PR - Farm Income Risk Assessment For Selected Farm Types In Poland - Implications Of Future Policy Reforms

In the traditional understanding “risk arises when the stochastic elements of a decision problem can be characterized in terms of numerical objective probabilities, whereas uncertainty refers to decision settings with random outcomes that lack such objective probabilities†[Moschini, Hennessy 2001, p. 91]. This distinction, attributed to Knight (1921) is largely ignored in more recent publications. Moschini and Hennessy [op.cit.] state “we tend to use the word uncertainty mostly to describe the environment in which economic decisions are made, and the word risk to characterize the economically relevant implications of uncertaintyâ€. Following this view any ex-ante considerations in the decision making process refer to uncertainty regarding the prediction of an un-known future, whilst risk relates more to the ex-post measuring or ex-ante assessment of economic impacts of the decisions made. As such “risk†can be defined as “uncertainty of outcomes†[EC Working Document 2001, after Hardaker, Huirne and Anderson 1997; M]. For some reason, farm-businesses, more than any other businesses, may be subject to a variety of risks, such as human or personal, asset, production or yield, price, institutional and financial [EC Working Document 2001]. Of those, production risk, mainly due to the nature of agricultural production exposed to weather conditions and dependent on the healthy growth of animals, as well as price risk, resulting from the volatility of agricultural markets, have a direct and probably the greatest impact on farm incomes. In addition the dependence of European farming on policy related transfers (market price support and direct income support) means that farm incomes are increasingly exposed to price and income risk related with the CAP reforms. For example, the consequences of the new WTO agreement may result in lower price support and greater exposure to world market price volatility. At the same time pending the policy debate on the EU budget for the next programming period will put both the forms and levels of direct farm support under public scrutiny. This paper deals with the assessment of risk for selected farm types in Poland in the perspective of the years 2013 and 2018 considering different EU farm policy scenarios creating an additional institutional risk, which through different market-related measures may affect, direct prices support and thus incomes. The typical Polish heterogeneity of farm structure creates a good basis for comparison of the income situation of different types of farms, with a focus on the probability of achieving low incomes threatening the farm’s existence. For this purpose a static simulation model using a Monte Carlo method was constructed. No changes in production structure and other possible adjustments, including investments, were considered.