Session 3:Agricultural Growth &

Social Protectionfrom the angle of risk management

Seminar on hot topics in agricultureBruxelles, 29 June - 1 July 2011

Nicholas Freeland

Introduction

• “Life is a risk”– Diane von Fürstenberg

• Survival is about managing risk

• Poorest are most exposed to risk…• … and have least resilience to handle it

• Agricultural growth and social protection offer complementary policy options on manage risk

2

Risk Management Instruments

Large families Buying/selling assets Community reciprocity Savings & loans/ROSCA Income/crop diversity Micro-credit/banking Formal insurance Warehouse receipts Weather insurance Futures/options SGR/price controls Subsidies Social transfers

3

Individual Universal

Form

al

In

form

al

Sta

te

C

om

merc

ial

Com

mu

nit

y

H

H

Risk Management Instruments

Large families Buying/selling assets Community reciprocity Savings & loans/ROSCA Income/crop diversity Micro-credit/banking Formal insurance

Warehouse receiptsWarehouse receipts

Weather insuranceWeather insurance

Futures/optionsFutures/options

SGR/price controlsSGR/price controls

SubsidiesSubsidies

Social transfersSocial transfers

4

Individual Universal

Form

al

In

form

al

Sta

te

C

om

merc

ial

Com

mu

nit

y

H

H

Risk Management Instruments:WAREHOUSE RECEIPTS

• Description• Examples

• South Africa ; Zambia • Pros

• Provides access to credit• Improves temporal arbitrage• Lowers seasonal price instability• Encourages investment in storage/transport

• Cons• Requires sophisticated grading/quality systems• Requires regulatory procedures and oversight• Requires stable policy behaviour on part of government

5

Risk Management Instruments:WEATHER INSURANCE

• Description• Examples

• India (BASIX) ; Kenya (HSNP) • Pros

• Reduces “adverse selection” and moral hazard• Facilitates rapid payouts (once trigger is reached)• Encourages investment in higher return activities• Low transaction costs that can be scaled to small farmers

• Cons• Who pays the premiums? And who gets the benefits?• Normally covers only a single risk• May expose insurer to catastrophic risk (so premiums high)

6

Risk Management Instruments:FUTURES/OPTIONS

• Description• Examples

• Malawi (2005) • Pros

• Can be used to hedge against price rises• More rapid inter-temporal adjustment to supply and demand • Improves spatial market integration

• Cons• Needs sophisticated commodity exchange infrastructure• Too complex for small farmers/traders• Large traders put off by uncertain policy environment• Serious governance risks in Government involvement

7

Risk Management Instruments:SGR/PRICE CONTROLS

• Description• Example

• Malawi (2001) • Pros

• Reduced price volatility• Can promote domestic food production and local markets• Smoothes impact of seasonality

• Cons• Mixed impact of high/low prices on producers, consumers

and labour market• Risk of political interference and lack of transparency• Reduced stabilisation role of private sector

8

Risk Management Instruments:SUBSIDIES

• Description• Examples

• Malawi ; Egypt • Pros

• Kick-start pro-poor growth (eg Asia)• Can raise production• Lower prices

• Cons• Most benefits captured by the better-off• Leakage across borders• Can exclude the poorest• Prey to macro and micro shocks• Hugely expensive to maintain (eg Egypt)

9

Risk Management Instruments:SOCIAL ASSISTANCE

• Description• Examples

• Lesotho (pension); Zambia (SCT); Ethiopia (PSNP); etc, etc

• Pros• Safeguards assets• Encourages risk-taking (job search, agric diversification)• Improves education, health, agric productivity• Used to buy local food, stimulates production and markets• Reduces seasonality

• Cons• Danger of inflation in weak markets• Risk of reduced value of cash transfer if prices rise

10

Potential beneficiaries of risk management instruments

Stakeholder Group

Warehouse Receipts

Weather Insurance

Futures/ Options

SGR/Price Controls

SubsidiesSocial

Assistance

Consuming Households

Low Low Low Moderate High High

Small-Scale Farmer

High Moderate Low Moderate High High

Small-Scale Trader or Processor

High Low Low Moderate High Low

Larger-Scale Farmer

High High Moderate High Moderate Low

Larger-Scale Trader or Processor

High Low High High Moderate Low

Public Food Agency

Moderate Moderate Moderate High Moderate Low

11

Integration of multiple approaches

12

www.wahenga.net