The Role of area-yield crop insurance program face to the Mid-term Review of Common Agricultural Policy

1- Introduction

The uncertainty of the farmers’ income has been one of the great concerns of farmers,
agricultural economists and policymakers under the successive Common Agricultural
Policy reviews.

The mid-term review of Common Agricultural Policy increases the complexity of the
decision-making process of farmers. The subsidies are substituted for a single decoupled
income payment. The farmers decide what crops and livestock will produce based on
climate, soils conditions and agricultural market signals and not based on subsidies
granted to each one of the crop and livestock activities. The area-yield crop insurance
program might have an important role on increasing production and facing natural
catastrophes.

The problem of this study is the decrease and the variability of the farmers’ income in
producing crops activities in the Alentejo region of Portugal. This paper studies the
introduction of the area-yield insurance program to reduce the risk originating from the
variability of farmers’ income and to compare this alternative with other agricultural
policy alternatives in the context of the mid-term review of Common Agricultural Policy.
The farmers will stop deciding with base on subsidies and they will make their decisions
independent of crop and livestock activities they choose to produce and they can start to
make decisions based on negative results. The Cumulative Prospect Theory allows
modeling the farmers'  behavior, because when defining that the different results are

appraised relatively to the initial wealth, it permits its appraisal in terms of gains and of

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