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Risk Management in Agriculture in Australia”, OECD Food, Agriculture and Fisheries Papers, No Please cite this paper as: Kimura, S. and J. Antón (2011-02-10), “Risk Management in Agriculture in Australia”, OECD Food, Agriculture and Fisheries Papers, No. 39, OECD Publishing, Paris. http://dx.doi.org/10.1787/5kgj0d8bj3d1-en OECD Food, Agriculture and Fisheries Papers No. 39 Risk Management in Agriculture in Australia Shingo Kimura Jesús Antón OECD FOOD, AGRICULTURE AND FISHERIES WORKING PAPERS The working paper series is designed to make available to a wide readership selected studies by OECD staff or by outside consultants and are generally available only in their original language, English or French. The present document has been declassified by the Working Party on Agricultural Policies and Markets of the OECD Committee for Agriculture. Comments on this series are welcome and should be sent to [email protected]. OECD FOOD, AGRICULTURE AND FISHERIES WORKING PAPERS are published on www.oecd.org/agriculture © OECD 2011 Applications for permission to reproduce or translate all or part of this material should be made to: OECD Publishing, [email protected] or by fax 33 1 45 24 99 30. Abstract RISK MANAGEMENT IN AGRICULTURE IN AUSTRALIA by Shingo KIMURA and Jesús ANTÓN* This report analyzes the agricultural risk management system in Australia, applying a holistic approach that considers the interactions between all sources of risk, farmers‟ strategies and policies. The policy analysis is structured around three layers of risk that require a differentiated policy response: normal (frequent) risks that should be retained by the farmer, marketable intermediate risks that can be transferred through market tools, and catastrophic risk that requires government assistance. The main focus of risk management policy in Australia is drought risk and this paper assesses the objective and instruments of the country‟s national drought policy framework. JEL: Q18 Keywords: Agricultural policy, risk management, catastrophic risk, drought policy, climate change, bio-security, cost sharing, index insurance. * OECD Trade and Agriculture Directorate. OECD FOOD, AGRICULTURE AND FISHERIES WORKING PAPER N°39 © OECD 2011 RISK MANAGEMENT IN AGRICULTURE IN AUSTRALIA – 3 FOREWORD The OECD project on risk management policy in agriculture (www.oecd.org/agriculture/policies/risk) developed the framework and methods originally published in Risk Management in Agriculture: a Holistic Approach (OECD, 2009). These were then applied to the analysis of the risk management policies of five countries: Australia, Canada, Netherlands, New Zealand and Spain. All five country studies which resulted from this project followed the same process of preparation. The key inputs to these reports were: responses by governments to a detailed questionnaire prepared by the OECD Secretariat; a background report drafted by a national expert; an OECD Secretariat visit to the country with the participation of national and international experts; and a report on the country visit by an international expert. The OECD Secretariat would like to highly acknowledge financial, information and organisational assistance of the Department of Agriculture, Fisheries and Forestry of the Australian Government (DAFF) in preparation of this and other components of the project. This project was led by Jesús Antón. The authors of this report are Shingo Kimura and Jesús Antón. The experts preparing the background report and the visit report for this study were Bill Malcolm from the University of Melbourne and Federica Angelucci from FAO (Italy). Statistical assistance was provided by Christine Le Thi. Editorial work was done by Michèle Patterson. The authors would also like to acknowledge the useful comments and discussions with several OECD colleagues. OECD FOOD, AGRICULTURE AND FISHERIES WORKING PAPER NO.-39 © OECD 2011 4 – RISK MANAGEMENT IN AGRICULTURE IN AUSTRALIA Table of contents Abbreviations ..................................................................................................................................... 6 PART I. RISKS, STRATEGIES AND POLICIES IN AUSTRALIA .................................................. 7 1. An assesment of agricultural risk in Australia: three layers of agricultural risk ......................... 7 Agricultural climate condition ....................................................................................................... 7 Market conditions ........................................................................................................................... 9 Types of Farming ........................................................................................................................... 9 Perceived risk in agriculture ......................................................................................................... 10 Quantitative assessment of agricultural risk: mixed farm in Australia ........................................ 11 Information and communication on risk and risk management ................................................... 14 2. Risk management strategies and policies in Australia .............................................................. 15 Farm household strategies ............................................................................................................ 16 Government measures to support farm household strategies ....................................................... 20 Risk market instruments ............................................................................................................... 23 Catastrophic risk management ..................................................................................................... 25 Overview of government risk management measures and the definition of risk layers ............... 31 PART II. MAIN ISSUES OF THE RISK MANAGEMENT SYSTEM IN AUSTRALIA ................ 34 3. Adjusting objectives and instruments in drought risk management policy .............................. 34 Is EC declaration system sustainable and efficient?..................................................................... 36 Is the EC triggering mechanism contributing to the effectiveness of ECRP as a social assistance program?...................................................................................................................... 39 Does NDP crowd out farmer‟s own risk management strategy? ................................................. 41 Drought policy, adverse selection and structural adjustment ....................................................... 45 4. Bio-security risk management: public-private partnership approach ....................................... 48 Issues in bio-security risk management ........................................................................................ 48 Incentive to report disease outbreak and compensation to quarantine measures in Australia ....................................................................................................................................... 49 Incentive to take risk reducing strategy and cost sharing mechanism .......................................... 50 Import quarantine measures in the bio-security risk management system ................................... 51 PART III. POLICY IMPLICATIONS ................................................................................................ 53 5. Policy recommendations and concluding remarks ................................................................... 53 Policy recommendations for Australia ......................................................................................... 53 Policy lessons beyond Australia ................................................................................................... 55 Annex A. The OECD team visit for the review of Australia.............................................................. 57 References ........................................................................................................................................... 58 OECD FOOD, AGRICULTURE AND FISHERIES WORKING PAPER N°39 © OECD 2011 RISK MANAGEMENT IN AGRICULTURE IN AUSTRALIA – 5 Tables Table 1. Average percentage area having exceptionally low rainfall .......................................... 8 Table 2. Risk management ........................................................................................................ 15 Table 3. Implementation of drought management strategies in Queensland by industry .......... 16 Table 4. Variability of per hectare return .................................................................................. 18 Table 5. Correlation of per hectare revenue .............................................................................. 18 Table 6. Summary of household risk management strategy by industry ................................... 20 Table 7. Main futures markets used by Australian marketers ................................................... 24 Table 9. Comparison of eligibility criteria of Newstart and ECRP ........................................... 29 Table 10. Mapping of risk management measures by governments in Australia ........................ 32 Table 11. Comparison of the impacts of different policy instruments ........................................ 41 Table 12. State tax on insurance premium (2009) ....................................................................... 45 Figures Figure 1. Agricultural climate zoning in Australia ....................................................................... 8 Figure 2. Variability of crop
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