Ferry’ crossing the Bani river to reach the market. Image: Oxfam
Ferry’ crossing the Bani river to reach the market. Image: Oxfam

Day 1: Risky Business

9 December, 2012 | Future of Agriculture: Online Discussion

Agriculture is a risky business, not only because of its dependence on the weather. Governments, the private sector and farmers themselves need to build robust and overlapping risk-management systems that provide farmers with more than one avenue for protection. 

By Sophia Murphy, Senior advisor to the Institute for Agriculture and Trade Policy

Agriculture is a risky business. At the mercy of inclement weather and pests, a frequent casualty of war, and subject to its own particular demand constraints and market failures, agriculture merits a branch of economics all to itself. The risks are not just economic: they also link to biological diversity and natural resource management, to culture and social relationships. 

The risks are political, too; most farmers are subject to relatively strong government involvement in their sector – which is not surprising because everyone has a stake in agriculture. Beyond the essential fact that agriculture is fundamental to our survival, agriculture matters because it is a powerful motor for the eradication of poverty .

To realize the potential of agriculture to end poverty, however, farm prices need to be stable. Stable does not mean static: prices need to reflect supply and demand, and to a degree shortages are best managed by price. But if left entirely to the market, food prices are inherently too volatile, reflecting the uncertainties of production as well as the effects of demand elsewhere, a demand created by globalized markets that contain enormous disparities in wealth. As agricultural economist C.P. Timmer says, ‘Only political action and public response from governments can provide stable food prices.’ 

Two particular kinds of risk pose very modern versions of age-old challenges. The first is climate change—humankind has always been at the mercy of the weather, but today we are also directly responsible for making the weather less predictable. 

"Economic forces are linking farmers from disparate parts of the world as they have never been linked before."

The second is price volatility. In an era of globalized markets, deregulated capital flows and free trade, economic forces are linking farmers from disparate parts of the world as they have never been linked before. Paul Nicholson , a farmer from the Basque region of Spain and a leader with La Via Campesina (LVC), describes the creation of LVC in the mid-1990s as a response to the similarities of the challenges that globalization presented to farmers in Minnesota and the French Midi, in Bamako and Bandung. 

What risk systems to use?
These risks are real, and the public has an interest in helping farmers to mitigate them. Many tools are available and risk management systems are useful in many different contexts. Governments need to build robust and overlapping systems, providing farmers with more than one avenue for protection.

One set of tools rests with farmers, though government and NGOs can play a helpful role. Collective action offers an important way for farmers to strengthen their political and economic bargaining power, and to reduce their business risks. For example, farmers can form buyers’ co-operatives to obtain fertilizer or seed or other inputs at reduced prices, or sellers’ cooperatives to negotiate better prices for a larger volume and to invest in technologies or storage facilities. Most fair trade certification depends on farmers working cooperatively. 

"Public procurement and storage of grain has historically provided an important risk reduction tool."

A second set of tools rests in the state’s hands. Governments can reduce risks for farmers significantly by providing basic services, such as reliable (and affordable) transportation, affordable healthcare, and safety nets in times of crisis. Governments at all levels can also procure and hold stocks. Public procurement and storage of grain has historically provided an important risk reduction tool. 

Brazil has experimented with public procurement from smallholder producers in an effort to provision safety nets for the urban poor while providing an income for the rural poor. While not easy to put into practice, the policy opens the possibility of a virtuous circle in which the risks that farmers face are reduced at the same time as consumers’ are provided with affordable food. 

Holding stocks of food can help mitigate wild swings in prices by alleviating uncertainties about market supply. Credible, transparent and properly managed stocks provide a powerful tool against volatility that can work for farmers and consumers alike.

A third set of tools rest with the private sector. To give just one example, mobile phone networks have become a way to enable people without bank accounts to move money from city to country and back, while also providing farmers with price information they can use in bargaining with traders. As both a communication tool and a financial system, mobile phones have made an enormous, positive difference to many smallholder producers in the developing world. 

"Mobile phones have made an enormous, positive difference to many smallholder producers in the developing world."

More prosaically, the private sector offers (at least) two big risk management systems for agriculture. One is commodity futures markets, which allow producers to sell agricultural commodities and processors to buy them before they are harvested. The parties sign a contract to deliver a certain amount of grain at a certain price on a given day. The contract itself is then bought and sold by speculators, who provide the money that the farmer needs but the processor does not want to spend until the grain is delivered. 

