Day 2: A Less Risky Business

We must invest in reducing the two greatest risks smallholders face: weather-related risk from climate change and market-related risk from globalization. Hope lies in stress-tolerant crops and innovative insurance plans, as well as social safety nets and other public welfare programs

By Shenggen Fan, Director General, International Food Policy Research Institute (IFPRI)

While smallholder farmers in emerging economies like China and Vietnam may have an opportunity to increase their farm size they will remain small in many parts of the developing world. They are central to global food security and poverty reduction, particularly in Sub-Saharan Africa and South Asia. 

However, like all farmers, they are affected by two global shocks: climate change and increasing volatility of agricultural commodity prices. In addition to reducing crop yields, climate change increases the magnitude and the frequency of extreme weather events, which increase smallholder vulnerability. 

Price volatility makes it difficult for farmers to know at the planting stage what crops they can sell profitably at harvest time, or whether the bottom line of a usually profitable but input-intensive crop will turn negative when input prices suddenly rise. 

Managing Climate Change RisksClimate variability forces farmers to adapt their agricultural practices. While for a few farmers in some regions climate change may turn out to be beneficial, many farmers will face major challenges to maintain or even improve their productivity, which is necessary to feed a growing world population. Most importantly, a less predictable climate marked by extreme weather events and changing seasons considerably increases farmers’ difficulties in managing related risks. 

“Research on drought-tolerant maize, millet and sorghum is expected to generate benefits worth millions of dollars each year.”

One solution to reducing weather-related risks is to develop—and for farmers to adopt—crop varieties that are tolerant to cold, heat, flood, or drought. Such varieties reduce the yield variability that farmers face when extreme weather events occur, and increase overall mean yields, and offer concomitant benefits not only for smallholders, but for all producers as well as consumers. For some countries in Sub-Saharan Africa, research on drought-tolerant maize, millet and sorghum is expected to generate benefits worth millions of dollars each year.  

Another solution is for farmers to switch from drought-sensitive to more drought-tolerant crops, in which case farmers’ access to the required planting material has to be ensured, whether through formal programs or an informal seed system. 

For stress-tolerant crops developed through modern plant breeding, target countries need to have regulatory frameworks in place that ensure an effective management of the potential benefits and risks of genetically engineered crops. Such frameworks should not discourage the development of valuable technologies through regulatory delays, nor should it act as a barrier to crops developed by the public sector or small private firms by imposing high regulatory costs. 

Innovative insurance schemes also offer great potential to help smallholders cope with weather-related shocks. Moving away from single insurance policies that compensate for average actual losses and instead promoting simple weather securities with fixed payments triggered when predetermined weather events occur has been shown to be a promising approach. 

Such “weather tickets” are easy to understand and can be combined flexibly by smallholders according to the level of their risk aversion. Payments from such schemes should stabilize smallholders’ incomes and help them meet their minimum financial requirements when hit by an (insured) shock, thereby reducing their vulnerability to climatic extremes. 

Managing Price Volatility RisksOver the last several years global food markets have been characterized by rising and more volatile prices. In many cases, this has not only reduced poor people’s spending on essential goods and services, it has also impoverished their diets, as people shift to cheaper, lower-quality, and less micronutrient-dense foods in an effort to cope with price increases and maintain overall calorie intake. Moreover, volatile food prices harm producers by increasing uncertainty and making it difficult to plan for production. 

In the past, high and volatile food prices were a result inter alia of high oil prices, policies that promote the expansion of biofuel production, thin global markets in major grains, and the lack of timely and reassuring information about the world food system. Hence, to manage the risks from price volatility, action is required at both national and international levels. 

“To manage the risks from price volatility, action is required at both national and international levels.”

Last year, the Group of 20 (G20) launched an “Agricultural Market Information System” to address the need for more collaboration and better information sharing among participants in global agricultural commodity markets. If successfully integrated into existing early warning systems, this tool should help to reduce price volatility. 

In addition, the World Bank launched a new “Agriculture Price Risk Management” product to protect farmers, food producers, and consumers in developing countries from volatile food prices by improving access to hedging instruments and enabling up to US$4 billion in price protection.

Social Protection Systems to Reduce Vulnerability Social safety nets and other social protection schemes are instrumental in reducing the hardship poor households experience when being exposed to shocks such as high food prices. In many countries social safety nets reach only a small proportion of those in need—nearly 80 percent of people in the world’s poorest countries lack effective social protection. 

National governments and international players are currently scaling up investments in agriculture, food security initiatives, and social protection systems. The World Bank increased its lending volume for social safety nets from US$1.2 billion in 2006–08 to US$9.0 billion in 2009–11, and it promotes resilient safety nets in low income countries. 

At the national level, Ethiopia’s Productive Safety Net Program (PSNP) is widely recognized as holding great potential for helping the poor, in particular farm households that benefit from the PSNP and also receive agricultural support. Focusing more on improving education, nutrition or health outcomes among the poor, conditional cash transfer programs like Brazil’s Bolsa Família or Mexico’s Oportunidades are also examples of improved social protection efforts over the last years. 

Moving from Rhetoric to Action Given that smallholders currently constitute the bulk of the poor and half of the world’s hungry, it is paramount to help them manage the multifaceted risks they face and reduce their vulnerability to shocks from their natural and socio-economic environment. The future of agriculture requires action to increase overall productivity; improve access to technologies that boost smallholders’ resilience to weather shocks; ensure access to weather-related insurance schemes; introduce output price risk management tools; scale-up social protection systems that safeguard productive assets; develop nutritious staple crop varieties; and enhance human capital. 

“For greater food justice, continued and vigorous support for smallholder agriculture is a must.”

In response the food price crises of the last few years, a lot has been done to address many of these issues, but the world is still far away from achieving the first Millennium Development Goal of halving the proportion of hungry and poor people. For greater food justice, continued and vigorous support for smallholder agriculture is a must. 

Download: A Less Risky Business: Helping Smallholders Cope with Market and Climate Risks

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