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To stabilise agricultural markets is one of the central objectives of the Common Agricultural Policies (CAP). After two decades of agricultural policy reforms markets are now only minimally influenced by direct policy interventions. However, prices of many farm commodities have become more volatile. A consequence is that farm incomes have become more volatile, as well. Direct payments are an effective instrument to stabilise incomes by offering a certain minimum level of liquidity. However, such premiums are low for many farmers and therefore a set of income stabilisation instruments was introduced during the Health Check Reform on an optional basis for Member States and certain groups of producers. In order to overcome some of the shortcomings of such approaches, we propose a margin insurance. We present such an insurance programme for EU agriculture and exemplify it using Austrian wheat and hog production as case studies. By referring to existing income insurance systems we identify necessary conditions for such a scheme to work. In order to address adverse selection, a micro simulation approach is proposed that makes granular premium discrimination feasible. Such an approach seems to be better suited for the heterogeneous structural conditions in the EU than a similar scheme for milk producers in the US that is based on a composite index.


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