Financing Agriculture: Risks and Risk Management Strategies

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Ajai Nair is a Consultant with the Agriculture and
Rural Development department of the World Bank
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He is involved in both analytical and operational
work at the World Bank in the area of
microfinance and rural finance.
He has published papers on commercial banks
and financial access, rural leasing, savings and
credit groups, and financial cooperatives.
He currently advises three livelihoods projects in
India and is leading a six country study on
agricultural finance.
Ajai also consults occasionally for the
International Fund for Agricultural Development.
Before starting to work with the World Bank, Ajai
worked with DHAN Foundation and PRADAN, two
leading NGOs in India, in their community-based
microfinance programs.
Ajai has graduate degrees from the Princeton
University in the US and Tamil Nadu Agricultural
University in India.
Financing Agriculture: Risks
and Risk Management
Strategies
Ajai Nair, Consultant, World Bank
3rd Agribanks Forum, theme ‘Africa Value
Chain Financing’, October 16-19, Nairobi,
Kenya .
What are the major risks agricultural
financing?
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Systemic/Correlated Risks
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Production Risks –weather, pests, farming
practice.
Price Risks – for inputs and outputs.
Political Risks – export bans, price caps, debt
write offs
Idiosyncratic/Independent Risks
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Willful default
Over-financing, under-financing, wrong pricing.
Life, Health, Asset
What is the impact of these risks?
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At a proximate level,
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Low availability of finance for farming and agribusiness.
Slow adoption of agricultural technology and private
sector investments in agribusinesses.
Ultimately,
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High volatility in household income / food security for
households
Higher impact on low income households because of
reduction in consumption and liquidation of assets.
What are the solutions?
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Reduce / better manage Systemic and
Idiosyncratic Risks
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Development and improved access to seeds, farming
practices and technology, agricultural development
services.
Development and improved access to physical
(forward sales, minimum price guarantee contracts,
etc) and financial tools (insurance, derivatives)
Better credit-risk assessment and management
by lenders.
World Bank’s work on Commodity Risk
Management
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Ongoing work
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Price Risk Management: Options (Tanzania, Zambia, Mozambique,
Malawi)
Weather Risk Management: Rainfall Index Insurance (India, Malawi,
Ethiopia, Thailand)
Users: Governments, Financial Institutions, Producer
Organizations, Agribusinesses, and producers.

Services offered
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Policy advice
Technical assistance: Risk Assessment, Contract Design, Pricing, and
Program management.
Experience so far: Price Risk
Management
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Price risk management products have been
offered:
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Product for intermediaries linked to financial services
Product for governments to manage food-security.
Pilot in Tanzania
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CRDB, a local bank, has offered product tthrough coffee
producer organizations and cotton ginning companies
Hedging helped coffee producer groups offer a higher
purchase price to farmers
Demand for contracts has varied with rise and fall in
commodity prices.
Better ability of bank and borrowers to manage price risk.
Experience so far: Weather Risk
Management
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Index based weather insurance offered as:
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a stand alone insurance contract,
part of a loan package or linked to other services such as seed
provision, and
portfolio coverage for a bank or lending institution`
Pilot in Malawi:
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3rd year of program development through NASFAM.
Insurance contracts helped ground-nut farmers use improved
varieties as contracts enabled access to finance from MRFC
and Opportunity International.
Lessons Learned: Price Risk
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Data: Robust historical commodity price data needed to
design good contracts.
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Technical Skills: Local institutional capacity needs to be
developed in price risk assessment (duration, volume) and
accessing derivatives markets.
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Institutions/Markets:
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Presence of robust, liquid market in the specific commodity
to transfer risks.
Local supply chain participants willing to undertake the
significant investment in staff time and financial resources,
and market the product and provide necessary education.
Link to finance critical for take up.
Lessons Learned: Weather Risk
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Data: Good quality historical data required to
design contracts and reduce basis risk.
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Technical Skills: Local expertise in contract
design, pricing, reinsurance, and program
management are critical and must be developed.
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Institutions/Markets:
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Local insurer willing to take risk or intermediate
transaction
Marketing organization able to market the product
and provide necessary education
Link to finance critical for take up
In Conclusion…
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Risks in financing agriculture involves not
only production and price risks, but also risks
to life, health, and assets.
Optimal production and price riskmanagement involves a combination of
physical and financial tools.
There are no silver bullet solutions.
Contacts
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Price Risk: Roy Parizat
royparizat@hotmail.com
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Weather Risk: Erin Bryla
ebryla@worldbank.org
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