Policies for a more resilient agro-food sector
Farming is an inherently risky activity, being exposed to unpredictable weather and associated production and price volatility, to animal and plant diseases , and to policy uncertainties. The Covid-19 pandemic has highlighted further vulnerabilities, such as shortfalls in the supply of seasonal labour, while climate change will only increase the uncertainties that farmers face. Equipping farmers to absorb and recover from shocks is an important element in many countries’ efforts to strengthen agricultural resilience. Jesús Antón, Senior Economist in the Trade and Agricultural Directorate, Jonathan Brooks, Head of the Agricultural and Resources Policies Division, Emily Gray, Agricultural Policy Analyst and Urszula Ziebinska, Senior Statistician, all with the OECD, explain various concepts involved with resilience in agriculture and how the EU’s Common Agricultural Policy can better address resilience in agriculture.
By Jesús Antón, Jonathan Brooks, Emily Gray and Urszula Ziebinska, Organisation for Economic Cooperation and Development (OECD)1
Resilience as a growing concern in agriculture
As the world recovers from a once-in-a-generation shock imposed by the COVID-19 pandemic, the word ‘resilience’ has become fashionable, reflecting the idea that economies must rebuild in a way that makes them more robust to future shocks. Yet in the case of the food and agricultural sector, the concept is not new, nor is the need for policies that build resilience, that is the ability to prepare and plan for, absorb, recover from, and more successfully adapt and transform in response to adverse events. Managing natural hazard risks is inherent in agriculture, given the sector’s reliance on climate and weather conditions and the natural resource base. And climate change is increasing the frequency and intensity of natural hazard-induced disasters, causing production losses and damaging farm land and assets in agricultural sectors across the world, and threatening livelihoods. The sector is also exposed to market shocks from both domestic and international sources.
The COVID-19 pandemic delivered twin health and economic shocks, compounding the stresses on agro-food systems. The main impacts came through changes to the structure of food demand and disruptions to supply chains. The production of most commodities was generally able to withstand the pandemic, although products requiring greater labour input — notably fruits and vegetables — were more affected. Policy responses were generally successful in maintaining the overall functioning of food supply chains, and overall, the agricultural sector proved resilient. Even so, major risks remain, especially in developing countries.
OECD Agricultural Ministers in 2016 emphasised a strengthening of resilience as a central priority in their Ministerial Communiqué. Since then, this topic has been a growing concern for agricultural policy makers. The bad news is that the challenges remain significant and may have become more acute. But the good news is that we now know more about the governance arrangements, policy measures and on-farm strategies that can enable governments, farmers and other agricultural sector stakeholders to better prepare for shocks before they occur. And we know more about the approaches that can help these players — where necessary — to widen opportunities to adapt and transform successfully afterwards.
Strengthening resilience for a more responsive agro food sector
All businesses are subject to risks, but agriculture is a particularly risky activity. Supply side shocks, stemming from weather events, and pest and disease outbreaks, can wipe out livelihoods very easily. It can be difficult for farmers to manage these risks through their own individual actions, and private risk markets are often not operational or accessible for individual farmers — especially smaller farmers. As a result, governments have a long history of intervention to help mitigate risks, often through market interventions such as price stabilisation that shield farmers from the true costs of their risk of loss.
One basic problem is moral hazard: the more extensively the government gets involved in risk management, the less incentive farmers have to manage their own risks. Accordingly, the OECD has long suggested a ‘layering’ of different kinds of risks.(2) That consists of:
- a clear delineation of the risks that can be borne by farmers themselves, as part of normal business risk;
- risks that can be managed by the use of private contingency markets; and
- finally a layer of risk that calls for government intervention.
These layers are represented by three columns in Figure 1. The third type of risk would typically comprise catastrophic risks, such as those stemming from natural disasters.
Figure 1 — A holistic approach to risk management for resilience
More recently, work on risk management has been expanded to cover the concept of resilience. There are lots of definitions of resilience based on which the OECD identifies the following core attributes of a resilient system: the ability to prepare and plan for shocks; to absorb & recover from them; and finally the capacity to adapt & transform. There are five key considerations; (3)
- consider the risk landscape over a longer time frame. Public and private actors should place a greater emphasis on what can be done ex ante to reduce risk exposure, and plan and prepare for possible shocks, rather than on ex post reactive strategies;
- account for trade-offs: For example, between policies that enhance different capacities. Actions to strengthen drought resistance could ultimately undermine resilience in the face of climate change. Resources also need to be prioritised;
- develop policies through participatory collaborative processes. Engagement of a wide range of stakeholders can help develop a common understanding of the risk landscape and respective responsibilities for managing risk;
- investment in on-farm resilience capacities. Policies should encourage farmers to develop entrepreneurial skills and their human capital more broadly, as well as promote or support the uptake of resilience-enhancing practices or technologies;
- no-regret policies. More focus is needed on policies and investments in key sectoral capacities that build agricultural sector resilience to risk under a wide range of future scenarios and contribute to agricultural productivity and sustainability, even in the absence of a shock.
