Elsevier

Ecological Economics

Volume 55, Issue 4, 1 December 2005, Pages 459-466
Ecological Economics

Analysis
Crop biodiversity, risk management and the implications of agricultural assistance

https://doi.org/10.1016/j.ecolecon.2004.12.005Get rights and content

Abstract

This paper presents a theoretical and empirical analysis of the impact of financial assistance to farms on crop biodiversity in an uncertain setting. The findings reveal that risk aversion is an important driving force for crop biodiversity conservation. Risk-averse farmers can hedge against the uncertainty they face by allocating land to different crop species. However, policies intended to stabilize revenues by supporting particular species may alter this link by delinking crop biodiversity from the management of revenues risk.

Introduction

After the seminal contributions of Brush et al. (1992), Heisey et al. (1997) and Smale et al. (1998), a number of studies focusing on the importance of crop biodiversity2 have been published in the agricultural and resource economics literature. A first strand of literature analyzed the contribution of crop biodiversity to the mean and the variance of agricultural yields (Smale et al., 1998, Smale et al., 2003, Widawsky and Rozelle, 1998) and to the mean and variance of farm income (Di Falco and Perrings, 2003). A second strand provided both theoretical and empirical investigation of the determinants of crop biodiversity (e.g. Meng, 1997, Van Dusen, 2000, Smale et al., 2001, Birol et al., in press, Smale et al., 2003). Market integration, agroecological conditions, the adoption of high yielding varieties and farmers' risk aversion were found to be key variables in crop biodiversity conservation. Surprisingly, the impact of agricultural policies on agro-biodiversity has been neglected. Financial assistance to farms affects directly farmers' production decisions, which in turn have impacts on crop biodiversity and environmental quality (Just and Antle, 1990, Just and Bockstael, 1991, Abler and Shortle, 1992, La France, 1992, Fraser, 1994, Lewandrowski et al., 1997).

The connection between agricultural assistance and crop biodiversity considered in this paper relates to the trade-off between farm support and crop choice in the management of production and marketing risks.3 The risky nature of the agricultural business is a key factor in farmers' acreage allocation and inputs use decisions (e.g. Chavas and Holt, 1990, Leathers and Quiggin, 1991). Further, risk-averse farmers will use more of the risk-reducing input than the risk-neutral farmers. In this paper these issues are exploited in order to shed light on the connection between financial assistance to farmers and crop biodiversity when farmers are risk averse. Risk may play a pivotal role in determining crop biodiversity. In fact, if allocating land to different species is a risk-reducing strategy, the risk-averse farmer would grow a higher number of crop species to hedge against uncertainty. This would result in a more diverse agroecosystem (Di Falco and Perrings, 2003).

At the same time, policies aiming to support or stabilize farmers' revenues – such as price support, grants, financial compensation – offer an alternative means of hedging against risks. Increasing financial support to one crop affects positively its profitability, expands its acreage and reduces the acreage of substitute crops (Chavas and Holt, 1990). Table 1 reports the different types of policies offered by the European Common Agricultural Policy (CAP, hereafter) for different cereals. For over 20 years, durum wheat producers benefited from a large set of policy instruments aimed at supporting and stabilizing their revenues. This may have created a clear incentive to grow the most supported crop, leading to a reduction in crop biodiversity. To manage risk farmers may decide to allocate their land to the single most supported crop instead of growing more species and maintaining crop biodiversity. This results in delinking crop biodiversity from risk management.

The objective of this study is to provide a theoretical and empirical analysis of the interface between crop biodiversity loss and agricultural policies when uncertainty is taken into account. The paper proceeds as follows. The next section presents a simple dynamic model of farmer's crop choices, where yields and revenues are uncertain. This is followed by a description of the data sources and variables. The fourth section introduces the empirical approach and the fifth section reports the estimation results. The concluding remarks are presented in the final section.

Section snippets

The model

Farmers allocate their land among different crops taking into account the characteristics of the land, the characteristics of the crops, relative prices and the financial incentives offered under the CAP. By choosing the share of land to be allocated to different crops, farmers determine the level of crop biodiversity in the agroecosystem. Farmers' crop choices are affected by the sources of uncertainty. Uncontrollable factors, such as weather, pest infestations or disease outbreaks all affect

Data sources and variables

Assuming that the representative farmer's decision making process described in the previous section scales up to the aggregate level, the hypotheses stemming from the model results can be tested by using aggregate data. The data are drawn from the Annuario di Statistica Agraria (ISTAT) and from the Bollettino Statistico (Banca d'Italia) and are about the cereal production in the South of Italy. This geographical area is known to be a megadiversity area for cereals (Vavilov, 1951, Harlan, 1971)

Empirical approach

In order to test the role of the two farming strategies on revenues, a Just and Pope, 1978, Just and Pope, 1979 stochastic specification is adopted. The empirical strategy involves two steps. In the first step, the impact of the strategies on the stochastic revenue function is estimated. The mean and the variance functions are estimated using a three-stage feasible generalized least squares (GLS) procedure (Judge et al., 1982, pp. 439–441). In the second step, the hypothesis of substitutability

Estimation results

Eqs. (10), (11) are estimated to test the role of the two strategies on the mean and variance of the farm revenues. Table 3 reports the estimation results. The estimation of the stochastic revenue function indicates that the estimated coefficients for the diversity strategy and for the benefit strategy are statistically significant. Both strategies are positively correlated to the mean revenue function and negatively correlated to the variance of the revenues. Crop biodiversity, at least in the

Concluding remarks

This study has presented a framework for analyzing the impact of agricultural price and income support schemes on crop biodiversity. A simple dynamic model of farmers' choices over crop biodiversity in an uncertain setting has been estimated by using data on cereal production in the South of Italy. To test the potential substitutability between crop biodiversity and financial assistance, a Just and Pope revenue function is specified, and the impacts of crop biodiversity and financial assistance

Acknowledgement

The authors acknowledge the helpful comments of two anonymous reviewers. We would also like to thank Sverre Grepperud, Jim Shortle, Ekin Birol, Eoghan Garvey and Michael Cuddy for their helpful comments and suggestions. The usual disclaimer applies.

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