Instead of Giving Aid, the Government Should Encourage Farmers to Make Their Own Provisions for the Future

Farmers in some regions of Germany are currently facing crop failures due to the long period of hot, dry weather this summer. Both the federal and state governments want to help the affected farmers by providing them with around 340 million euros in aid. However, ZEW economist Daniel Osberghaus thinks that offering government aid is the wrong strategy and is calling for more sustainable, long-term solutions.

Why shouldn’t the government offer financial aid to farmers to reduce the economic impact of drought damage?

The government has decided to compensate farmers for weather-related crop failures with taxpayer-funded emergency aid. From a macroeconomic perspective, these kinds of transfers send the wrong message because they reduce farmers’ vested interest in protecting themselves against potential risk. Indeed, farmers who take comprehensive private measures to protect themselves against the economic impact of poor harvests tend to receive less government aid than enterprises that take no such preventative steps. Empirical studies carried out in other countries have shown that government aid can even have a negative effect on farmers making provisions for the future.

In addition, emergency aid funded through taxes is, in practice, not consistent and can vary greatly depending on the state of public funds, media interest and the efforts of lobbying groups. From an economic perspective, however, these factors should have no effect on the provision of financial support to farmers in need.

What might be a better, more sustainable alternative to tax-funded emergency aid?

Rather than creating false incentives through expensive relief payments, the government should be encouraging farmers to make their own provisions for the future. Farmers already have the option of insuring themselves against drought-related crop failures. In comparison to other states in Europe and the US, however, these insurance policies are not subsidised in Germany. Instead, they are even taxed by the government. As a result, demand for this insurance is very low, and in many cases, a lack of insurance has led to farmers having to bear heavy losses. It is my opinion, therefore, that the government should pursue a strategy to provide financial incentives for taking out crop insurance and in so doing encourage farmers to make provisions to manage future risk. Particularly given the fact that climate change is likely to make drought periods more common in the future, this is a more sustainable strategy compared to continually providing costly government relief.

The German Farmers’ Association originally asked for a billion euros in aid. The government has announced it will provide 340 million euros. Is this a good compromise?

In the short term, there are likely to be some farming enterprises for whom some form of liquidity support is necessary. This short-term support should, however, be paired with a more comprehensive, long-term strategy to encourage farmers to make provisions to secure their financial future. The goal of this strategy should be to make such provisions affordable for farmers while also sending a clear message that they will not be able to rely on relief from the government if an event like this summer’s drought happens again.