Risk and Risk Transfer in Agriculture

Facilitating food security and poor farmer participation

The current food crisis has manifested itself in high prices of most major food crops, posing the risk of serious hardship for consumers, and especially the most vulnerable poor. The crisis has prompted a search for measures that might boost the supply of food crops (and curtail “unnecessary” demand, such as that for biofuel feedstock).  But why would such interventions to boost production be necessary? Shouldn’t the dramatic increase in prices provide a sufficient market incentive for producers to right the balance? Indeed, why was the current situation not anticipated and production expanded before it was too late?

These questions can be addressed from two different perspectives. One perspective suggests that the current situation is the result of the globe running up against the limits of its capacity to supply food.  This paper focuses on the second perspective, which does not focus directly on physical or production technology capacity constraints, but instead sees the current crisis at least in part as the product of the risky nature of agricultural production. Viewed from this perspective, the current crisis is a particular manifestation of the tendency of agricultural markets to occasionally produce supply/demand imbalances that can cause pronounced spikes, as well as collapses, in prices.

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