Yield risk in wheat production: A policy study for the Alentejo of Portugal

Abstract

This study attempts to determine whether or not Portuguese wheat policies have resulted in a stabilization of the wheat price and/or the stabilization of income for wheat growers in the Alentejo region. It was found that these policies have contributed to a stabilization of price rather than a stabilization of income. It was also found that the income variability caused by yield variability was greater for the Alentejo farmers than that for the country as a whole. Weather uncertainties measured by rainfall were found to be a major source of that variability in both area and yield equations. Therefore, it was concluded that rainfall is significant in explaining variations in wheat supply and cannot be eliminated from the model specification. Finally, this study looked at a policy that would stabilize output returns to Alentejo farmers since high yield variability will continue to constrain farmers' willingness to invest in wheat production. An insurance program may be the policy to implement in this region since yield risks are the predominant source of income variability. However, the cost of financing an agricultural insurance scheme as well as the delineation of homogeneous areas are crucial determinants to the success of an all-risk insurance program.