Policies on Managing Risk in Agricultural Markets

Abstract

Over the past dozen years, policymakers have largely abandoned long-standing popular approaches for addressing risk in agriculture without fully resolving the question of how best to manage the negative consequences of volatile agricultural markets. The article reviews the transition from past policies and describes current approaches that distinguish between the trade-related fiscal consequences of commodity market volatility and the consequences of price and production risks for vulnerable rural households and communities. Current policies rely more heavily on markets, even though markets for risk are incomplete in numerous ways. The benefits and limitations of market-based instruments are examined in the context of risk management strategies, and innovative approaches to extend the reach of risk markets are discussed.For decades governments have intervened to reduce risk in markets for internationally traded commodities. Over the past dozen years, however, many of the policies and supporting institutions used for that purpose were reevaluated and found to be not only ineffective and unsustainable but impediments to growth. Most of these approaches have now been abandoned, but governments and policymakers still seek to understand how best to manage the negative consequences of volatile commodity markets because traded commodities remain an important source of export earnings for many developing economies and an important component of income and consumption for the poor.This article reviews the historical relationship between the work of applied economists and policymakers and the commodity and risk market instruments introduced in the 1980s. It explores how a growing body of analytical work contributed to a change in thinking that moved the emphasis of policy from stabilization to management of risks, and it surveys current thinking on managing rural risks.

Managing food price risks and instability in a liberalizing market environment: Overview and policy options

“…These and other market-based approaches to managing food system risks have a number of advantages over price stabilization schemes (Larson et al, 2004). Participation is generally voluntary so people participate only at a level that suits their particular situation.…”

Food Security and Storage in the Middle East and North Africa

“…Later, Massell (1969) introduced the notion that commodity price stabilization could generate welfare benefits for the sector as a whole, which could be shared among producers and consumers. (Larson et al 2004;Knudsen and Nash 1990).…”

“…This large literature centered on how risk mitigation and adaptation were central to rural livelihood strategies, influencing agricultural production choices and spawning a variety of formal and informal insurance mechanisms. Larson et al (2004) and Dercon (2005) provide reviews. In terms of policy, this line of literature often promoted instruments designed to mitigate the harsh consequences of commodity price volatility, rather than instrument meant to change the distribution of prices.…”

Rural Households in a Changing Climate

“…In an attempt to address the moral hazard and adverse selection issues that plague traditional crop insurance, some insurers now offer products in which payouts are linked to the occurrence of a weather event, such as low rainfall, which can be observed without a costly loss assessment procedure. Larson, Anderson, and Varangis (2004) provide a useful review of weather-indexed insurance and related risk management tools. One difficulty, they note, is that these products require reliable climate-related information and therefore significant weather station infrastructure.…”