Risk Mitigation in Agriculture: Are we asking the right questions

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Risk Mitigation in Agriculture Are we asking
the right questions?

• Sarthak Gaurav, Ph.D. Scholar, IGIDR
• Risk Mitigation in Agriculture
• 11th Aug, 2009, Ahmedabad

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Returns from Farm and Off-farm Activity 2002-03
Source Calculated from unit level data NSS, 59th
Round, Situation Assessment Survey of Farmers
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Monthly Per Capita Income and Consumption by
Size-Class of Holding Cash-Flow Crisis
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Agrarian Crisis

• Deceleration in production and productivity
• Waning profitability and poor returns
• Limited off-farm opportunities
• Marginalization of land holdings
• Decline of public investment in irrigation and
  other infrastructure
• Indebtedness to informal credit sources
• Failure of research and extension

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Agenda

• Do agricultural risks affect the risk averse
  farmers and farm households resource allocation
  welfare?
• Are the effects of risk and its management
  strategies heterogeneous?
• Impact on decision making and behaviour?
• Is variability of yield and prices a significant
  source of income risk ?

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Green Revolution Blues

• Crop production became more sensitive to weather
  (rainfall) and price changes since mid 60s
• gt 90 of increase in production variance at
  national level due to changes in inter-district
  production covariance (Walker 1989)
• Area shifts to HYVs led allocation of riskier
  and inferior land to other riskier crops where
  CV is high (also population pressure)

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Growth and Instability

• HYV/fertilizer/modern purchased input intensive
  farming
• Higher income risk for the farmer
• Increase in Yield Variance (high CV)
• Increase in Covariance of yields of different
  crops and regions
• Decrease in area-yield correlation

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People Respond to Incentives..Do Farmers?

• Weaker supply response in last 50 years
• Non-price factors dominate over price factors
• Rabi crops respond better to P increases than
  Kharif
• Adjustments by varying non-land inputs
• Acreage shifts from food grains to non-food
  grains
• High Regional Variations in Irrigation and Yield

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Yield Risk- Price Risk Affair

• Stage 1 farmers allocate land based on Pe
• Stage 2 yield is determined on basis of other
  inputs, agro-climatic variables, bio-physical
  factors and farmer characteristics, given acreage
• Yield depends on Price (inputs and output)
• Negative Correlation b/w Yield and Price makes
  reduction in revenue variance difficult

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Yield Risk, Price Risk and Income in ICRISAT
Villages (1975/76-1983/84)
Source Anderson and Hazell 1989
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Evidence on Yield Risk

• Yield Variability gt Price Variability by 4
• Yield Variability Main Reason for Income
  Instability
• In 49 out of 59 un-irrigated districts yield
  variation exceeds price variation (1956-1974
  data) Walker and Ryan (1990)
• Credit Market Imperfections interact with land
  and labour market imperfections

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True Welfare Effects

• Impact on Consumption (direct and indirect)
• Non-separability of production and consumption
  decisions
• Different impact on different categories of rural
  households- landless agricultural labourers and
  deficit farmers are worst off

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The Risk Averse Homo economicus

• Low income farmers are Risk Averse
• This leads to inefficiency of resource use (MVPgt
  Factor Price) sub-optimal decisions
• Cropping Patterns to safeguard family security.
  Forget Profits safety-expected profit tradeoff
• Reduction of input levels (risky output, certain
  Input costs)
• Laggards, Delays in Innovation and Adoption of
  New Tech

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Measuring Risk Attitudes

• Risk Aversion (Moscardi and de Janvry 1977,
  Dillon and Scandizzo 1978, Rosenzweig and
  Binswanger1993, Townsend 1994, Morduch 1995, )
• Direct Elicitation Methods/Experimental Gambling
  (Binswanger 1980,)Disaster Avoidance (Roumasset
  1976)
• How close to real farming real losses?
• Do we factor in the constraints interlinks?

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Contingent Markets are Imperfect Public Policy?

• traditional Informal mechanisms fail in case of
  covariate shocks and disastrous losses
• impose costs in terms of equity and
  sustainability
• natural disasters/cats may trigger involuntary
  defaults

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Innovations can add to the Risk!

• increased input costs might depress net farm
  income
• worst-case gross output might go up, while
  worst-case net farm income falls vis-à-vis
  traditional scenario e.g. Bt Cotton Seeds
• profitability, land tenure and info asymmetry
  matters
• changing technology and market conditions can add
  to uncertainties in product factor markets