Report to the European Parliament on risk management tools:
Momagri’s ideas are making headway!
Expert of Momagri
The European Parliament recently published an extremely interesting and innovative study on risk management tools in agriculture1. The study takes stock of the use of the CAP measures related to the prevention and management of risks for the 2007/2014 years and for the current period through a review of the member states’ decisions implementing the latest reform. It provides a typology of risks and tools that is mostly based on the level of insurability/pooling of the various risks, and very clearly determines the (central) role of public authorities. Very concrete scenarios for a switchover from the current CAP to a new regime are also presented, as well as far-reaching recommendations on the need to improve market transparency and the powers of regulators. Momagri feels that the document truly makes a concerted effort to address the issue of market risk management, and, although some points might require further clarification, it shares the same philosophy as the Momagri’s CAP project: Let’s not indulge in the magical thinking of “all insurance”, but let’s bring together effective tools for a given intensity level of hazards by strengthening the public authorities’ ability to steer the risk management system.
Empirically, the report’s major contribution is a detailed budget analysis of the public funds channeled to risk management tools. In addition to the measures financed by Article 68 between 2007 and 2014, the subsidies for crop insurance and mutual funds granted to farming organizations (mostly cooperative firms) in the wine, fruit and vegetable sectors are also covered. We see that France was one of the four countries making use of Article 68 to improve the access to insurance, well ahead of Italy, Hungary and The Netherlands in terms of aid amounts (€434 million out of a total of €761 million). As far as the wine, fruit and vegetable sectors are concerned, 13 countries have tapped this financing method for a total of €173 million, including €115 million to fund the mutual fund of the Italian wine sector. Although quite moderate, these amounts nevertheless only represent the tip of the iceberg, since the bulk of crisis management aid was financed by national budgets under the designation of State Aid (which mostly slips under the WTO radar because of the de minimis clause). As a result, subsidies for agricultural disasters, emergency measures for health crises and even subsidies for insurance premiums accounted for €13 billion during the 2007/2013 period, including €3.8 billion for insurance premiums. As regards national aid, Spain ranked first (with €2.6 billion) to finance its climate risk management system, which is in fact Europe’s most complete approach.
The new CAP implementation choices for the 2014/2020 period are showing that little noticeable improvement can be anticipated, and that risk management tools––mostly for climate or health hazards––will continue to be financed by national budgets. Although risk management was one of the discussion topics during the latest CAP reform completed in 2013, member states clearly did not resort to the opportunities authorized by shifting this type of measures from the first to the second pillar. It is expected that the 12 regions or member states that opted to fund insurance premiums (Article 37), health mutual funds (Article 38) and economic mutual funds (Article 39) will only activate €2.6 billion over five years, including €2.2 billion for insurance. In fact, the “new” risk management tools represented by health and economic mutual funds did not catch on: Only Romania (€200 million), Italy (€97 million) and France (€60 million) started health mutual funds, while Italy (€97 million), Hungary (€19 million) and Castile-Leon (€14 million) opened up economic mutual funds. We could therefore state that, far from being a revolution in the European approach to manage risks, the latest reform mostly allowed several nations to shift to the European budget a portion of the financing for insurance subsidies. Overall, the budget earmarked for the three risk management tools of the CAP remains quite moderate: Less than two percent of the second pillar budget, or 0.4 percent of the total CAP budget for the 2014/2020 period.
These results seem all the more inadequate since we note that the lion’s share is allocated to managing health and climate hazards, and that ultimately managing market risks corresponds to the sole Article 39 (up to €130 million) since only health and climate insurance would be subsidized. In view of the structural instability of agricultural markets and the crisis currently affecting several sectors, one cannot help but wonder about the reasons for the failure in developing market risk management tools funded by the European budget. This report to the Parliament makes interesting points to explain the reasons for such low interest in economic mutual funds. Among the technical reasons, we note the fact that payment terms are deemed to be far too lengthy, since they are only triggered when income declines are ascertained after the close of the fiscal year. Triggering aid payments based on actual incomes also involves riks of moral hazards (possibility of fraud). The scope of economic mutual funds also raises questions: If, in theory, it would be worthwile for producers in different sectors to participate in the same fund (we can hope that all sectors are not experiencing crises at the same time), the experience of collective action in agriculture clearly shows that cross-sectoral governance is a highly complex issue. The Castile-Leon economic mutual fund was supposed to be limited to dairy farmers only, but under the Commission’s pressure, it will be available to all producers. Lastly, complying at face value with WTO requirements (30 percent trigger threshold and 30 percent deductible) is hindering the tool’s appeal.
The report’s second interest is the typology of risks and tool that is presented as a five-story pyramid2. Placed at the bottom of the pyramid, we have what involves low intensity risks to be managed by any economic agent; risks whose intensity require public-private partnerships are placed in the middle; and at the very top, are hazards that can only be handled by a public policy-driven action.
