Featured Books for 2015 Annual Review

CABI in review15 Selected book chapters For our annual review this year, we have made available selected chapters from CABI books in a CABI in Review 2015 eBook. The chapters have been taken from the following books (click on the book to take you directly to that chapter). Click here for more information about our work in Knowledge and Publishing This chapter is from the book: Coping with Risk in Agriculture: Applied Decision Analysis, 3rd Edition Author(s): J.B. Hardaker Published by: CAB International ISBN: 9781780645742 Coping with Risk in Agriculture 3rd Edition Applied Decision Analysis Coping with Risk in Agriculture 3rd Edition Applied Decision Analysis J. Brian Hardaker Emeritus Professor of Agricultural Economics, University of New England, Australia Gudbrand Lien Professor, Lillehammer University College; Senior Researcher, Norwegian Agricultural Economics Research Institute, Norway Jock R. Anderson Emeritus Professor of Agricultural Economics, University of New England, Australia; Consultant, Washington, DC, USA Ruud B.M. Huirne Professor of Cooperative Entrepreneurship, Wageningen University and Rabobank, The Netherlands CABI is a trading name of CAB International CABI CABI Nosworthy Way 38 Chauncy Street Wallingford Suite 1002 Oxfordshire OX10 8DE Boston, MA 02111 UK USA Tel: +44 (0)1491 832111 Tel: +1 800 552 3083 (toll free) Fax: +44 (0)1491 833508 E-mail: [email protected] E-mail: [email protected] Website: www.cabi.org © J.B. Hardaker, G. Lien, J.R. Anderson and R.B.M. Huirne 2015. All rights reserved. No part of this publication may be reproduced in any form or by any means, electronically, mechanically, by photocopying, recording or otherwise, without the prior permission of the copyright owners. A catalogue record for this book is available from the British Library, London, UK. Library of Congress Cataloging-in-Publication Data Hardaker, J. B., author. Coping with risk in agriculture : applied decision analysis / J. Brian Hardaker, Gudbrand Lien, Jock R. Anderson, and Ruud B.M. Huirne. -- Third edition. pages cm Includes bibliographical references and index. ISBN 978-1-78064-240-6 (pbk. : alk. paper) -- ISBN 978-1-78064-574-2 (hardback : alk. paper) 1. Farm management--Decision making. 2. Farm management--Risk assessment. I. Title. S561.H2335 2015 630.68--dc23 2014035631 ISBN-13: 978 1 78064 240 6 (Pbk) 978 1 78064 574 2 (Hbk) Commissioning editor: Claire Parfitt Editorial assistant: Alexandra Lainsbury Production editor: Lauren Povey Typeset by SPi, Pondicherry, India. Printed and bound by Gutenberg Press Ltd, Tarxien, Malta. Preface to the Third Edition The purpose of this edition of the book is the same as for earlier editions. Our aim is to support better agricultural decision making by explaining what can be done nowadays in risk analysis and risk management. As before, the intended readership includes senior undergraduate or graduate students of agricultural and rural resource management, agricultural research workers, people involved in advising farmers, such as extension workers, financial advisers and veterinarians, some farmers themselves, and policy makers. Methods of risk analysis and management are evolving rapidly. In this third edition we have included some recent advances in both theory and methods of analysis. New material includes sections on state-contingent versus stochastic production functions and an introduction to the use of copulas for modelling stochastic dependency. Improvements in available software continue to expand the scope to better represent and model real-world risky choices, and we have updated our advice concerning use of contemporary software. We wish to thank Priscilla Sharland for her editorial input. Thanks are also due to Claire Parfitt, our commissioning editor, and to other staff at CABI, especially to Alexandra Lainsbury and Lauren Povey, for their professional work and encouragement in the production of this third edition. Note Dollar signs are used throughout to indicate money units but are not specific to any particular currency. J. Brian Hardaker Gudbrand Lien Jock R. Anderson Ruud B.M. Huirne Risk Considerations in 13 Agricultural Policy Making Introduction Our illustrations in earlier chapters demonstrate that the type and severity of risks confronting farmers vary greatly with the farming system and with the climatic, policy and institutional setting. This is the case in both more developed countries (MDCs) and less developed countries (LDCs). Nevertheless, agricultural risks are prevalent throughout the world and, arguably, have increased over time, as is suggested by the food, fuel and finance crises that have beset the world since 2007. Moreover, climate change appears to be creating more risk for agriculture in many locations. These