 0.00 0.10 0.20 0.30 0.40 0.50 0.60 Wheat Barley Oilseed Sugarbeet Rye Rice Potato Tomato Corn Beef cattle Sheep OECD Trade & Agriculture Directorate 8
Wheat Barley Oilseed Risk exposure: Comparing price and yield variability Wheat Barley Oilseed Price risk seem larger than the yield risk at the aggregated data, but farmer may be exposed more to yield risk than to price risk Comparison of coefficient of variation of price and yield Aggregate level Price Yield 0.00 0.10 0.20 0.30 0.40 0.50 0.60 0.70 Farm level Price Yield 0.00 0.10 0.20 0.30 0.40 0.50 0.60 Estonia Estonia Estonia Estonia OECD Trade & Agriculture Directorate 9
Oilseed Barley Wheat Risk exposure: Price-yield correlation Lower yield-price correlation at farm level data, but still significant in many cases. Coefficient of correlation of price and yield (Aggregate versus Farm level) Farm level Aggregate 0.00 0.10 0.20 0.30 0.40 0.50 0.60 0.70 0.80 0.90 OECD Trade & Agriculture Directorate 10
Risk exposure: Price-yield correlation Farm level correlation of price and yield across commodities Netherland Italy 0.00 0.10 0.20 0.30 0.40 0.50 Wheat Barley Oilseed Sugarbeet Tomato Rice Corn OECD Trade & Agriculture Directorate 11
Correlation of risk across farms: Insurability of agricultural risk Insurability of agricultural risks depends on systemic nature of risk, information asymmetricity and transaction costs. Low Chance of moral hazard and adverse selection High Single peril Hail Output price Multiple peril crop yield More idiosyncratic Revenue Income More systemic Single peril Hail Multiple peril crop yield Income Revenue Output price Insurable through markets Insurable with government subsidy Not insurable. Market can offer futures or forward contact OECD Trade & Agriculture Directorate 12
Correlation of risks across farms Insurability of specific risk depends on the correlations of risk across farms Farm level correlation of price and yield across commodities () Yield Price Revenue (per ha) 0.00 0.10 0.20 0.30 0.40 0.50 0.60 0.70 0.80 Wheat Barley Oilseeds idiosyncratic systemic OECD Trade & Agriculture Directorate 13
Correlation of risk across farms: Simulation of insurance policy Simulation of insurance policy indicates that the variability of indemnity payment is much higher than other insurance that the market offers Insurance offered in the market Simulated indemnity payment Indemnity payment Wheat yield insurance Independent Actural correlation Mean 31.71 31.78 Standard deviation 19.70 29.54 Coneffienct of variation 0.62 0.93 Maximum 130.04 276.99 *Insurance is assumed to be 35% deductible and simulation is conducted 1000 times Type of insurance *Miranda and Glauber 1997 Coefficient of variation of total indemnities Auto collision 0.05 Workers compensation 0.09 Homeowners multiple peril 0.12 Commercial multiple peril 0.11 Inland marine 0.06 Fire 0.06 Group accident and health 0.11 Allied lines 0.12 Ocean marine 0.06 Crop-hail 0.15 35% deductible crop insurance program estimated by Miranda and Glauber (1997) OECD Trade & Agriculture Directorate 14 0.81
What factors are contributing to income stabilization?: Revenue cost correlation Positive correlation between farm revenue and cost is reducing the variability of farm income Farm level correlation of farm revenue and variable cost 0.00 0.10 0.20 0.30 0.40 0.50 0.60 Estonia Netherland Italy New Zealand OECD Trade & Agriculture Directorate 15
What factors are contributing to income stabilization?: Off-farm income Farmer may be making use of off-farm employment to stabilize household income Correlation of off-farm income and farm revenue Correlation of off-farm income and variable cost 0.05 0-0.05-0.1-0.15 0.00 0.05 0.10 0.15 0.20 0.25 0.30 Netherland Netherland OECD Trade & Agriculture Directorate 16
