Agricultural policy uncertainty and the risk averse firm

Summary Instability of prices, output and incomes is one reason that is often advanced for government intervention in the agricultural sector. This instability stems from both market and environmental factors. Once governments intervene, the policy process becomes another source of uncertainty facing the producer in agriculture. The price fixing procedures of the Common Agricultural Policy are used to illustrate the operation of an agricultural policy process and to illustrate the political criteria used in the operation of that process. The paper attempts to characterise an imperfect policy process by means of its impact on the subjective probability distribution of market prices held by a risk averse firm and then analyses this impact on the level of expected utility of profit attained by the firm. It is concluded that the policy process is an important additional source of uncertainty facing producers.