Risk is an important component of agricultural production and it affects farmers’ production choices. There are different kind of risk in agriculture, production risk, market risk, institutional risk, personal risk and financial risk, and the literature has shown that the farmers are risk averse meaning that they are willing to sacrifice some income to ensure against the risky consequences.
In recent years the market risk has increased on the EU markets as a consequence of the shift of the EU Common Agricultural Policy (CAP) towards market liberalisation and the current climate change may lead to a rise in the production risk as well. Risks and risk aversion of farmers also play a crucial role for the uptake of new crops and production methods that are relevant for the Bioeconomy.
In agricultural economics there are different techniques to include risk consideration in models which simulate farmer's behaviour. One recent frontier in this modelling area consists in including farm's risk consideration in mathematical programming models calibrated to the observed production plan in the baseline and used to simulate farmer's choices under different scenarios. As the risk is included in such models, a change in the farmer's decisions because of variation in farm's risk as well as the effects of different farmer's risk management option may be analysed.
During my staying at the Production Economics Group at the University of Bonn financed by the guest researcher instrument of the Biosc, I could work on the development of a farm-level model which combines these two components:
1. calibration of the model to the observed situation and
2. risk consideration.
This was done in collaboration with two core groups of the BioSC, namely the Production Economics Group (Prof. Robert Finger) and the Economics and Agricultural Policy Group (Prof. Thomas Heckelei). An intensive exchange with researchers also from other groups took place during a seminar presentation co-organized by the BioSC on February 03, 2015. The model elaborated has been applied to a sample of arable crop farms observed over the years 1995-2008. The model is not in the final step yet, a further work and cooperation will continue in next months. The plan is to apply the model to simulate different market and policy scenarios. As regard to the market scenarios changes in crop price volatility on the EU markets will be simulated. In addition, some policy instruments addressed to reduce the farmer's risk will be analysed such as the newly introduced Income Stabilisation Tool (IST), which has been introduced with the last CAP reform and aims at ensuring farmers against severe income drop. The here developed model is intended to serve potentially also as input for recent research activities of the Production Economics Group and the Economics and Agricultural Policy Group.
The guest researcher instrument supported by the BioSC is an interesting instrument as it allows researchers from different universities and research centres to work in close collaboration and to have an intensive exchange of ideas and knowledge on topics related to the bioeconomy. I could benefit from this instrument by collaborating with other researchers from the BioSC core groups and by getting a better insights on the modelling in agricultural economics. This experience has been definitely worth for my learning process and for future research projects.