What factors are contributing to income stabilization?: Government Subsidy Positive correlation between subsidy and variable cost may be more significant in stabilizing income than subsidy revenue correlation. Correlation between subsidy and farm revenue Correlation between subsidy and variable cost -0.20-0.10 0.00 0.10 0.20 0.30 0.40 0.00 0.10 0.20 0.30 0.40 0.50 0.60 0.70 Estonia Netherland Italy Estonia Netherland Italy OECD Trade & Agriculture Directorate 17
Which correlations are important in stabilizing income? Income risk is not a sum of each component Farm Income (I) = Revenue (R) + Subsidy (S) Cost (C). Var( I) Var( R) Var( S) Var( C) 2Cov( R, S) 2Cov( R, C) 2Cov( S, C) Variance components Covariance components OECD Trade & Agriculture Directorate 18
Which correlations are important in stabilizing income? Variance components Covariance components Farm income Estonia Italy New Zealand Farm income and diversified income Farm income Farm income Farm income Farm income Sub Total 100% 100% 100% 100% 100% 100% Output 76% 71% 65% 41% 71% 63% Crop output 29% 27% Livestock output 39% 36% Other agricultural output 9% 8% Input cost 22% 21% 20% 57% 19% 37% Subsidy 2% 2% 7% 2% 10% On-farm diversified income 6% Sub Total -56% -70% -62% -55% -63% -50% Among output -3% -3% Output and cost -55% -51% -50% -65% -57% -50% Output and subsidy 1% 1% 2% 3% -3% Subsidy and cost -2% -2% -14% -5% -3% Diversified income and output -3% Diversified income and cost -15% Diversied income and subsidy Variance of income relative to the case without correlations 3% 44% 30% 38% 45% 37% 50% OECD Trade & Agriculture Directorate 19
Does crop diversification reduce revenue risk? Per hectare revenue: monoculture and crop diversification Estonia Netherland Oilseeds 0.31 0.33 Return from each crop Rye 0.29 Spring barley 0.38 Sugarbeet 0.16 0.27 Winter barley 0.23 0.34 0.42 Wheat 0.20 0.31 0.53 0.64 Oat 0.52 Starch potato 1.51 Ware potato 1.41 Seed potato 0.86 Total crop revenue 0.12 0.22 0.29 0.35 Significant reduction of revenue variability OECD Trade & Agriculture Directorate 20
Does crop diversification reduce revenue risk? Less than one correlation of revenue can reduce the variability of total revenue Wheat Oilseed Barley Wheat 1 0.44 0.71 Oilseed 1 0.43 Barley 1 The Netherlands Estonia Wheat Oat Barley Wheat 1 0.25 0.03 Oat 1 0.68 Barley 1 Ware Seed Sugarbe Starch Wheat Onoin potato potato et potato Ware potato 1-0.12 0.11 0.16 0.46-0.04 Seed potato 1-0.03 0.30 0.36 0.06 Sugarbeet 1-0.01 0.08 0.16 Wheat 1 0.17 0.22 Onoin 1 0.00 Starch potato 1 OECD Trade & Agriculture Directorate 21
Some preliminary findings Farm - level data is very useful for risk analysis in agriculture Aggregated data can be misleading - Farmer faces higher yield variability, and lower negative yieldprice correlation at the farm level - Farmer may be exposed more to yield risk than price risk. Degrees of correlation across farms are different depending on the agricultural risks Correlations and crop diversification are stabilizing farm income OECD Trade & Agriculture Directorate 22
Next Steps More country / sector coverage Harmonization of data for cross-country and crosssector comparison of risk exposure More detailed analysis of income stabilization strategies adopted by farmers Policy simulation in each country s setting Application of cluster analysis to other countries OECD Trade & Agriculture Directorate 23
Thank You Trade and Agriculture Directorate Visit our website: www.oecd.org/agriculture/policies/risk Contact us: shingo.kimura@oecd.org OECD Trade & Agriculture Directorate 24