The Impact on Production Incentives of Different Risk Reducing Policies

Reflecting several recent policy developments that have brought risk management to the forefront of policy discussions, this paper looks at government intervention to reduce price and yield risk from farming and how it interacts with market instruments. The starting point is to compare existing policy measures from the point of view of their impact on production and their ability to reduce risk. In the context of “decoupling”, two related questions are posed: What is the production response to each policy? What is the relative effectiveness of different policies in reducing farming risk? When dealing with the objective of farm risk reduction, both questions are inter-related because risk reduction induces production responses from risk adverse farmers.