Using market evidence to protect smallholder farmers from price variability

That most African smallholder farmers can produce enough commodities for household consumption and surplus for the market is now beyond question. The majority of committed farmers have mastered the art of producing almost any commodity.  What remains outside their control are market dynamics such as prices as well as supply and demand trends. The situation is worse in informal agricultural markets through which more than 70 percent of agricultural commodities pass en route to diverse consumers.

using-market-evidence-to-protect-smallholder-farmers-from-price-variability

While African insurance companies have started getting excited about insuring agriculture against weather-related parameters like hail, frost or drought, they are still to craft uniquely market-related insurance products. For commercially-minded farmers, insuring agricultural commodities against weather is meaningless if unpredictable market prices result in huge losses.  Agricultural markets re becoming too volatile such that even if commodities are insured against weather, failure to insure against price variability and supply trends derails the whole farming business.

Towards an agricultural market insurance index

Based on data and evidence gathered in agricultural markets across Zimbabwe over the past six years, eMKambo has started exploring a market insurance index that can cushion farmers against negative market dynamics. Lessons from this initiative can be scaled out to other countries. So far, market trends from diverse agricultural commodities signal that an appropriate market insurance product can focus on the following parameters:

  1. The break-even price for commodities to be insured: The insurer and farmers will have to agree on what is considered a break-even price.  If the break-even price for tomatoes is US$2 per box, anything above U$2 becomes a profit for farmers.  Farmers will have to focus on minimizing costs of production. Depending on type of commodity, there will be a minimum area of production for farmers to break-even.
  2. Price elasticity:  This is about how often the price of the insured agricultural commodity can change. Does it change three times a month or is it too elastic such that it can move from $2 today and $3 tomorrow? This factor takes into account differences between perishable commodities and non-perishables whose prices may remain stable for a given period.
  3. Price range: What is the price range for insured agricultural commodities?  For instance, in Zimbabwe’s informal markets, tomato prices can range from 50c a box to $12 a box within eight months depending on supply and demand. However, potatoes rarely go down to $1 irrespective of supply and demand. The cost of producing potatoes determines how low the price can go.
  4. Shocks:  To what extent are insured commodities affected by shocks such as dry spells, floods and others?  Sometimes good rains can cause gluts like what happened this year in Southern Africa.
  5. Trends: How do commodities behave in a given period? There are times when commodity supplies of commodities like onion and oranges are very low. Understanding how these commodities behave in a given season can inform designing of insurance products.

Bundle of services

Since it is not enough to offer insurance as a single service, there is enormous scope to combine insurance with other advisory services so that it becomes a coherent bundle of services that are critical for agriculture. While being evidence-based and knowledge-intensive, the market insurance model incentivizes farmers to work on their costs so that they stay above the break-even. Just as traditional insurance does not cover a car that is not moving, the market index insurance will not pay for poor quality commodities.  Farmer and commodity location will be critical part of valuation of farmers.

Distributing agricultural wealth and finance

By taking into account different commodities, production zones and contexts, the market insurance index will assist in redistributing agricultural wealth. The main challenge for African countries is absence of systems that can distribute agricultural commodities where they are needed without passing through major urban centres.  Agricultural commodities can move from one rural area to urban centres and back to a neighbouring rural areas. In most cases not much value will have been added to the product in urban areas.  Part of the problem is that most African countries have not transformed colonial structures which were designed in such a way that everything is directed to urban centres.  That is why rural to urban migration is not the increase although some rural areas may offer better opportunities.

Mechanisms that can update food needs of various communities are badly needed so that commodities can be easily moved from areas of production or abundance to where they are needed. In most cases, where commodities are produced there is no local market or demand because everyone has the commodity. For instance, there cannot be a market for bananas in Honde Valley area of Zimbabwe because almost everyone produces the fruit. Unfortunately, even if the fruit is needed in Gwanda district, it has to pass through urban centres like Mutare, Masvingo and Bulawayo where there will be so much double handling which results in losses.  A robust insurance index should cover all these issues.

 

Charles@knowledgetransafrica.com  / charles@emkambo.co.zw / info@knowledgetransafrica.com

Website: www.emkambo.co.zw / www.knowledgetransafrica.com

eMkambo Call Centre: 0771 859000-5/ 0716 331140-5 / 0739 866 343-6

2 thoughts on “Using market evidence to protect smallholder farmers from price variability

  • Although parametric insurance is far better than conventional one, yet insuring the cost of production for small traditional rain-fed farmers will not encourage them to participate. Therefore parametric insurance should cover the yield rather as small traditional rain-fed farmers rely almost entirely for their livelihoods on agricultural produce. Moreover, small traditional farmers’ cost of production is almost negligible as the own the land, have the family labor, and preserved seeds from previous season.

    • Precisely Mahmoud! Insurance is a hard sell among smallholder farmers. The only way farmers end up accepting it is when it comes as part of a contractual agreement with private companies or financial institutions.

      Regards,

      Charles

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