The role of public policy and agricultural risk management in food security Public policy: implications for food security

Citation

Boyd, M. and Holly Wang, H. (2011), "The role of public policy and agricultural risk management in food security Public policy: implications for food security", China Agricultural Economic Review, Vol. 3 No. 4. https://doi.org/10.1108/caer.2011.40603daa.001

The role of public policy and agricultural risk management in food security Public policy: implications for food security

Article Type: Guest editorial From: China Agricultural Economic Review, Volume 3, Issue 4

About the Guest Editors

Milton Boyd Professor and Economist at the University of Manitoba in Winnipeg, Canada. He is also an Adjunct Professor in Risk Management, in the Asper School of Business at the University. He holds a Doctorate Degree from Purdue University (USA) and a Bachelors Degree from Seattle Pacific University. Some of his research interests include quantitative finance, risk management, derivatives (futures and options), portfolio management, quantitative marketing research, and international business. He has traveled to over 70 countries for international activities including teaching, research, and advising, and has written over 150 articles. He has provided commentary to the media and has also been quoted in the international media such as The New York Times newspaper. He has served in the past as a contributing editor and columnist for Grainews for a number of years where he has written many articles on commodity markets and financial markets, and he has also served as a Policy Advisor for the Frontier Center for Public Policy. Milton Boyd is the corresponding author and can be contacted at: Boyd@cc.umantioba.ca

H. Holly WangProfessor at the Agricultural Economics Department, Purdue University, USA. She has published near to forty peer reviewed journal articles and over one hundred of other publications in the areas of risk management, agricultural policy, market, and food safety on both US and China issues. She has also advised more than a dozen PhD students over her tenure as a faculty member. Dr Wang served as the President of the Chinese Economist Society, and the Founding Chair of the China Section and the Vice Chair of the CWEA Section of Agricultural and Applied Economics Association.

As world population continues to grow, United Nations (2010) projections indicate that world population may reach 10 billion by 2100. This is 3 billion, or 42 percent more than the world’s current 7 billion population. A number of ideas are being voiced to provide the necessary food security to feed the world in the future. First, more research on improved plant genetics will be needed to increase yields, by further overcoming adverse weather and soil conditions, disease and pests, and providing more efficient use of water and fertilizer for plant growth. Continued research and development in this area will be required by the private sector, government, universities, and NGO’s, including a number of international crop research organizations such as CIMMYT and IRRI. Second, some argue for policies to limit the use of bio-fuels from food and feed crops such as corn, wheat, oilseeds and sugar, and thereby providing more food for human consumption rather than fuel, as countries such as the USA have recently used over 30 percent of corn supplies for ethanol. Third, some advocate for a more efficient use of grain by raising animals that have higher feed conversion efficiency. As well, they propose more direct human consumption of grain, with less grain fed to animals, further adding to efficiency of grain use.

Food scarcity will impact the lower income and developing countries the most. The late British development economist Peter Bauer was one of the first development economists to broadly examine food security in developing countries from a wide policy perspective (Bauer, 1972, 1981, 1991, 2004). Bauer, of the London School of Economics, was also one of the main influences on development economist Amartya Sen, who later was a 1998 Nobel Prize Winner in Economics (Sen, 1999), for his research on economic development and food security.

Bauer pointed out that improved public policy, such as economic policy, can enhance food security. He stated that a main obstacle to food security in developing countries is lack of income. This is because income is needed to buy food and also stimulate food production. Therefore, successful economic development policy is needed to order to provide income, which in turn can provide food security.