The contract may change hands many times, with buyers and sellers trying to anticipate future prices based on projections of supply and demand. In this way, the commodity market cushions shocks. 

There are costs as well, of course. Some of the attempts to create commodity exchanges in Africa (for example in Nigeria and in Ethiopia) have struggled to attract farmers because the transaction costs are great, and the minimum production to generate a contract is too big for the majority of producers. 

In established markets, such as the Chicago Board of Trade (CBOT), the deregulation ushered in over the last decade or more has also undermined the effectiveness of the futures markets for price discovery. Financialization of the exchanges has increased short-term volatility, adding a new source of risk for farmers. 

The second big private sector contribution to risk management is insurance. Historically, insurance companies have avoided agriculture. The risks are largely systemic (everyone in a large area faces the same growing conditions) as opposed to idiosyncratic (risks that everyone runs, but that few people are likely to suffer simultaneously, such as a house fire). This makes it difficult to manage as a private firm—you either have a great year because you sell lots of policies but get few claims, or you go bankrupt, because half your customers claim at once. 

Thus even highly commercialized markets, such as the United States, have very significant gov-ernment involvement in their insurance programmes. The government subsidizes premiums, the administrative costs of the private insurers, and the final pay-outs. Indeed, the U.S. example is not an encouraging one, as both the insurers and the farmers end up with too few risks, leading to poor decisions regarding where, what and how much to plant. 

New experiments with insurance in the developing world have shown more promise. These are pub-lic-private partnerships, meaning that the costs are not entirely borne by the private sector. Oxfam is involved in one scheme in Ethiopia with Swiss Re, the World Food Program and US AID (R4 Rural Resilience Initiative) that has shown success. 

In Bolivia, the International Labor Organization (ILO) is working with Gates Foundation money to offer insurance to the smallest-scale producers . Insured risks include crop failure and death of a close family member. This project has shown success as well, and will be rolled out nationally in 2013.

What if?
Farmers need strong risk insurance programs to have the confidence to invest in what they do. Without investment, agriculture stagnates, and so does food production. With investment agriculture can grow the food the world needs, rural economies thrive, and rural-urban migration slows.  

"Farmers need risk insurance to have the confidence to invest. Without investment, agriculture stagnates, and so does food production."

Risk management systems should not encourage a farmer to take unwarranted risk. Farmers should be responsible for making good business decisions about their operations, not encouraged to take unnecessary risks as the shallow loss insurance programs proposed in the 2012 U.S. Farm Bill would. But the systems should be strong enough to protect farmers and their households from destitution, especially where the risks involved are outside farmers’ control, as is the case with climate change and international price volatility. 

The public has a powerful interest in what comes of this, not only because of the primordial need to secure an adequate food supply, but also to ensure agriculture plays a vibrant role in national de-velopment, creating jobs, generating capital and husbanding natural resources for the future. 

Download: Risky Business

Comments

Risky or not?

Risky or not?
Both Nwanze and Murphy demonstrate that various tools are already available to manage the many risks farmers face. We know a lot about what works, and there are plenty of islands of success. So do we simply need more and better investments to build on these insights, or do we need to radically reconsider if we’re to achieve systemic successes in the face of changing risks? What do you think?

 

Risk affects cost structure: But we also need opportunity in ag

Great gathering of the existing methods for risk damping in the agricultural sector. Indeed, risk mitigation is highly important to make primary producers more resilient against social and natural changes. 

But risk is mostly associated with the cost of agriculture, small bets hedging against the occurrence of an event that subtracts from revenue. I would say that we also need to start thinking on the entrepreneurial opportunity we provide to producers. Most value capturing is located down stream in the agricultural value chain, while most value creation is realized up stream. 

So next to risk, we also need to look at entrepreneurship, new methods that allow producers to participate into segments of the value chain, which were inaccessible before. 

I have dedicated my work to helping farmers acieve that. If you would like to know more, then I hope to exchange with you further, here, or on my blog

Thanks for starting this discussion Oxfam. I'll following the discussion of this coming week!

Bart

Risky Business

Indeed various tools -amongst them (micro-)insurance- need to be developped further and made available for farmers in order to enable them to pick up their role as entrepreneurs. But apart from the risk-financing aspect of insurance it is at least as important to realise and further explore the potential of insurances (and pensions alike!) as funding instruments for the financing of the necessary infrastructure for sound development of agricultural enttrepreneurship.

