Goodbye support, hello risk management

These were all huge changes for agriculture, but what initially seemed strange were soon part of farming life. Now with Brexit we will see new support structures, and soon we may have to become experts in risk management. This seems to be the favoured option of the government at Westminster as the core tool for supporting farmers – and ironically it is moving up the agenda in Brussels at the same time.

Indeed when we are out of the CAP, the policy we are leaving behind may in fact be a lot more similar to what the UK will end up with than looked likely in June when the referendum took place. In theory, a single country should be able to make this work better than a new approach spread across what will by then be 27 member states.

Risk management is not new. It is something we all try to do, by putting funds aside when times are good for inevitable tougher times.

It is also an extension of what we all do in taking out insurance. The concept is already part of what member states could do through their rural development programmes, although few have implemented the policy even at a basic level. The European Commission sought to sell this as part of a toolbox of measures to tackle risk. Its thinking was around aid for weather or disease events, but now thinking in Brussels and London is moving towards seeing risk management as a full or partial alternative to direct payments.

There is no simple blueprint as to how this could operate. The UK and EU would adopt different structures, but there will be a common aim.

That will be new structures where farmers manage risk by insuring against negative price movements that would threaten farm incomes. In the case of the EU, this will probably run in parallel with soft loans from the European Investment Bank. Any change in the EU would be phased in as direct payments are wound down – but the opportunity for gradual change is less likely in the UK. Here the front runners are risk management, support for disadvantaged areas and some form of basic agri-environment scheme that can be sold to taxpayers.

As the debate on risk management intensifies, eyes will turn to the United States, where this has been in place for some time. There payments are described as counter-cyclical, in that they seek to balance out price cycles in agriculture. They were introduced to avoid public criticism when farmers were paid subsidies even in times of high commodity prices.

Instead they now have three core programmes that are effectively subsidised insurance programmes. These cover crops, other commodities and natural disasters. Because commercial insurance, based on calculating and underwriting risk, would be prohibitively expensive, the state works with commercial companies. Every dollar paid to farmers through the insurance programmes costs the taxpayer two dollars. This suggests that these are costly programmes that cannot be budgeted for because markets are so volatile. That said, these cost around $15 billion in 2014, which is a long way off the €45 billion direct payments cost in the EU.

For arable commodities, the farmer picks a level of risk they are prepared to accept, covering for example the first third of losses before insurance kicks in. Like an excess on insurance, this reduces the premium. Beyond that there is a level of reinsurance to cover other risks beyond price, such as weather or disease. For dairy farmers there is a separate dairy margin protection programme, which pays out when the milk returns minus production costs fall below agreed national margins.

Again farmers can insure for different loss levels, and the greater the protection the greater the cost. This is not a model the UK or EU will be able to directly copy. But if we end up with a risk management based support structure, some elements of the US approach will almost certainly come to the UK. The battle for farmers will be to maximise the contribution from government, because commercial underwriting of risk from price volatility could never be viable.