Business choices, risk management and distortions in the wine market in the European Union

ABSTRACT

The objective of this work is to analyze the management of technical and economic risks in agri-food production. It is well established that any business activity is characterized by risks that, if not managed efficiently and effectively, can cause a company’s downward spiral. In this context, the management of a winery requires the adoption of company policies aimed at reducing risk. This study highlights the fact that the wine insurance market is characterized by information asymmetry and adverse selection that contribute to the creation of ‘distorted markets’. The results of the empirical analysis show the collapse of subsidized insurance contracts in viticulture leading to a decrease in the public contribution provided to businesses.

KEYWORDS:

• Climate change
• risk management policies

Disclosure statement

No potential conflict of interest was reported by the author(s).

Notes

1 The NSP provides a menu of 11 measures: single payment scheme and support of winegrowers, potable alcohol distillation, promotion in third-country markets, crisis distillation, restructuring and conversion of vineyards, use of grapes and concentrated must, green harvesting, mutual funds, harvest insurance, investments, by-product distillation.

2 This insurance is an alternative to indemnities that were previously granted, a posteriori, by public bodies at the European, national or regional level to compensate for losses due to natural disasters.

3 Mutual funds are created by associations of entrepreneurs who come together to set aside funds in order to help each other in case of emergency or ‘corporate crises’. They make a portion of their resources available to meet the needs of the participants. In particular, the associated agricultural entrepreneurs voluntarily contribute to the creation of a common financial reserve and share a certain risk, which is the specific reason for creating the common fund. The fund is a form of self-insurance for farmers, who choose to share the risk by self-financing (Nizza & Pontrandolfi, 2011). From the point of view of economic theory, mutual funds tend to make farmers more responsible, reducing moral hazard, but diminishing to an even greater extent the information asymmetry that characterizes agricultural insurance instruments.

4 The aim of this tool is to orient the farmer towards a ‘market vision’, which originated with decoupled payments, in order to make the agricultural company competitive and ‘economically viable’. The instruments are those foreseen by the rural development measures and, where these are insufficient, measures can be adopted that are aimed at supporting any temporary crises of company liquidity.

5 With Regulation (CE) n. 1234/2007, aid is provided to cover the costs of setting up mutual funds for farmers who wish to self-insure against the risk of market fluctuations. Furthermore, aid is provided for the payment of insurance premiums paid by producers to cover losses caused by adverse climatic conditions such as natural disasters (Garrido and Zilberman, op.cit.).

6 An economic loss is the additional cost incurred by the farmer as a result of exceptional measures taken to reduce the supply on the market in question or any substantial decline in production.

7 Regulation (EU) n. 1305/2013. While the insurance measure has been included in rural development since the new CAP programming (2014–2020), as we saw with the CMO for the wine sector, it was activated in the five-year NSP as early as 2010.

8 With Regulation (EU) n. 2393/2017, the Commission confirmed its intent to review the functioning and efficiency of the risk management tools provided for by Regulation (EU) No 1305/2013, in the context of its proposal for the modernization and simplification of the CAP.

9 Defense consortia are bodies representing the interests of farmers in the active and passive defense of agricultural production from atmospheric calamities, constituted at the local level, in accordance with Article 14 and subsequent articles of Law n. 364 of 25 May 1970, and subsequent modifications. In Italy, there are over 60 defense consortia operating in the sector of agricultural risk prevention and management, and they are represented and coordinated by the Associazione Nazionale Condifesa (ASNACODI) (ISMEA, 2018).

10 In Italy, according to ISMEA data (2018), the insurance market related to crops, which in insured value makes up 19% of the gross saleable production (GSP) of plant products and 9% of the total utilized agricultural area (UAA), is characterized by a strong degree of concentration in terms of both crop type and territory. In fact, wine grapes, apples, maize, rice and tomatoes represent over two-thirds of the insured values; while for the surface area, 53% of the market consists of corn, rice and wine grapes. The data distributed at the regional level attribute two-thirds of the insured values to the northern regions (Emilia Romagna, Veneto, Lombardy, Trentino Alto Adige and Piedmont).

11 It is well known that, in many countries, collusive agreements and dominant companies in oligopolistic markets are illegal. In Italy, the subject is regulated by Law n. 287/90.