Agricultural Risk Management in the European Union: A Proposal to Facilitate Precautionary Savings

Through a series of reforms, the European Union (EU) replaced most of its trade distorting price support programmes with safety net provisions and direct payments decoupled from production. This has resulted in greater market orientation and a situation in which farmers face increased price variability. Policy now emphasises the development of business risk management (BRM) programmes, such as crop and whole farm insurance. However, for various reasons EU-wide adoption of BRM programmes and farmer uptake and use of risk instruments is below expectations. We recommend the use of farm-specific savings accounts upon which farmers can draw when revenues fall below a proportion of expected revenue. Farmer-Directed Precautionary Savings Accounts (FDPSAs) would complement traditional non-financial, on-farm risk management strategies and private/public risk transfer strategies. FDPSAs would protect farmers against shallow losses and, along with crop and/or index-based insurance, also protect against deep losses. Further, this form of protection is easy to understand and administer and leaves complete control with the producer.