EU income stabilization tool: potential impacts, financial sustainability and farmer\u2019s risk aversion

Simone Severini,Cinzia Zinnanti,Valeria Borsellino,Emanuele Schimmenti

doi:10.1186/s40100-021-00205-4

Simone Severini, Cinzia Zinnanti + Show 2 more

Open Access

https://doi.org/10.1186/s40100-021-00205-4

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Abstract

The Income Stabilization Tool, a risk management scheme introduced within the Common Agricultural Policy (CAP) 2014–2020, could help European Union farmers manage the income risks they face. This study assesses the potential impact of implementing this tool through the maximum level of contribution to the fund which determines an indifference to participate in the fund and its financial sustainability. The study relies on an expected utility approach and assesses the variability of loss ratios over time using a sample of Italian hazelnut farms as a case study. The participation depends on the level of farmers' contributions and their degree of risk aversion. However, the CAP public support makes the scheme financially sustainable.

Highlights

The resilience and sustainability of farms are influenced strongly by their capacity to survive various risks and shocks that affect their income (Lien et al 2007; Dahms 2010; Mitchell and Harris 2012; Meuwissen et al 2019; Reidsma et al 2015)
The analysis shows that the proposed approach provides useful results in regards to the extent of the reduction of farm income risk and the level of farmer’s contributions that makes an income-based risk management scheme feasible while accounting for the role of public support
The results of the analysis suggest that the proposed approach could be used to assess the implication and feasibility of income-based risk management schemes such as the Income Stabilization Tool (IST) in other European Union (EU) countries and sectors

Summary

Introduction

The resilience and sustainability of farms are influenced strongly by their capacity to survive various risks and shocks that affect their income (Lien et al 2007; Dahms 2010; Mitchell and Harris 2012; Meuwissen et al 2019; Reidsma et al 2015). Farms specialized in horticulture and permanent crops other than viticulture have a high probability of severe economic losses (Trestini et al 2017). Risk management can help farmers face potentially disruptive challenges (Meuwissen et al 2019). Risks could be managed through market tools such as the individual ones (insurance, forward and future contracts) or shared with other farmers (mutual funds), cooperatives, producer organisations, or through

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