He further argued that reduced conflict and good governance could bring about food security, and held that that many large-scale famines have been needlessly brought about through conflict or ill advised government policy. Bauer held that these famines were often created or perpetuated by human beings and governments, rather than natural forces such as weather, disease, pests, etc. As an example, North Korea has often faced food deficits, while South Korea has had relative food security, and both are about equally endowed with agricultural resources. Yet they differ greatly in food security, primarily due to public policy and governance. Bauer also argued for international trade as means to development, as besides reducing food deficits through trade, substantial trade could also bring about new ideas, new technology, new production methods, and new products. Along with trade, Bauer stressed the importance of migration, so that people could freely relocate from areas of low income and food scarcity to areas of higher income and food abundance. As well, Bauer argued for freedom from price controls, so that price signals could serve to sufficiently allocate resources for food production and reduce food scarcities. Further, Bauer questioned any excessive and repeated use of foreign aid, including food aid. He warned of the dependency issue and lack of food production it could create in poorer food deficit countries, for both the individual and the country.

Agricultural risk management: benefits for food security

Besides the broader policy approaches above for agricultural development, a more recent focus has been on improved agricultural risk management, and how it can contribute to global food security, through both public and private approaches. Crop insurance is a main agricultural risk management approach to address production risk (Wang et al., 1988; Sherrick et al., 2003, 2004; Hueth and Furtan, 1994). Crop insurance has been introduced in many countries (Ray, 1980) and first began to achieve wider participation, commercial success, and improvements, around the 1970s in certain developed countries. However, it is now receiving considerable attention in a number of developing countries.

There are a number of advantages of crop insurance. Farmers purchasing crop insurance may be more likely to use sufficient amounts of inputs in producing a crop, and therefore produce higher yields. This is because if their crop fails, their input costs are likely to be sufficiently covered, thereby reducing their risk. In addition to providing farmers with income security at the farm level, the higher yield from using sufficient input amounts also provides more food security for the public at the national level. Crop insurance has also served as an implied form of security for borrowing, allowing the purchase more inputs and thereby bringing higher yields, as lenders are more likely to provide financing for inputs if farmers purchase crop insurance. Crop insurance can provide crucial income and stability to subsistence farmers who are most impacted by crop failures and disasters, and provide them with enough funds to plant their crop the following year, after facing a disaster year.

In developing countries, small farm size makes crop insurance more challenging to implement, due to higher administration costs from sales and loss measurement (Boyd et al., 2011). However, this can be partly overcome through farmers cooperating together to pool their crop insurance premiums at the village level or other aggregate level. As well, government crop insurance subsidies can increase the participation rate of farmers in crop insurance programs, and thereby reduce the administration cost and premiums, and also reduce the adverse selection problem (Boyd et al., 2011). Another problem identified in crop insurance, moral hazard (Chambers, 1989), can also be dealt with by solutions such as increasing the premiums based on claims (losses), having deductible insurance policies, or having loss sharing between the farmer and insurer. Moral hazard refers to the possible lack of care that could arise when a customer purchases insurance.

Weather index insurance, a more recent form of insurance, may help overcome the high administration cost of loss measurement faced by developing countries with small farms, and it also avoids moral hazard and adverse selection problems. Weather index insurance is being attempted in a number of countries, though mostly at the initial or experimental stages (Skees et al., 2006; Skees, 2008). However, it suffers from a major problem, basis risk. Losses by an individual farmer may be considerably different than the payouts (indemnities) from the weather index used for the insurance payout. For example, the weather index measurement at its central location may indicate favorable weather, while the farmer’s land at a different location than the weather index location may face adverse weather, and so the farmer receives no payout. Livestock insurance is also another more recent type of insurance, but has been less successful than crop insurance so far, due to a number of challenges (Koontz et al., 2006). Some of these challenges include identifying the cause of loss, moral hazard, adverse selection, and high administration costs.

