Explore innovative insurance products for farmers to mitigate losses

Tuesday September 4 2018


Man inspects his farm in Rwanda's Eastern Province. Farmers took loans to buy seeds and fertilisers. PHOTO | FILE 

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Floods, drought, heat waves, cold spells and other natural disasters are sources of risk to farmers.

Climate induced stresses not only affects agriculture production but also may mean more farmers are deprived of their crucial source of livelihoods.

These disasters can lead to a poor harvest, leaving uninsured farming households with little income for the season. While prolonged drought has been ranked as the most important factor affecting crop production, increasingly floods are also undermining production.

In order to cope with unpredictable weather, farmers often plant low-risk, low-return crops instead of investing in more profitable crops that are sensitive to bad weather.

Furthermore, farmers wary of bad weather may hesitate to make other investments in their farms, such as increasing fertiliser use. As a result, the threat of extreme weather can trap farmers in a cycle of low productivity.

This year has been extremely bad for farmers after heavy rains experienced earlier this year destroyed hundreds of acres of farmland.

While banks have agreed to extend the loan repayment for farmers, it is temporary relief as weather experts are already predicting more heavy rains in the coming months. There is a need for long term solutions to address the challenges related to weather.

For instance, the government could consider rolling out a weather index insurance, which makes pay-outs based on an easily observable variable such as rainfall.

This is an innovative financial product designed to make insurance accessible to poor smallholder farmers. For instance, if rainfall is below threshold, farmers receive a pay-out which depends on the size of the rainfall deficit.

Weather index insurance was first offered in the early 2000s, and it is now marketed to individual farmers in over 15 countries.

Randomised evaluations in some African countries including Ethiopia, Ghana, and Malawi which tested take-up of weather index insurance products found that weather it can change farmers’ investment decisions especially if there are subsidies.

The study also found that insured farmers were more likely to plant riskier but higher-yielding crops. In the three studies that measured changes in farmer behaviour, farmers who bought insurance shifted production toward crops that were more sensitive to weather but more profitable on average.

There is also need to explore other risk-mitigating technologies, such as improved seeds that better tolerate weather events.

According to the Rockefeller Foundation, by 2030, maize production in Southern Africa could drop 30 per cent due to climate change.

Biotech companies are already developing drought tolerant seeds that will fare better in hot, dry conditions which could help farmers mitigate the risk of yield loss when experiencing drought stress.