Risks perceptions and risk management instruments in the European Union: Do farmers have a clear idea of what they need?

Abstract

This paper explores and analyzes farmers’ risk perceptions, risk management instruments’ demand and usage in five Member States (Hungary, Spain, the Netherlands, Germany and Poland). A survey completed by 1047 representative farmers of these EU Member Status collected information that allowed us to set apart two focus areas: the first looks at the declared importance of several sources of farms’ risk and income instability, and at the actual means that farmers pursue to manage and face them. The second area focuses on the demand for risk management instruments. The paper’s objective is to determine the factors that explain farmers’ responses in the first area, and based on those factors, analyse the demands for two instruments (insurance, and future & option markets). After carrying out basic descriptive statistic analyses, we perform factor analysis in order to establish the linkages between the perceptions and ranking of risks with the declared strategies to manage them. Logit models were fit to determine potential demand of insurance, and futures & options based on the three factors, and other variables like activity types and other controls, like nationality. Results from the factor analysis show that the perception of risk and actual use of risk management are very diverse. Logit models show that insurance is clearly an alternative instrument to diversification, but its demand is poorly explained by the other factors. Furthermore the demand for the use of futures and options is explained by the three factors, with the volatility factor, positively linked; market access /contractual risks; and diversification, negatively linked. In conclusion, policy makers should proceed with caution selecting the most adequate risk management instruments for farmers. It appears that the expected demand of risk management tools does not fit perfectly with the stated perception of risks.