On the price side, agricultural price risk management is more straightforward. It can often include forward contracts that can provide price stability (Nelson, 1985). In more developed markets, futures contracts (Carter, 1999) and options contracts (Garcia and Leuthold, 2004) may also be used for hedging to stabilize prices. Other risk management methods used by farmers may include improved farm management practices, avoiding or limiting production of risky crops, diversifying across crops and/or livestock, crop rotation, carrying sufficiently low debt to equity levels, having off-farm employment or spousal employment, or carrying long-term savings (or carrying over grain stocks or livestock from year to year). At the macro level, carrying of buffer grain stocks by industry and/or government is also a possibility, and also pension and health insurance mechanisms for farmers, and educational opportunities may reduce risk. When farmers can face a more stable and certain economic environment through the use of risk management, they are more likely to increase their production levels. They thereby provide more food security at the individual level, as well as the national level, and may also contribute to food security at the global level.

The International Conference on Agricultural Risk and Food Security (ARFS), 2010 was held in Beijing during June 10-12, 2010, in order to bring together a large group of researchers to examine and share approaches to improve risk management and food security. The ARFS 2010 Conference was successfully held, and followed an earlier 1994 conference (ISAID), the first international crop insurance symposium held in China, at Northwest Agricultural University in Yangling (Tuo and Framingham, 1994). The ARFS 2010 Conference provided an excellent opportunity to further explore risk management and food security issues, with participants from approximately 15 countries, including academics, government, NGO’s, and business. This journal special issue volume on ARFS includes eight refereed papers, from those presented at the Beijing ARFS 2010 Conference. These papers should be of particular interest to researchers, analysts, and policy-makers working in the areas of agricultural risk management and food security.

A first group of three papers focus on agricultural insurance, and include:

1. 1.

   “Factors influencing Shaanxi and Gansu farmers’ willingness to purchase weather insurance” (by Rong Kong, Calum G. Turvey, Guangwen He, Jiujie Ma, and Patrick Meagher).

2. 2.

   “Factors affecting crop insurance purchases in China: the Inner Mongolia region” (by Milton Boyd, Jeffrey Pai, Qiao Zhang, H. Holly Wang, and Ke Wang).

3. 3.

   “Testing for adverse selection of crop insurance in Northern China” (by Linging Hou, Dana L.K. Hoag, and Yueying Mu).

A second group of four papers focus on agricultural pricing, contracting, and risk management, and include:

1. 1.

   “Evaluating agricultural catastrophic risk” (by Lei Xu, Qiao Zhang, and Xi Zhang).

2. 2.

   “Factors affecting Chinese enterprises’ hedging decision making” (by Shi Zheng, Pei Xu, and Zhigang Wang).

3. 3.

   “Is contract farming a risk management instrument for Chinese farmers? Evidence from a survey of vegetable farmers in Shandong” (by H. Holly Wang, Yanping Zhang, and Laping Wu).

4. 4.

   “A strategic risk management program for agriculture” (by Dana L.K. Hoag).

A next paper focuses on food security:

• •

  “Impacts of agricultural public spending on Chinese food economy: a general equilibrium approach” (by Shiwei Xu, Yumei Zhang, Xinshen Diao, Kevin Z. Chen).

Other papers from the ARFS Conference can be found in the Proceedings (Xu et al., 2010). We wish to thank a number of organizations for their generous funding support and sponsoring of the conference, as without their help, the conference and this journal special issue would not have been possible. The supporters and sponsors include the Chinese Academy of Agricultural Sciences (CAAS), including the Agricultural Information Institute and Key Laboratory of Digital Agricultural Early-warning Technology Ministry of Agriculture, P.R. China; IFPRI (International Food Policy Research Institute, USA, and Beijing Office); and DFID (UK Department for International Development, DelPHE project of DFID, China Office).

Acknowledgements

Funding for this paper and research was provided through the DelPHE Grants Program, China Crop Insurance Project, Department for International Development (DFID), UK.

Milton BoydDepartment of Agribusiness and Agricultural Economics, Warren Centre for Actuarial Studies & Research, University of Manitoba, Winnipeg, Canada, and

H. Holly WangDepartment of Agricultural Economics, Purdue University, West Lafayette, Indiana, USA