Simulating risk management strategies for specialized farming systems: the potential impact of the EU income stabilization tool

Cinzia Zinnanti, Attilio Coletta, Michele Torrigiani and Simone Severini

Agricultural Finance Review, 2022, vol. 83, issue 2, 264-285

Abstract: Purpose - This study assesses the potential impact of the European Income Stabilization Tool (IST – a whole farm income risk management [RM] tool) within a farm cooperative specializing in vineyards and operating in a small area of production. The authors assess the conditions under which IST could improve the well-being of the associated farmers and, at the same time, improve financial sustainability. Financial aspects are of particular relevance since the characteristics of the cooperative cause the management of the tool to become potentially risky. Design/methodology/approach - The analysis relies on a balanced panel dataset to report the production and economic characteristics of individual associated farms. This is the basis for simulating the implementation of the IST as described in the current European regulation. The expected utility approach is then used to assess the potential impact on farmers' well-being under different levels of risk aversion and premiums. The analysis of the IST annual cash flow allows for an accurate assessment of its financial sustainability. Findings - The results suggest that the IST can improve farmers' well-being under plausible levels of risk aversion and premiums, making most farmers willing to support its implementation. Furthermore, the tool could be financially sustainable even if implemented in a specialized and geographically concentrated group of farms. In addition, the results suggest that the use of strategies such as the IST could help cope with negative annual balances by treating the financial sustainability of the fund. Originality/value - The analysis adds to previous research on the IST by accounting for farmers' risk aversion. Furthermore, it is the first analysis that simulates the implementation of this tool in a sector-specific and concentrated group of farms. The results provide useful evidence for those subjects planning to implement the IST in small and specialized farming systems.

Keywords: Risk management; Risk aversion; Mutual fund; Gross margin; Expected utility; Wine cooperative (search for similar items in EconPapers)
Date: 2022
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Persistent link: https://EconPapers.repec.org/RePEc:eme:afrpps:afr-11-2021-0146

DOI: 10.1108/AFR-11-2021-0146

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