There is a lot of potential for agricultural production as there is a rapidly growing need for food for the global society. Investments -not only in risk-financing tools but also in roads, access to good quality seedmaterial, knowledge, logistics, etc.- may be as important. Insurance- and pensionsystems may be very adequate tools for the funding of these infrastructural investments.

Agriculture is a risky business

All over the world new technologies are emerging almost on daily basis to improve the efficiency of delivery and reduce risk associated with the work. How much technology has been introduced into agriculture in developing countries? Often new technologies to Africa are designed and manafactured in developed countries and introduced into Africa without any reference to local conditions. Certainly agriculture will still be a risky business unless efforts are directed at tackling the problems at the local level.

Those risks from being poor, women and excluded

Yes, agriculture is a risky business. As presented by Sophia, in some cases you can prevent and even control your risk; in some other cases this is an impossible task.  My impression is that in order to evaluate the set of risks related with agriculture, you need to consider the reality of people’s real participation, gender, science, class and ethnic origin. Though we can make a general debate on risk, my impression is that it is important to consider the previous 5 variables, because they are the ones charging the dice, and making smallholders less able to face any growing risk coming from markets’ globalisation. The global market is a kind of public casino where players bet their future by playing with charged dice.  

During the last two weeks we discussed about the importance of gender for defining adequate policies and programmes. In order to face risk, we need to improve leadership.  I just read “50 Voices and Faces of Cuban Campesina Women Leaders” and through the women testimonies you learn what they did on agriculture with their revolution: defining leadership at all levels in Cuba and took control. Women joinned groups from many municipalities in order to achieve change at the regional and national levels.  Some of the changes explain why Cuba managed to become self-reliant in food and agriculture to an important level.  What is the level of participation of a gender approach in the market globalised processes described by Sophia?  Timmer is right, Only political action and public response from governments can provide stable food prices”.

Yes, it is true that climate change has increased vulnerability and lack of prediction with seasons, but one of the important learning that we have received from several countries in the South (let me mention the Buen Vivir from the Quechua communities in the Andes) is that the so-called “traditional methods” in agriculture represent ancestral knowledge practiced by the indigenous peoples, afro-descendants and the peasant population of the region, and many of them continue to exist today and they continue to be successful. Yes, we need science and technology, but we need to learn what we already knew!

The principal causes behind the increase of risk are deforestation, mining, changes in the use of the land, land grabbing and energy development based on fossil fuels. Class and ethnic origin are important and both, poverty and inequality are central variables —their interpenetration with structural problems and the interaction between the food prices crisis, the financial crisis and the effects of climate change become central to the type of agriculture that we should follow.

 

I am thinking on several of the countries where I have lived and my impression is that the public, instead of being interested in helping farmers to mitigate risks, have become totally ignorant about how rural society is living and which are the main challenges. Urban society is just starting to discover where products are coming from and why smallholders are so important for a good quality of food.  

 

Consta

Agricultural Commodity Exchange in Malawi

Malawi also provides an example of a commodity exchange in Africa. True: it is necessary for the benefits of an exchange to offset the costs. And in many cases, costs and requirements have typically not been favorable to smaller-scale agriculture. It is paramount, however,  to keep in mind that the development of a successful exchange is a learning process that must be dictated by local needs and specificities.

Malawi's agricultural commodity exchange (www.aceafrica.org) is a good example of this. It has proven to be an important, inclusive tool for farmers to access fairer markets, better prices, financing and storage in an environment where the government is able to do very little to ameliorate infrastructure challenges. Not to mention that the exchange is striving to make commodity trading (especially maize, a highly sensitive commodity in the country) more transparent and to provide accurate information on prices and available volumes to all parties involved.

Farmers risk insurance has private and public benefits

The focus of benefits of risk insurance is very much on the individuals. However,  if the benefits for a country could be quantified it would certainly help to leverage more public support/incentives for insuring agricultural risks. 

Make it less risky

 

All risk management tools presented here provide single answers to a problem which is rightly depicted as multi-dimensional. Multi-dimensional problems call for multi-dimensional solutions. So what if the answer in risk management was to have a systemic approach where all five (and more) tools were used simultaneously and complementarily?

  • Why would a buyer accept to bargain prices when a farmer indicates that her mobile phone told her that somewhere else (where she can’t go) someone could pay more?
  • Why would small farmers join and build a cooperative whith sufficient bargaining power to obtain substantial price advantages, when organization and coordination cost will raise drastically?
  • Why would the State suddenly invest in storage capacity and provision of affordable transportation, healthcare and safety net if it had not done that before?
  • Why would market prices be less volatile when an increasing number of operators are now playing on commodity markets for short-term financial benefits and not for selling and buying a good they need for their core productive activity?
  • Why would a company suddenly take the risk of ensuring small farmers at affordable rates ?

