Stochastic Partial Equilibrium Modelling: An Application to Crop Yield Variability

Market volatility is of increasing concern within the agricultural sector of the EU and consequently the FAPRI-UK and EU-GOLD partial equilibrium modelling system is being developed to produce stochastic projections, which reflect underlying uncertainties. This chapter describes the underlying methodology. In the initial simulations, only one source of uncertainty, namely crop yield variability within the EU, is examined. Positive correlations among crop yield deviates amplify variations in crop production. This is supported by our results of the experimental simulations in which correlations among crop yield deviates are taken into account and compared to results where they are not addressed. Variability in output value varies widely depending on the aggregation level under consideration. In particular, at levels below where prices are determined, output value variability is larger than either production variability or price variability alone, supporting the potential need for risk management policy.