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The real rate of protection: the income and insurance effects of agricultural policy

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  • Stanley Thompson
  • P. Michael Schmitz
  • Nobuyuki Iwai
  • Barry Goodwin

Abstract

Agricultural price policies in developed countries aim at protecting farmers against both low and volatile world market prices. However, traditional indicators of protection only refer to the income (level) effect of policy. Following other research, it is argued that public policy can also yield an insurance (stabilizing) effect. In this paper a way to measure these dual effects is proposed. The method is illustrated with wheat market data for the USA and the European Union. Strong evidence is found that the insurance effect is an important component of protection, albeit a small one relative to the income effect. Policy support provided higher income and lower insurance effects in the EU than in the USA. For both markets, policy reforms in the 1990s led to significantly reduced income effects and smaller insurance effects. Without accounting for the influence of policy on income variability, traditional measures of protection will understate the real rate of protection.

Suggested Citation

  • Stanley Thompson & P. Michael Schmitz & Nobuyuki Iwai & Barry Goodwin, 2004. "The real rate of protection: the income and insurance effects of agricultural policy," Applied Economics, Taylor & Francis Journals, vol. 36(16), pages 1851-1858.
    • Handle: RePEc:taf:applec:v:36:y:2004:i:16:p:1851-1858
    DOI: 10.1080/0003684042000279744
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    References listed on IDEAS

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    1. Atanu Saha & C. Richard Shumway & Hovav Talpaz, 1994. "Joint Estimation of Risk Preference Structure and Technology Using Expo-Power Utility," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 76(2), pages 173-184.
    2. Stanley R. Thompson & Roland Herrmann & Wolfgang Gohout, 2000. "Agricultural Market Liberalization and Instability of Domestic Agricultural Markets: The Case of the CAP," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 82(3), pages 718-726.
    3. David A. Hennessy & Bruce A. Babcock & Dermot J. Hayes, 1997. "Budgetary and Producer Welfare Effects of Revenue Insurance," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 79(3), pages 1024-1034.
    4. Stanley R. Thompson & Donggyu Sul & Martin T. Bohl, 2002. "Spatial Market Efficiency and Policy Regime Change: Seemingly Unrelated Error Correction Model Estimation," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 84(4), pages 1042-1053.
    5. Newbery, David M, 1989. "The Theory of Food Price Stabilisation," Economic Journal, Royal Economic Society, vol. 99(398), pages 1065-1082, December.
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    Cited by:

    1. S. Thompson & Y. Bae & M. Kniepert, 2010. "Agricultural policy regime change assessment: Austrian accession to the European union," Empirical Economics, Springer, vol. 39(1), pages 291-302, August.
    2. Ashok Mishra & Barry Goodwin, 2006. "Revenue insurance purchase decisions of farmers," Applied Economics, Taylor & Francis Journals, vol. 38(2), pages 149-159.
    3. Abel Tiemtore, 2021. "Examining the effects of agricultural income insurance on farmers in Burkina Faso," The Geneva Papers on Risk and Insurance - Issues and Practice, Palgrave Macmillan;The Geneva Association, vol. 46(3), pages 422-439, July.
    4. Anderson, Kym & Nelgen, Signe, 2012. "Trade Barrier Volatility and Agricultural Price Stabilization," World Development, Elsevier, vol. 40(1), pages 36-48.
    5. Key, Nigel & Prager, Daniel & Burns, Christopher, 2017. "Farm Household Income Volatility: An Analysis Using Panel Data From a National Survey," Economic Research Report 256710, United States Department of Agriculture, Economic Research Service.
    6. Johanna L. Croser & Kym Anderson & Signe Nelgen & Ernesto Valenzuela, 2009. "Global Distortions to Key Agricultural Commodity Markets," World Bank Publications - Reports 28169, The World Bank Group.
    7. El Benni, Nadja & Finger, Robert & Mann, Stefan, 2012. "The effect of agricultural policy change on income risk in Swiss agriculture," 123rd Seminar, February 23-24, 2012, Dublin, Ireland 122532, European Association of Agricultural Economists.

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