prevalent and prospective agricultural risks have naturally attracted the attention of many governments – groups of DMs who have so far re- ceived little focus in our discussion. In this chapter we address analysis of risk management from this rather different point of view. In our treatment we deal first with government interventions that have risk implications. Govern- ments should realize that they are an important source of risk, as explained in earlier chapters, in particular when interventions negatively affect the asset base of farms. Potentially successful interventions are not those that merely reduce variance or volatility, but those that increase risk efficiency and resilience (to shocks, such as occasions of severely reduced access to food in LDCs, or extreme weather conditions). In many cases, this means increasing the expected value rather than decreasing the variance. In regard to specific instruments whereby farmers can share risk with others, we argue below that only in the case of market failure is there any reason for government involvement. Market failure is most severe in the case of so-called ‘in-between risks’ or catastrophic risks. As explained later, in-between risks are risks that, by their nature, cannot be insured or hedged. Catastrophic risks are risks with low probabilities of occurrence but severe consequences. In this chapter we address issues in developing policies to manage these difficult risks as well as the management of some emerging risks, such as extreme weather, food-price spikes, food safety, epidemic pests and animal diseases, and environmental risks. Government Intervention and Farm-level Risk Background Governments tend to want to intervene when they perceive that market mechanisms will not deliver economically efficient, socially desirable, environmentallysustainable or politically expedient outcomes. Such situations can be broadly conceived as forms of market failure. Unfortunately, however, it is not © J.B. Hardaker, G. Lien, J.R. Anderson and R.B.M. Huirne 2015. Coping with Risk in Agriculture, 3rd Edition: Applied Decision Analysis (J.B. Hardaker et al.) Risk Considerations in Agricultural Policy Making necessarily the case that all market failures can be fixed by government intervention. First, economic, social, environmental and political goals are often conflicting. Consequently, measures to improve the at- tainment of one goal will often have unintended and possibly seriously deleterious consequences in terms of other goals. So, for example, subsidies designed to support farmers’ incomes may induce serious economic distortions and may lead to undesirable intensification of farming systems, thereby possibly harm- ing the environment. In this chapter, we leave political considerations to the politicians and focus mainly on economic efficiency with some consideration given to social welfare and the environment. Second, while markets certainly do fail in some situations, it is by no means always the case that government intervention will make things better. Sometimes, the information needed to design an effective policy may be too difficult and expensive to collect, or may even be unobtainable. Then the administrative costs of intervention may be high and unjustifiable relative to the likely benefits. Moreover, market failures have to be balanced against administrative failures. Some policy measures, especially those of a ‘com- mand and control’ nature, may be too difficult to implement effectively. Even a well-designed policy may fail if the public servants responsible for its implementation are incompetent or corrupt, inappropriately trained and experienced, or inadequately supervised and resourced. Experience shows that policy intervention in agriculture is a tricky business, to the extent that deci- sions about such interventions fall clearly into the category of risky choice. Evidently, policy analysts could well use some of the previously described methods of decision analysis to better account for the uncertainty of (often multi-attributed) outcomes that proposed interventions are intended to achieve. Any government intervention that affects farmers’ costs and returns will also affect their risk efficiency. As illustrated in Fig. 12.1 in Chapter 12, it is a mistake to think of policies relating to risk in agriculture solely in terms of measures to reduce volatility of production, prices or incomes. Of course, such measures are certainly important and are addressed later in this chapter. On the other hand, as is also clear from Fig. 12.1, any intervention that has the effect of shifting the CDF of a farmer’s uncertain income to the right will be risk efficient in the sense that it will be utility increasing for any farmer who prefers more

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