Efficiency of selected risk management instruments. An empirical analysis of risk reduction in Kazakhstani crop production

Kazakhstan’s agricultural sector plays an important role in the country's economy. Not only does it function as an economic output producer, it also serves as a social buffer in times of transition to a market economy. The restructuring process had a strong impact on the economic performance of agricultural enterprises. As the state no longer functions as a back-up financier in times of economic downturn, farmers have to find their own sustainable instruments to manage business risks, which are significant in Kazakhstan due to the acute continental climate and the resulting revenue fluctuations. This thesis is an integral part of the research project "Crop Insurance in Kazakhstan – Options for Building a Sound, Institution Promoting Agricultural Production". It aims at shedding light on the question, how farm income can be efficiently stabilized under transition conditions. Furthermore, it will be attempted to answer following sub-questions by employing a utility-efficient risk programming model to three typical study farms in North, East, and South Kazakhstan: • What are the most efficient income stabilization mechanisms for different farm types in Kazakhstan? • How do climatic conditions and yield variability influence the efficiency of income stabilization instruments? • How do assumptions about the decision-maker behaviour influence the choice and efficiency of selected farm income stabilisation instruments, e.g. to which extent risk aversion affects the choice of risk management instruments in a less developed country with extremely high coefficients of yield variation and often little diversified production systems? Although insurance solutions to agricultural risk suffer from being prone to asymmetric information problems, their possible impact on risk reduction will be investigated. Therefore, insurance products, which are able to limit the extent of moral hazard problems will be described and analysed. Additionally to the programming model, a farm survey as well as a stakeholder survey among political decision-makers, representatives of insurance companies and public administration and researchers have been carried out. The rationale for these empirical studies, particularly the farm survey, was to obtain information about production risks Kazakhstani farmers face, their attitude towards risk, and the risk management instruments they apply. Furthermore, answers will be provided to the question how the actual law on crop insurance in Kazakhstan can profit from findings generated in the course of this research. Considering the utility-efficiency of different risk management instruments, we can conclude that the separate regional analysis was a reasonable procedure, because no general recommendations can be derived from the efficiency results. Therefore, conclusions regarding the utility-efficiency of the considered insurance instruments will be drawn regionally. A large number of insurance products stabilises income efficiently as can be derived from the utility rankings. However, weather index insurance seems to be more appropriate in Northern Kazakhstani grain production. Area-yield insurance might be a reasonable alternative to weather insurance, since it provides a number of advantages in fighting moral hazard compared to farm yield insurance. Efficiency results as well as the analysis of variation coefficients show its applicability for East and South Kazakhstan conditions. However, the advantages providing better access to symmetric information should be evaluated against the potentially lower risk reduction. When introducing area-yield insurance, smaller areas (rayons) as the basis for the calculation of the underlying yield index are supposed to provide higher risk reductions than larger areas (oblasts). A central conclusion can be derived for all considered study farms simultaneously. The choice of the production technology is the decisive factor in risk management. The result can be connected to the evaluation of risk management responses of the farm survey. According to the interviewed farmers, the maintenance of capital reserves and production with low costs are two of the most important objectives in risk management. As results from the normative decision model show, these strategies are not ‘first best solutions’ for all considered farms. When crop production is insured, more intensive production technologies (with higher costs) might be more appropriate than low input technologies. For further research, we can conclude that decision-making conditions and criteria vary across geographic regions and by farm type; thus, subsequent risk models should be adapted to the unique conditions of the research domain because standardized modelling formulations can produce spurious results. Obviously, a natural extension of this work is the investigation of other crops and regions. Future research should test the long-term economic potential of alternative crops under changing natural conditions and prices. Furthermore, different combinations of insurance with hedging products can be tested. The hypothesis that crop insurance often supports only large-scale farmers cannot be rejected when investigating the data on crop insurance market development. One of the reasons for introducing mandatory crop insurance in Kazakhstan was to provide all farmers with access to insurance, disregarding their risk exposure or the size of their enterprises. However, insurance companies have less incentives to insure small, risk-prone farms. The future task of the government will be to find appropriate enforcement mechanisms to motivate insurance companies to provide insurance to small farms or to transform the mandatory system into a voluntary one. A further government task involves breaking up the path dependence of crop insurance. The bad image of the entire insurance industry could be primarily overcome by setting right the legal framework, the incentives, and enforcement mechanisms. The objective would be to create an insurance system, in which insurance companies can generate profits with their clients experiencing justice and income stabilisation that provides a sound base for the development of economic activities. To strengthen the link between on-farm risk management and risk-sharing strategies, the government could promote research in agronomic methods to mitigate the effects of difficult growing conditions. Differences in agro-climatic environments such as soil type and fertility, moisture availability, distribution of weeds, and susceptibility to erosion should be better taken into consideration when developing new technology recommendations