Source: Bardaji et Garrido report to the European Parliament (published on April 1, 2016)
Before a more detailed analysis, we cannot fail to note a proximity to the typology developed by Momagri that was presented to the European Parliament in February 2016. The role of public authorities in preventing and managing risks is also clarified.
Source: Momagri, Jacques Carles’ hearing at the European Parliament (February 23, 2016)3
While we are not proposing here a detailed analysis of the similarities and differences between these two graphs, we will focus on two points that are showing noticeable similarities.
First of all, great significance is given in the two graphs to cooperative firms, generically named as farmers’ organizations. In both approaches, it represents “the first level of regulation”. Adjusting supply to demand is one of their purposes. Here, we see the rationale of promoting the development of coopertives in the fruit, vegetable and wine sectors (withdrawal and green harvesting measures). In fact, we must remember that in the activities in which they exist, cooperatives are by far the leading provider of risk transfer solutions for farmers (long-term financial contracts, options, fixed-price physical contracts and average price contracts). Modifications to the competition legislation are sometimes required to allow farmers’ organizations to operate as cooperative businesses, but the more obvious method seems to assist farmers’ organizations to change to cooperatives or unions of cooperatives.
As far as the second point is concerned, the similarity may seem less clear than at first sight. The report to the Parliament includes at the layer 3: Climate risks (yield risks) that must be handled by crop insurance or mutual funds in cases of moderate losses (less than 30 percent), as well as the more severe risks (over 30 percent loss), which must be covered by national aid or insurance subsidies in order to respect the WTO green box rules.
As regards to layer 44, we find the high/low decline difference but there it is about sales or incomes: Small declines (less than 30 percent) should relate to insurances or mutual funds (and it is indicated that these tools are not currently available) backed by national or CAP aid, while for higher declines, the report advocates the direct funding of farmers’ savings accounts through tax deductions or direct subsidies. The direct financing of savings accounts offers the advantage to provide farmers with direct support, and sidesteps the input of an insurance company, which may lead to significant online losses.
This type of measure makes a direct reference to the Canadian “Agri-Investissement” program, in which farmers can save a portion of their incomes in a savings account that is supplemented by the government. In case of low income variations (less than 15 percent), farmers can then dip into these savings. Yet, one must note that Canada’s “Agri-Investissement” is carried out with a system of counter-cyclical subsidies called “Agri-Stabilité” for more significant income declines. While it is available for a fee (Can$3.8 for a Can$1,000 reference margin), the “Agri-Stabilité” program is not an insurance, since there are no agricultural insurance contracts from insurance companies in Canada5.
The scenarios to develop the CAP outlined in the report also clarify the source of required financing for insurance subsidies and mutual funds for small losses, as well as the direct financing of savings accounts. It would mean, during the next reform, to give to the member states at their request the opportunity to use the budget currently used by basic payments to that end.
Granting direct support to a farmer’s savings account on the basis of an income drop indeed falls in the category of counter-cyclical subsidies! Momagri, which advocates such type of support in its white paper for the next CAP reform, cannot but concur with this proposal. As confirmed by the US experience, the price risk is and will remain systemic, so insurance for economic risks will only develop for small losses, and provided that governments take on the consequences of strong fluctuations. In addition, economic mutual funds are creating considerable or even insurmountable problems of collective action, even for producers operating within a single activity. Lastly, the lengthy payment delays, risks of misuse and administrative costs are campaigning for preferring payments based on references (acreage reference and price reference), rather than those based on sales or farmers’ actual incomes.
In conclusion, we feel that the report has everything it takes to mark a milestone and futures changes for the CAP. Identifying trajectories of change and learning from agricultural policies in other major producing nations are indeed presenting noteworthy ways to fuel public discussions, and especially the European Parliament debate. Now more than ever, MEPs must have access to cutting-edge and pragmatic expertise, so that the co-decision procedure between the Council and the Parliament can bear fruit, and ultimately charts a new strategic course to the CAP.
1 Bardaji I., Garrido A. (coord.) (2016) State of play of risk management tools implemented by member states during the periode 2014-2020 : national and european frameworks, Study for the European Parliament’s Committee on Agriculture and Rural Development.
2 This typology is based on and maintains those developed by Debar et Cordier in 2004 in the Demeter publication, and by J. Anton in 2011 in an OECD publication.
3 Chart extract from Jacques Carles’ presentation, Chief Operating Officer (COO) of Momagri, during the hearing at the European Parliament on the « tools to reduce price volatility in Agricultural Markets ». The entire presentation (in French) is available from :https://polcms.secure.europarl.europa.eu(...)JacquesCarlesPresentationPPT-versionlongue.pdf
4 See page 93
5 Contrary to what the report’s authors write page 11. See the 2011 OECD Report “Risk Management in Agriculture in Canada”.
6 See Momagri’s white paper, “A new Strategic Course for the CAP”, January 2015