Risk, uncertainty, crises management and public intervention in agriculture
From Firenze University Press Journal: Italian Review of Agricultural Economics (REA)
Fabian Capitanio,Veterinary and Animal Production Department — University of Naples Federico II
Winter 2021 in Italy was the warmest on record for the third consecutive year, with rain and snowfall decreased by 50%; furthermore, spring and summer 2022 saw a long period of drought and above-average temperatures (JRC Global Drought Observatory, 2022). These unusual weather conditions have brought the topic of climate change back to the fore and have forced farmers to take a closer look at crop insurance coverage and other methods of stabilizing farm income, including the role of public interventions. It would seem that we are now in a moment when farmers and consumers alike are painfully aware of the precariousness of Italy’s food supply and people are beginning to realise that permanently stocked shelves cannot simply be taken for granted. It has been established that agriculture is arguably the sector of production where factors outside managers’ con-trol are more heavily responsible for the final result of the enterprise, something that has contributed to the devel-opment and acceptance of forms of public intervention aimed at reducing income variability that have no paral-lel in other sectors of the economy (Moschini, Hennessy, 2001; Wright, 2006).
The nature of the risks facing farms has changed greatly in recent decades, as have the poten-tial negative impacts of different forms of risk: produc-tion, markets, financial, and institutional. What is often overlooked, however, is the changing nature of the needs of farmers, who will surely require radically reformed risk transfer tools (new crop insurance, financing, loans) and greater public intervention, both ex-ante and ex-post. However, the recent climatic trends mean unpredict-able economic performance for farmers. This, together with other reasons, has traditionally fostered legislators around the world to build agricultural policies that are designed to shield farmers from the inherent risks asso-ciated with food production. Indeed, policies to develop infrastructure in the agricultural sector have increasingly given way to poli-cies directed at price and yield stabilisation mechanisms. In the same vein, of the many tools available for income risk management, the most heavily applied continues to be crop insurance. Since 1970, in Italy, there has been a complex struc-ture of state insurance subsidies for the primary sector. Priority has been given to subsidies for insurance poli-cy premiums and ex-post interventions to compensate farmers for damages in the event of a natural disaster.
The main aim of this paper is to clearly define a theoretical framework for a correct approach to income risk management in agriculture built on the “green port-folio” concept, where private risk management tools are used alongside public interventions. The paper also tries to highlight the difference between evaluating risk and uncertainty, which will pose new challenges when deal-ing with risk management in agriculture.The theoretical framework is therefore instrumental in defining the scope of intervention for a variety of public and private instruments that can be applied to income risk management for farmers. The synergy between dif-ferent instruments highlights the complexity of the issue and suggests that simplistic solutions will not suffice. In order to indemnify the agricultural sector against future risks in the long term, an innovative approach to risk management is required, one which also incorporates a strong relationship between banks and agricultural busi-nesses and can finally tackle the criticalities amplified by the de-specialisation of credit introduced under the Basel II Accord (Adinolfi et al., 2012). Of course, the difficulties in accessing credit (credit crunch) must also be taken into consideration, not doing so would be short-sighted and result in a strategy des-tined to fail the Italian agricultural sector. Similarly, it is necessary to bear in mind that Italy has reduced pub-lic spending for the primary sector and that forecasts predict a decline in the value of national land assets. Indeed, in the next 80 years, it is expected that Italy’s farmland will lose 50 billion euros in value in the “best-case scenario” of a +1°C temperature increase; in the “worst-case scenario” of a +5°C increase, the loss is esti-mated to reach 185 billion euros) (IFPRI, 2022).
This is rarely taken into account but suggests an urgent need for evolution — and revolution — in public intervention, which must be better focused on the implementation of new risk management tools and strategies. The need for new management models, both from an economic and financing perspective, is now undeni-able; they can no longer be overlooked in the scientific, business and political debate.This is especially true given the changing face of the Italian primary sector in recent years; the num-ber of farms run by university or high school graduates has increased significantly (up 15,000 for the former; 65,000 for the latter), and the total number of farms run by young people has risen sharply (an increase of 17% in the last three years), just like the percentage of farms run by women, with a rate higher than the EU average (Unioncamere, 2020). Despite the counterfeits and fraudulent use of “Italian sounding” branding, Ita-ly’s food products preserve their feature of uniqueness as derived from peculiar pedo-climatic conditions and from centuries-old techniques and heritages in the long history of “Italian food artisanship”, which can vary from region to region or even town to town.
The “fragmentation” of Italian farms, often referred to as the fra-gility of the system, could be interpreted as a secular adaptation to the specificity and unique requirements of a multitude of different terrains. From this point of view, such an Italian farm model must be defended and sup-ported; and new future scenarios require us to have a clear and courageous vision for its survival.
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