The first three considerations can lead to a more effective process for developing policies; the latter two (shown in the top and bottom rows of Figure 1) suggest more active policy interventions to foster resilience. A shift to resilience-based policies can shift the boundaries between risk layers, so that a greater share of risks can be managed by farmers or by private markets. In other words, an expanded government role in fostering resilience may be cost effective by reducing the need for expensive interventions in the form of disaster assistance. Digital technologies can accelerate those boundary shifts by enhancing information on risks and uncertainties and resolving information asymmetries.
Keeping the pace of CAP reform to increase resilience
However, policy trends have not always moved in the right direction. Globally, public support devoted to conventional risk management is increasing (see Figure 2). The largest share of this support takes the form of insurance subsidies, which, if not well designed, may smooth the financial impact of extreme events but, at the same time, reduce incentives to develop other resilience capacities such as to increase preparedness or to adapt and transform in response to future risks.(4) The other measures reported in Figure 2 are dominated by ex post disaster aid and ad hoc assistance, which significantly increased in 2018–19, mainly reflecting the trade loss mitigation programmes in the US.
Figure 2 — Global expenditure on risk management policies is increasing
Has the Common Agricultural Policy (CAP) moved towards a resilience approach? The EU has undertaken significant reforms of the CAP over the years, making it less production and trade distorting. The 1992 MacSharry reforms substituted support tied to production (through intervention buying and export subsidies) in favour of support to producer incomes through direct payments. Subsequently, the 2003 Fischler reforms decoupled significant share of support into the single payment scheme (SPS). These reforms have been reflected in a significant change in the total and composition of the OECD Producer Support Estimate (PSE) (OECD, 2021).(5) Over the past 35 years, in particular through the 1990s and 2000s, the PSE as a percentage of gross farm receipts has fallen from 38% (1986–88) to 19% (2018–20), while the share of this support that is potentially most distorting has been reduced from 90% to 21% over this period (Figure 3).
Figure 3 — The European Union has significantly reformed its support for agriculture in the decades of the 1990’s and 2000’s
These reforms have already helped to make farmers more responsive to market signals and shocks, thus, more proactively resilient. Nowadays, the biggest share of support in the EU is made through decoupled payments. These programmes help to smooth the financial impact of shocks but do not create incentives for farmers to invest in reducing their risk exposure, nor to adapt and transform farming practices in response to the changing risk environment. No-regret policies that include investments in resilient infrastructure and innovation are better oriented to improving both productivity and sustainability.
The new CAP and the subsequent National Strategic Plans are an opportunity for some changes that could target innovation to improve productivity and sustainability, while strengthening resilience. However, the EU dedicates only 10% of its Total Support Estimate (TSE) to support general services (GSSE) and public goods that better contribute to these objectives, compared to a global average of 17% and 13% among OECD countries (Figure 4). Even if a small share in the EU, most of this general services support is focused on innovation that can contribute to a more resilient sector. A greater effort could be made to re-orient public expenditures on producer support towards investments in these public goods.
Figure 4 — Most of the support in the European Union does not target innovation and public services to the sector
New CAP offers increased potential for European agricultural resilience
Forward-looking policies to enhance the resilience of the sector need strengthened policy processes that consider the risk landscape over the long term, engage a wide range of stakeholders, and account for the trade-offs inherent in different policy options. But they also need a shift in policy content, with increasing incentives to build on-farm resilience and a greater emphasis on providing public goods and services. The two are linked insofar as a process shift towards ex ante preparedness, as opposed to ex post assistance, implies content shift of public spending towards spending on (no-regret) public goods as opposed to private goods (such as disaster payment cheques).
The EU’s long-term COVID-19 recovery packages (in the form of the Next Generation EU and the reinforced budget) provide an opportunity to leverage the crisis and build a more resilient agriculture. The new CAP reform provides some room for changes in the right direction. Member States’ National Strategic Plans will be able to reallocate resources between the funds for direct payments and sectoral policies (Pillar 1) and the funds for rural development (Pillar 2), and to design eco-schemes that create incentives for adaptation and transformation. Alignment of the new CAP with the European Green Deal and the Farm to Fork strategy provides longer-term opportunities to build a more resilient European agricultural sector.
(1) The views expressed in this article are the author’s and not necessarily those of the OECD or its member countries.
(2) See OECD, Managing Risk in Agriculture: A Holistic Approach, OECD Publishing, Paris 2009; OECD, Managing Risk in Agriculture: Policy Assessment and Design, OECD Publishing, Paris 2011.
(3) OECD, Strengthening Agricultural Resilience in the Face of Multiple Risks, OECD Publishing, Paris 2020; OECD-FAO, Building Agricultural Resilience to Natural Hazard-Induced Disasters: Insights from Country Case Studies, OECD Publishing 2021.
(4) Glauber, J. et al., Design principles for agricultural risk management policies, 2021.
(5) OECD, Agricultural Policy Monitoring and Evaluation 2021, OECD Publishing, Paris 2021.
This article was first published on the 2/2021 issue of the ECA Journal. The contents of the interviews and the articles are the sole responsibility of the interviewees and authors and do not necessarily reflect the opinion of the European Court of Auditors.