Reforming the European Common Agricultural Policy: From price & income support to risk management |
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| Institution: | 1. INRAE (Institut national de recherche pour l’agriculture, l’alimentation et l’environnement), SMART-LERECO, 4 allée Adolphe Bobierre, 35000 Rennes, France;2. RFF-CMCC European Institute on Economics and the Environment (EIEE), Centro Euro-Mediterraneo sui Cambiamenti Climatici, Via Bergognone 34, 20144 Milano, Italy;1. Department of Economics, Obafemi Awolowo University, Ile-Ife, Osun State, Nigeria;2. Department of Economics, University of Lagos, Lagos, Nigeria;1. Department MEMOTEF, Sapienza University of Rome, Italy;2. Department of Economics and Law, Sapienza University of Rome, Italy;3. Council of Experts, Ministry of Economy and Finance, Italy;4. School of European Political Economy, Luiss, Rome, Italy;5. Department of Treasury, Ministry of Economy and Finance, Italy;1. Department of Management, Monash Business School, Monash University, Menzies Building, Level 11, Clayton Campus, Victoria 3800, Australia;2. Department of Public Administration, University of Sri Jayewardenepura, Gangodawila-Nugegoda, Sri Lanka;3. Department of Management, Monash Business School, Monash University, Caulfield Campus, Caulfield East, Victoria 3145, Australia |
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| Abstract: | Over the last 30 years, the European Union has significantly reformed its Common Agricultural Policy by introducing direct payments to farmers and reducing price support levels. While the European agricultural prices become more volatile, all economic models assessing these reforms remain static and ignore the risk dimensions. This paper develops an original stochastic computable general equilibrium model capturing the different sources of risk, farmers’ risk attitude and risk contingent markets. We find that the reduction of price support levels has modest market impacts but negative global welfare effects by exposing risk-averse European farmers to the world price volatility. This issue is not solved by the direct payments, which have negligible market and global welfare impacts through their wealth effects. On the other hand, we find that unbiased futures markets can solve this global welfare issue by allowing European farmers to transfer their price risks. Therefore, European policymakers should ensure well-functioning risk contingent markets rather than maintaining rigid intervention price levels. |
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| Keywords: | Common agricultural policy Risk Stochastic modeling Risk contingent market |
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