Well, if all these actions were happening  together and complementing each other, that is with a multi-dimensional multi-actor integrated risk management approach, maybe there would be a good answer to all these questions.

A cooperative can have a multiplier effect on the utility of mobile phones which in turn can render coordination and organization less expensive. Especially if a cooperative/collective movement is accompanied by a re-oreintation of public investment in transportation, storage, healthcare and safety nets which will in turn make easier access to markets, stronger bargaining power (including the power to wait for better prices). With that bargaining power and the capacity to access other markets through ITC, and better infrastructure, risk insurance becomes much less a “risky” business and in turn gives more stability to the whole system.

Question: where and how do we start such a virtuous circle?  

There is only one answer, try to guess what is it?

RE:Risky Business

 The most of the risk issues are well written. Another risk on agriculture system is “rural urban- migration “therefore we have to make farming as a business and attractive to retain productive manpower in rural areas. For young generation, the agri business has not been that attractive venture and they are gradually migrating for un-skilled labour markets, which is another risk factors for agriculture productivity

Another point of view

Absolutely composed written content, Really enjoyed examining.

risky business

It is important for farmers to have access to insurance, credit, roads etc but it is also important to look at the macroeconomic environment of the country. if the economy is not "stable" the farmers will not be willing to invest even with available technology.

responsibilities of the state to mitigate risk

Thanks to Sophia for a clear and cogent explanation of some of the main risks farmers face, and risk management tools!  And thanks to Oxfam for opening a debate on issues in agriculture.

I'd like to point out that the state has other important obligations to manage risk for farmers, buyers and everyone else in the food system.  The state must respect, protect and fulfill the right to adequate food and nutrition;  if this right isn't accepted (as it is not in the US), then poor people (including farmers, who make up the majority of malnourished people worldwide) run the risk of not being able to eat at all, or not being able to access healthy food that their bodies need.  Accepting this right goes beyond the market-based solutions with which Sophia dealt primarily, but market-based solutions tend to enrich people who already have power if they are not grounded in and consistently trumped by human rights.  Not all states have the resources to adequately ensure that all of their citizens enjoy the right to adequate food and nutrition, of course; but this shortcoming can be ameliorated somewhat with global funds for food (purchased in ways that support and build local food systems) and for social safety nets.

Create an enabling environment for collective action

Many of the policies that work to reduce risk in agriculture, like commodity exchanges, public procurement, are in fact not policies directed to individual farmers.  They create an enabling environment and, doing so, create business opportunities for collective action of farmers, especially for collective marketing. Organized farmers are also necessary for improving access to inputs and finance by lowering the costs for the providers of these services to reach rural areas.

A focus on the creation of ‘a more enabling environment for collective action’  can lead to more ambitious and more effective agricultural policies than the traditional focus on technology & yields, prices & markets. The Brazilian preferential procurement from cooperatives is a good example of a policy that helps to create and support social capital in agriculture. The pressure on cooperatives to start paying VAT on internal transactions between members and their cooperative, as happened in Peru and is opposed by the Junta Nacional de Café (www.esfim.org), provides for a negative example.

Collective action does not come as a free good. It takes time, effort and money to organize, to build trust within the organisation and with trading partners, to experiment with new products or add value with processing or packaging or transportation. Let’s strive for policies and support that make it easier for them to do so.

 

The problems will not be solved unless everyone jumps together

I am late coming back to the conversation, but wanted to go on record anyway. It's great to hear from friends old and new - thank you all for your contributions.

 I can only agree that the problems will not be solved unless everyone jumps together. Ideally, governments will use a coordinated set of policy interventions to allow a jump from vicious to virtuous circle. It won't be from hell to heaven, but we know it is possible to move from more vicious to more virtuous circles, by acknowledging who holds the power and understanding where change is needed. I think of Caroline Moser’s distinction between meeting practical and strategic needs. What would be most strategic for small-scale producers? Not just meeting a need, but actually building their power – their agency, as Hivos and the International Institute for Environment and Development describe it.

