Price volatility in agricultural markets: Risk management and other tools

Farmers are often confronted with substantial changes in the prices they receive for the sale of their agricultural products, which causes financial uncertainty about their incomes. Commonly referred to as 'price volatility', this phenomenon is more evident in agriculture than in other economic sectors due to a variety of economic, natural and political factors. Data provided by the United Nations Food and Agriculture Organisation suggest that global price volatility has been on the increase since 2005 and is likely to remain a major concern for farmers in the coming decades.

The Common Agricultural Policy (CAP) for the 2014–2020 period is mainly aimed at compensating farmers for the negative effects of price volatility and at tackling income volatility, rather than directly addressing price volatility itself. Indeed, market interventions have been reduced and now play the limited role of safety net measures which are only activated when prices drop below certain levels. The main policy instrument involves direct payments which provide a stable form of income for farmers regardless of market conditions. Additionally, Member States have the possibility to support three risk management tools (insurance schemes, mutual funds and an Income Stabilisation Tool) through their rural development programmes.

The European Parliament has been working actively on the issue of price volatility in agricultural markets, notably by organising a hearing and launching an own-initiative report on the subject. It will also play a crucial role in determining the next CAP framework. Looking to the future, direct payments, which reduce income volatility by providing a stable form of revenue for farmers, will probably still play a role in the CAP after 2020, but a political shift towards the further development of risk management tools, especially the Income Stabilisation Tool, could be at the core of the debate on the future of the European agricultural policy.

Author: Francesco Tropea with Pieter Devuyst