Geoffroy Enjolras, Grenoble IAE Graduate School of Management
Today, two major objectives are at the top of the agricultural policy agenda. First, reducing the harmful effects of agricultural pesticides on the environment and human health. Second, mitigating income risks for farmers. In the context of agricultural policy reform plans in the European Union, these issues deserve special attention.
As a result, numerous public initiatives aimed at restricting pesticide use have been launched, such as the Ecophyto I, II, and II+ plans in France. But as a report by the Court of Auditors from late 2019 points out, the targets set for these plans are far from being met: not only have pesticide use not decreased by 50% over ten years, but the number of unit doses (NODU) has actually increased in recent years (+21% in 2018 alone). While there has been no shortage of financial resources allocated to the Ecophyto plans (€400 million in 2018), their implementation raises legitimate questions, particularly from an economic and financial perspective.
In recent years, farmers have indeed faced greater risks to their incomes due to climate change and increased price volatility in the markets.
In this context, reducing pesticide use amounts to calling into question practices designed to ensure stable yields and, as a result, further undermining an economic model that is already under strain. For public policies supporting this reduction to be effective and perceived as credible by stakeholders, they must guide the industry toward better overall risk management.
In this regard, one instrument deserves special attention: crop insurance contracts.
An old but rarely used system
These insurance programs have existed in France for several decades and have seen significant growth since the 2000s. Their purpose is to protect farmers from a drop in yield directly linked to adverse weather conditions. In practice, French farmers have the option to insure their crops—including their pastures—before each growing season. They then receive a government subsidy that partially covers their insurance premiums (between 45% and 65% depending on the options chosen, funded by the European Common Agricultural Policy).
If a weather event causes damage to their crops beyond a certain threshold (for example, 30% of the average yield), compensation is paid following an assessment. Amended several times in 2005, 2010, and 2015, the crop insurance program has had mixed success. In 2018, more than 70,000 French farms took out crop insurance policies, covering more than 4 million hectares—but representing only 30.5% of the total usable agricultural area. Although they are partially subsidized, French insurance policies have high deductibles and do not provide direct protection against fluctuations in agricultural prices.
Conceptually, farmers’ purchases of crop insurance and pesticides appear to be closely linked, in that both help preserve farmers’ yields and income. To align agricultural policy objectives and safeguard farmers’ production, we must understand this relationship. For pesticides and crop insurance to be considered substitutes, it is necessary to examine the two main channels of interaction in how they are applied.
Margin Effects
Insurance can encourage farmers to change their pesticide use through two effects. The first, known as the “intensive margin effect,” results in a change for a given crop or production system, with the farm’s structure remaining unchanged. The second, known as the “extensive margin effect,” results in a change in land use.
For example, an insured farmer could reduce his pesticide use per hectare since the insurance would cover any yield losses (“intensive margin effect”). However, this environmental benefit will be limited if the farmer takes advantage of his insurance coverage to take on more risk and expand the area under cultivation on his farm (“extensive margin effect”). Ultimately, this would lead to an increase in total pesticide use.
The edge effects, documented by numerous studies, are far from insignificant, as pesticide use varies greatly from one crop to another: for example, average pesticide use on fruit crops can be ten times higher than on certain cereal crops. In this regard, it is interesting to note that while the insurance market is relatively well-developed in field crops and viticulture, it largely excludes vegetable farming and fruit growing, where technical protection measures are preferred.
Crop Insurance and Increased Pesticide Use
In a recent article in the journal *Agricultural Systems*, we analyzed the relationship between crop insurance and pesticide use in European agriculture, using France and Switzerland as examples. We found that crop insurance is associated with an increase in pesticide expenditures in both countries. However, the magnitude of the effect and the underlying mechanisms are specific to each country.
Thus, while crop insurance is subsidized in France, this is not the case in Switzerland. Although agricultural policies differ, farmers in both countries must comply with public policies known as “cross-compliance,” which are aimed in particular at reducing the risks associated with pesticide use. In our empirical analysis, we examine farmers’ decisions regarding insurance enrollment, land use, and pesticide use—as well as the interdependencies among these factors. We use farm-level panel data from France and Switzerland, taking into account farm and farmer characteristics, weather conditions, and exposure to climate risks.
Our results indicate that, without insurance, pesticide expenditures would be 6% lower in France and 11% lower in Switzerland. The mechanisms differ: while the extensive margin effect (changes in land use) is dominant in Switzerland, the intensive margin effect (pesticide use per hectare) dominates in France. We attribute the differences in mechanisms to the larger share of temporary grassland in Switzerland and the higher insurance subsidies in France.
It should be noted that we used pesticide expenditures as an indicator of pesticide use by farmers; this measure does not reflect the potential risks of pesticides to humans and the environment.
Rethinking Support for Crop Insurance
While our findings clearly show that crop insurance can lead to increased pesticide use, this does not mean that crop insurance is an inappropriate risk management tool for agriculture. On the contrary, it is an essential tool for farmers’ risk management and is becoming increasingly important.
However, we emphasize that there may be unintended side effects that must be taken into account. Our findings underscore the need for a careful evaluation of policies supporting crop insurance. Indeed, the current system does not contribute to improving the environmental performance of agriculture. We must therefore develop sustainable insurance solutions that benefit both farmers and the environment.
For example, low-pesticide or organic farming is often more economically risky for farmers: insurance can be an effective tool for encouraging farmers to adopt these practices. Finally, our findings clearly highlight the need for a holistic approach to agricultural policy in order to provide tools and instruments tailored to the various objectives and stakeholders of agricultural policy.
This article was written in collaboration with Niklas Möhring, Robert Finger (ETH Zurich, Switzerland), and Tobias Dalhaus (Wageningen University, Netherlands).
Geoffroy Enjolras, Professor of Finance, Grenoble IAE Graduate School of Management
This article is republished from The Conversation under a Creative Commons license. Read the original article.