Risk clearly depends on where you sit. Consta sets out the perspectives from which risk should be assessed. And, as Molly says, risk is not alike in all systems. It’s harder perhaps today than it was 20 years ago to understand that all economies are not alike – that they run on human decision (and error) and not on immutable laws like Newton’s laws of motion. There was a time when there was a larger, more vibrant “marketplace of ideas” on economic management itself. After several decades of triumphant rule by the neo-classical thought, it can be hard to remember that we do not have to transact all our business through money, that the private sector is prone to error and greed as well as brilliance, and that companies are subject to the same idiocies (and craven behaviour) as unaccountable governments. It turns out the private sector and the public sector are all run by humans, though the structure subjects decision-makers to somewhat different pressures and weaknesses.

 Insulating people from all risk comes at a price, we have learned – a price that most people would rather not pay. I remember vividly the Tanzanian farmer I met who had come to talk to Westerners about the evils of structural adjustment for his people and his sector. I asked him about collectivization and whether farmers would like to return to that certainty. Never, he said. 

Our governments, responding to significant pressure from one model of business (trans-national companies that are both vertically and horizontally integrated), have built economic systems that unnecessarily blight billions of lives by increasing the risks that poor households must live with. We are all at risk from the resulting behaviour. Alternative business models are all around us, from ISEAL standard-setting to fair trade to co-operatives. Let’s learn from them.

Another point of view

Very interesting points you have observed , appreciate it for putting up. "Women have been trained to speak softly and carry a lipstick. Those days are over." by Bella Abzug.

Risky Business comments

I have been a farmer in southwest Iowa for 40 years now.  We stopped using pesticides and anhydrous ammonia in 1983.  We have been certified organic since 1994.  We rarely use federal crop insurance as a risk reducing tool.  Our experience is that we are already reducing a great deal of risk with our diversified crop and livestock farm.  It consists of mostly a seven year crop rotation of corn, soy, corn, soy and then small grains and two years of mixed hay.  We have permanent pasture. On our 700 acre farm we have about 350 acres of corn and soy annually, 80-100 acres of "small grains"  (oats, wheat, barley, triticale, field peas) 100 acres of hay, 120 acres of pasture, and the rest is in headlands, grass waterways, buffer strips, trees, terraces, building sites. We have around 100 beef cows and 50 sows and have a diversity of markets including our own meat label for many years now.   We do take hail insurance out.  We have collected on federal crop only one time with having to replant organic corn because of a cold and wet spell in the first two weeks of May when we traditionally plant corn.  I will agree that climate change is making it more difficult to know what to do as organic farmers as well as for our conventional neighbors.  Last year however, with a pretty bad drought going on in our area, our organic corn and soy yields matched that of the conventional neighbors.  This is almost always the case no matter what the year.  With 30 years of yield data and plot work (I am a Practical Farmers of Iowa farmer-researcher) our yields have been very close to conventional ag on corn ( maybe 10-20 bushels less/acre/year)  and the same or actually better on soybeans.  We have put on no commercial potassium for over 30 years and rely entirely on composted hog and cattle manure and legumes for our N, P, and K.  This tells me that the life in the soil is the critical key to crop production.

I am continuing some of my son's work that he started in the Peace Corp in Honduras.  I am going down for the third time next week to work in economic development projects in the Copan region.  Our son is now doing a fellowship at the State Dept. in Global Food Security.  I am very disturbed by our governments stance on food sovereignty for the poor countries of Central America for instance.  I believe that the North American Free Trade agreement has had mostly negative effects on the countries affected.   They are against it which to me says we will continue to push our industrial ag. farming on everyone else in the world,whether it is bio-tech or our model of high inputs of pesticides and fertilizers.  I believe that for the most part, food soverienty is possible for many developing countries with an emphasis on sustainable farming methods and cooperative market developments. I am finding out that "Fair trade" is not all that much better than the markets they now have.   Cutting out "free trade brokers"  and NGO's who have good intentions but high administative costs may be part of addressing this at least for some things.  I have learned that the dumping of "emergency food aid" has the overall affect of greatly damaging any positive attempts for countries to develop their own food production systems.  (Haiti) 

Prices for our U. S. commodities of corn and soy are very high.  For corn, much of this has to do with ethanol's share of the crop.  For soy it is the demand for protein. Some of what I have been reading says that it will take about two years ( given that there are even average world-wide crop yields with climate change which of course is an unknown)  for the world prices of corn and soy to come down.  This is because farmers in other parts of the world will be planting more acreage of these two crops because of their high prices now.  This of course only exacerbates the negative mono-cropping effects of single commodity crops which is part of the strategy for big Ag.  These are some of my thoughts.  Thank you.

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