Edited by Joseph A. McMahon and Michael N. Cardwell
Chapter 4: Risk management in agriculture: What role for policy in the new Common Agricultural Policy?
Risk management is an inherent part of farming, but risk is often perceived as particularly dramatic when it concerns agriculture. Increasing awareness about climate change and recent episodes of price volatility in world markets have contributed to this perception, which is further heightened in cases where climate extremes and commodity price volatility seem largely beyond farmers’ ability to cope. But risk is also a part of any economic activity and at the origin of entrepreneurial innovations. Risk is not necessarily a bad thing as it can pose challenging opportunities to do things better. Although there is a need to reduce some risks, the majority just need to be managed to allow for investment opportunities and necessary structural adjustment. Policy interventions should be therefore carefully designed to broaden the spectrum of available risk management tools, while maintaining the economic incentives for adaptation, investment and innovation. Public visibility and concerns about risks in agriculture have at times driven agricultural policy decisions in Organisation for Economic Co-operation and Development (OECD) countries, with expressed policy concerns relating to the consequences of agricultural risks on producers and consumers. For example, simple but solid economic analysis has often been invoked to argue that the combination of inelastic demand and supply, together with weather variability and extreme events, may cause high levels of agricultural price volatility.
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