Risk management in crop farming

The agricultural sector is heavily exposed to the impact of climate change and the more common extreme weather events. This exposure can have significant impacts on agricultural production. To deal with the financial impacts caused by natural hazards, crop insurance is an appropriate tool (Di Falco et al., 2014). In addition to crop insurance purchase, to maximize agriculture’s mitigation potential regarding to weather-related risks, there is a need for investments in technological innovation and agricultural intensification related to increased efficiency of input usage (Vermeulen et al., 2012). The dissertation aimed to explore the influencing factors of crop insurance take-up and evaluate the effect of crop insurance purchase on technical efficiency and farm investment, and analyse the interrelationship between these factors based on three articles. The analysis was carried out using quantitative methods, such as Moran’s I index, dynamic spatial autoregressive model, various probit models, DEA method with double bootstrap and system of simultaneous equations based on crop insurance data collected by Research Institute of Agricultural Economics (AKI), on utilised area data from the Integrated Administration and on FADN data. The main results of the dissertation: • The intensity of crop insurance take-up has a spatial pattern, as farmers’ insurance decision are influenced by the decisions of nearby producers. In addition, neighbouring farms can face similar weather-related risks which also provide an explanation for the similar insurance decision. • Crop insurance level is influenced by the rate of fruit production and vegetable production in total crop production for all types of subsidised insurance taken together. A high share of fruit production discourages participation in the subsidised insurance system, which can be explained by the typical damage scale, the relative high insurance premium for fruit crops and the low-risk appetite of insurers. However, vegetable producers are more likely to purchase for crop insurance, which can be explained by the high-risk exposure and the moderate insurance premium rates. • Crop diversification increases crop insurance usage, which suggests that a farmer with a diversified crop production structure may also willing to purchase crop insurance to further reduce weather-related risks. Hungarian farmers do not tend to treat crop diversification as a substitute for crop insurance usage, rather it is a complementary tool to reduce risk. • Older farmers might be more risk averse; therefore, they were more likely to purchase crop insurance. • Return on equity (ROE) does not impact significantly on crop insurance demand, suggesting that the premium subsidies, which were available the end of the period examined, helped to relax the budget constraints on Hungarian farms. • Crop insurance purchase effects significantly and positively on technical efficiency, suggesting that the safety provided by the insurance also might contribute to introduce new technology and to develop technical efficiency. • Both technical efficiency and farm investment encourage crop insurance take-up, suggesting that managers of farms with higher technical efficiency and higher level of investment also consider carefully other aspects of production, like crop insurance decision. In addition, crop insurance purchase increases technical efficiency and farm investment by providing a safety net. As a result, policy interventions that stimulate any of the three factors can potentially have additional positive impacts through spill-over effects on other factors, consequently, these farms’ resilience to the impact of extreme weather events and climate change might be further improved