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Risk and crisis management in agriculture

The introduction of the single payment scheme * enables farmers to gear their production decisions to economic and agronomic criteria. At the same time it requires them to take their own responsibility for dealing with risks and crises whose effects in the past have been absorbed by market and price support policies. Thus, as part of the reform of the common agricultural policy (CAP), farmers need new risk and crisis management instruments. The Commission is looking into this problem and is proposing the introduction of measures to help farmers to address these issues.

ACT

Communication from the Commission to the Council of 9 March 2005 on risk and crisis management in agriculture [COM(2005) 74 final - Not published in the Official Journal].

SUMMARY

In this communication, the Commission proposes the introduction of measures to help farmers to manage risk and improve their response to crises. It is proposing three categories of new measures.

New options for risk and crisis management tools

Risk * (resulting in a negative outcome) and crises * may have serious economic consequences for businesses, affecting their income. Most of the instruments devised to provide assistance to cope with unforeseeable events rely on ad hoc measures.

The Commission has examined a number of instruments to accompany or partially replace the existing ad hoc emergency measures. The three options proposed by the Commission are as follows:

  • insurance against natural disasters: this would involve the provision of a financial contribution towards the premiums paid by farmers for insurance against income loss as a result of natural disaster, bad weather or disease. This measure would encourage insurance in the sector, which up to now has been underdeveloped as a result of the systemic nature of the risks involved. Reinsurance schemes are also considered;
  • supporting mutual funds: mutual funds are a means of sharing risk among groups of producers, enabling farmers to be compensated in the event of loss. In the past, funds have usually been set up on the initiative of producer groups in the same sector. The Commission is proposing that the setting up of mutual funds in the agricultural sector be encouraged by granting temporary degressive aid for their administration;
  • providing basic coverage against income crises: new instruments could be created to provide basic coverage in the event of liquidity problems or serious loss of income. The reasoning is that, while rural development programmes will be available to support major investment in restructuring and provide aid for structural adjustments, they could prove insufficient.

Training measures could be introduced under the rural development programmes to help improve awareness of current risks and improve risk management strategies.

Safety net in the event of market crisis

The instruments used to influence the market and price situation and address possible crises vary between market organisations. Following the CAP reform, safety net provisions in the event of crisis remain available in several sectors covered by the reform. For other sectors, there is currently no justification for the introduction of an additional general safety net provision. The Commission therefore rules out the introduction of a safety net clause for each common market organisation.

Financing risk and crisis management measures

The Commission proposes that these additional risk and crisis management measures should be funded under the rural development programmes (under the competitiveness priority) out of one percentage point of modulation *. Using modulation would not require additional Community expenditure and would make it possible for the Member States to use a limited amount of rural development funds for these purposes. For the new Member States, in which modulation does not apply, a method enabling those so wishing to allocate funds to these measures will have to be examined.

The use of state aid or top-ups for this type of measure would be subject to the relevant Community competition rules.

Background

An initial analysis of risk management tools was presented by the Commission in January 2001. The conclusions of the Luxembourg Council (June 2003) on the reform of the CAP include a statement by the Commission on this matter, announcing that it would examine specific measures to address risks and crises by the end of 2004.

Key terms used in the act
  • Single payment scheme: the single payment is an annual income payment to farmers calculated on the basis of the aid received over the 2000-02 reference period. The main aim of this payment is to ensure greater income stability for farmers. Farmers are free to decide what they want to produce in response to demand without losing their entitlement to support.
  • Modulation: a mechanism to progressively reduce direct payments to farmers and transfer the funds thus released to the rural development sector.
  • Risk: implies a situation that could have a variety of outcomes, for each of which the probability can be estimated.
  • Crisis: an unforeseen situation that endangers the viability of agricultural holdings, either at local level or across a whole sector of production.
Last updated: 24.01.2006
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