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Decision and Policy Analysis Research Area – DAPA

Risk: The invisible constraint to poverty reduction

Farmer in Rwanda

Farmer in Rwanda

Agriculture is an uncertain activity. A resource poor farmer operates in an information poor environment where they do not know what weather, technology and the markets have in store for them tomorrow let alone at the time of their harvest. Despite this, small farmers and their families continue to plant, manage, harvest and sell the majority of the food consumed by the poor globally and especially in the Global South.

In the recently released Rural Poverty Report, IFAD takes a serious and broad-ranging look at what rural poverty means in 2010. One of the issue that comes out time and again is the issue of risk. Risk is the 800 pound gorilla that stops small farmers from adopting technologies and approaches that could improve their livelihoods. At the same time, it could be a growth field if taken seriously by entrepreneurs.

To IFAD’s credit, the report focuses on small farmers globally as an entrepreneurial group and not merely beneficiaries of aid programs. Despite the resilience and adaptive capacity shown daily by small farmers, there are many parts of the system that do them disservice and could be fixed in creative and potentially profitable ways. Let’s take a look at some of them:

Climate risk

Climate risk includes both climate change over time as well as unexpected climatic events happening in the short term (floods, drought, frost, etc.) This risk is fairly well understood and an entire industry has emerged in the developed world to assess and manage risk through weather and other types of insurance. This is a major business offered by mainstream insurance firms. Yet in the Global South, despite the best efforts of lots of people this remains at the scale of pilot projects like this, this and this. Why is this the case? Principally this is due to a poor understanding of the real risk facing farmers. The price of insurance is a function of the level of risk (or the probability) of an untoward event occurring and causing crop loss. If insurers and, principally, re-insurers do not understand the real risk they will over price their products which makes them unattainable for the rural poor.

Opportunities

  • Make use of existing weather and crop models to better estimate basis risk across the tropics and build realistic pricing models that do not exclude small farmers
  • Develop innovative, low-cost delivery mechanisms like this one in Kenya to lower transaction costs and increase coverage.

Market risk

Market risk is inherent in agriculture globally. Nonetheless the way the issue is dealt with in the North and the South is a study in contrasts. In the North, market risk is managed through private commodity exchanges and a robust set of government support programs. In the South, these are either incipient like this or this or do not exist. A best case scenario in the South may well be contract farming but this normally only covers export or high-value crops which account for, at most, 10% of total smallholder production.

Opportunities

  • Develop market risk management mechanisms for wholesale and traditional market channels — e.g. wet markets — where the bulk of food is still traded globally
  • Make use of emerging ICT tools — e.g. cell phones — to increase transparency in transactions, pricing and grading decisions

As the IFAD report notes, the rural poor are entrepreneurial, capable of engaging in commercial agriculture and nearly 1 billion strong. Seeing them as partners in business rather than recipients of hand-outs is a growth market. The only question that remains is who will be smart enough to see and serve this market in innovative and inclusive ways?

Share your examples of effective solutions in the comments.

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