Risk and insurance
234. We were told that the risk profile faced by the European
farmer has been increasing since the 1992 CAP reform began to
break the link between production and price support. Agenda 2000
continued that process, and the prospects of trade liberalisation
- leading to reductions in export subsidies and import duties
- would take it further. These developments, we were told, will
"change the risk perception of the European and United Kingdom
The Policy Commission on the Future of Farming and Food acknowledged
"We believe that with farmers assuming more risks within
their business, and with the shelter of the subsidy system gradually
disappearing, the Government should encourage the wider use of
risk management instruments.
"The Government should be prepared to support the development
of basic safety net aids at European Union level, once CAP price
support is removed. Such aids should operate so that they do not
distort markets over the longer term, but provide short term relief
during periods of market volatility.
"The Treasury should consult with banks and other financial
bodies to investigate the efficient provision of suitable financial
risk management instruments at reasonable cost. Collaborative
farming ventures and industry levy bodies should be involved in
these discussions, as they could be valuable conduits to transmit
the benefits of such instruments to smaller farmers".
235. In addition to the policy and market developments that are
leading to changing emphases and attitudes to risk, the approach
to managing disease risk needs to be considered. The Lessons Learned
Inquiry reported that "much of the cost of the 2001 [foot
and mouth disease] outbreak to the farming industry was externalised".
It then noted that it was a complex question as to "whether
compensation is the appropriate reimbursement mechanism or whether
a system closer to insurance arrangement should operate".
236. The Government has been considering various aspects of risk
management and insurance in agriculture. In January 2001, the
Ministry of Agriculture, Fisheries and Food produced an economic
report entitled Risk management in agriculture,
and discussions have been going on between the Government and
the agricultural industry.
The CLA was "slightly worried about the speed with which
the Government is trying to push this issue". It said that
there were problems over "the coverage of the risk"
and "how the risks are shared between farmers, the insurance
industry and the public who benefit potentially from the absence
In addition, the National Farmers' Union pointed out that in the
case of foot and mouth disease those who "suffer the most
severely are not the people who get the disease".
237. The move from commodity price support to direct payments
that are decoupled from production means that farmers are likely
to experience more volatility in the prices they receive for their
production. In addition, as we have seen from foot and mouth disease,
the consequences of exotic disease entering the country is another
type of risk. Representatives from Guy Carpenter, a global re-insurance
broker, also highlighted some potential problems in developing
an insurance market with the agricultural sector. They said that
there was a need to establish an infrastructure before launching
products: they identified a role for government in both of these
238. We welcome the fact that the Government and the industry
are talking about the role of insurance and other approaches to
risk management in agriculture. We note that in the 2002 Spending
Review, in return for investment in United Kingdom agriculture,
"the Government expects farmers to play their part in making
their industry sustainable, for example by managing risks".
239. We believe that discussions over insurance should move
forward as quickly as possible, and that they should explore all
possible routes of funding disease insurance packages, such as
levies and fixed compensation payments (as is already the case
for BSE, for example). There may be a legitimate role for some
public sector contribution toward establishing a market in these
products, reflecting the substantial human and animal health concerns
of the public. In the case of changing market risks, which have
arisen because of policy changes, we believe that ultimately it
should be the responsibility of individual farmers to decide how
to manage the market risk they face.
240. We are cautious about endorsing the Policy Commission's
call for a safety net, even at European Union level. If, as we
envisage, marketing of agricultural production is increasingly
to take place on the basis of long-term contracts between producers
and processors or retailers, risk will be reduced. Furthermore,
the intervention system that led to the build up of expensive
stocks was originally designed with similar objectives.