kjp on market instability
TRANSCRIPT
Why volatility can be useful and uncertainty needs more attention
Krijn Poppe l senior economist and research manager
LEI Wageningen UR
Seminar Market Instability, Ulysses project, Milan 2015
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• 1960s policy debate: should we have a CAP for ware and seed potatoes ?
• Favoured by France, fiercely opposed by The Netherlands
• Starch potatoes: high volatility in yields (sandy soils), fixed (wheat-based) price: volatile incomes
• Ware and seed potatoes: high volatility in yields (but irrigation easier), very volatile prices, very volatile incomes, but at a higher level.
Gerlich’s hog cycle: 1911 - 2011
(c) Parker & Shonkwiler – ERAE 41 (1) 20145
In praise for price volatility
In saturated markets with yield increases, production areas have to decline
Technical change that increases labour productivity (to raise incomes) means that areas have to concentrate on larger farms
In a year / period with low prices farms quit the sector – and have a socially acceptable excuse to do so
Years with high prices (due to weather that reduces yields with inelastic demand) provide the 20% best farms with a financial buffer to
●innovate: buy the new and bigger machinery
●enlarge: buy the land of the neighbour
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Volatility of output vs. farm income in the EU
EU Project Income Stabilisation
income higher than opportunity
costs1%
income still positive
17%
delay redemption22%
financial distress30%
before shock negative income
30%
Simulated income crises (arable)
income higher than opportunity
costs13%
income still positive
77%
delay redemption4%
before shock negative income
3%financial distress3%
Spain Netherlands
income higher than opportunity
costs1%
income still positive
30%
delay redemption37%
financial distress17%
before shock negative income
15%
income higher than opportunity
costs6%
income still positive
31%
delay redemption23%
before shock negative income
24%
financial distress16%
GermanyHungary
Is there a policy issue to be researched ?
Price and output volatility are easier to measure, but income stability is the political issue
Farmers have many tools to cope with instability:
●Cropping plan and technical decisions
●Insurance (technology helps)
●Future markets
●Contracts
●Pooling of sales in a cooperative or with a merchant
●Level of borrowing (solvency)
●Tax smoothing
Should we address policy makers to take action if we conclude on price, yield or income volatility ??
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About 40% of growers have financial stress, lack of cash flow
Financial stress in Dutch glasshouse horticulture
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Farm Income per FTE, Glasshouse horticulture – NL
Vegetables
Loans exploded and are now redeemed(index long term loans / m2 glass, 2001/05=100)
12Source: LEI FADN
OECD Trade & Agriculture 13
Catastrophic RisksRare, high damage &
systemic
Marketable RisksMiddle range
Normal RisksSmall damage but
frequent
On farm strategies
Market tools
Ex-ante Policies
Ex-post Policies
Good policy response: Risk layeringProbability
Higher income loss
On-farm strategy- Diversification- Saving
Market tools- Forward contract- Private insurance
Disaster Assistance Policies - Ex-ante/ Ex-post payment - Subsidized insurance
Mor
e go
vern
men
t in
volv
emen
t?
Good Governance
Uncertainties matter more than risks
(c) The Economist; source Munich-Re 14
Provocative statements for the discussion
Farmers: trade off between risk and return (CAPM)
It is hard in CAP to reduce their risk without their returns
Volatility has positive effects at sector level as it supports sector dynamics: innovation and scaling up
Farmers have many tools to manage risks and if not, governments could help to install market based solutions
Researchers that study such risks should refrain from policy advise but address farm management
Given climate change and plant and animal diseases, researchers (and CAP) should concentrate on resilience to catastrophic risks, uncertainties, black swans...
How to provide a (social) safety net to farmers: CAP or normal social policy ?
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Thanks for your attention
wageningenUR.nl/lei
EAAE Seminar December 1 Brussels: Does Europe need a Food Policy?