Risk Management Strategies of Smallholder Farmers

Risk Management Strategies of Smallholder Farmers
in vulnerable production areas
Brussels Policy Briefing 25:
Food Price Volatility: Implications for ACP Countries
Brussels, 30 November 2011
Thomas Elhaut
Director, Statistics and Studies for Development
Typology of Risks
Source: WDR (2000), and DFID (2004)
The risk-web,
trapping smallholders
natural risks, climate
change background
market, institutional,
policy failure
public health risks
policy biases, lack of
political risks, conflict
spatial risks
market risks
Key message 1: a risky world
• The global risks landscape (WEF 2011) is impressive
and diversified, with …
• increased frequency and intensity of incidents,
eroding response capacities, and …
• sharper market volatility exacerbates the world risk
profile, and
• asymmetry in access to market and other risk
information constrains coping strategies.
• Smallholders, women farmers, indigenous farmers
and young farmers are particularly vulnerable
categories of producers; … especially in remote,
marginal production areas
Key message 2: food security compromised
 These risks (and perceptions) and uncertainties
compromise (returns to) assets,
affect longer-term investment behaviour,
generate risk of trapping vulnerable smallholder
farmers in risk-averse, low-return and unsustainable
production systems
inhibit entry of new (young) entrepreneurs in the
excessively risky and poorly remunerated business of
agriculture, which …
 Ultimately compromises global food security
 While higher (“economic”) agricultural prices should provide
and incentive framework for supply responses
Key message 3: where there is a will, there is a way
• Farmers have mitigated and adapted to risks, with a
range of strategies:
– from soft, traditional knowledge, solidarity based strategies;
– to harder, know-how and resource intensive strategies;
– including diversification of incomes and migration
• We can build on this expertise, enhance risk resilience,
develop more robust risk management systems, design
risk transfer mechanisms
• This requires coordinated action: research, innovation,
impact assessment, systematisation, scaling-up,
market information management, partnerships, private
& public investment and effective brokerage
Risk management strategies
Source: Adapted from WDR 2000, World Bank (2001), Walker and Ryan (1990), Mathur and Gaiha (2004), and Gaiha and Imai (2004).
The rural nature of the challenge
Energy security
Public health
Food security
• The problem is rural:
– agriculture as a
contributing cause;
– agriculture as a victim
• Is also the solution rural?
• Towards a new rurality …
• … new rural futures?
Smallholder agriculture transformation
2 - Modernised farmers: diversified, specialised
Transformation path
1- Subsistence farmers:
Surpluses of low value commodities,
local markets
3 – Commercial
high value
national and
world markets
Market risks and volatility invisible hands that strangle smallholders
• “rien ne va plus”:
– subsistence farmers, in remote and vulnerable areas
were traditionally relatively insulated (decoupled) from
markets and global conditions (and opportunities)
– in globalised economy, exogenous shocks transmit widely
• the 2 edges of the sword:
– market volatility,
– price volatility
• the need for innovation and governance
Volatility and Growth of Food Prices in Selected Asia-Pacific Countries
Market and price volatility and responses –
the 2008 case
Addressing information asymmetry
• The underlying logic:
– World food security depends on smallholder farmers
– Smallholder farmers need on-farm investment
– Market uncertainty, price volatility and related
information asymmetry constrain risk management
options and strategies and thus investment
– Smallholder access to agricultural market information
(transparency) is essential for world food security
• The ultimate goal:
From club good to global public good
Level playing field
Complex information needs of smallholders
• Which information?
– Non-tariff barriers
– Quality and safety standards, phyto-sanitary regulations,
– Certification norms
– Production costs
– Farm gate, local markets, national markets, regional markets
– Rural competiveness and investment climate
– Value chain data
• Improving access
– Information systems, versus supply of ad hoc data
– Processed, analysed, visualised
– ICT (private: cell-phones; public: media)
Market information, what for?
Micro- or enterprise level:
 Transmitting market signals
to smallholder farmers
 Inclusive agri-business
 Pro-poor policy
 Ultimately: global food
Transmitting market signals to
smallholder farmers:
– Transparency, price transmission,
price-risk management
– Supply response
– Sales/storage decisions
– Reduce transaction costs
– Adjustment along value chain,
managing transaction costs
– On farm investment decisions
Inclusive agri-business:
– Investment decisions
– Procurement decisions, and longer
term relationships with farmers
– Fair dividends along the value chain
Layers that affect price transmission:
Marketing Costs for Rice in Cambodia, 2002 (Riels per kilogram of paddy rice)
Source: World Bank Study Team (July 2002).
Concluding message 1: the risk cloud over our heads
• the global risk landscape is becoming more complex and threatening
• 500,000 smallholder farmers are particularly vulnerable (asset base,
returns to assets, diversification options)
• market volatility (prices, trade) exacerbates these vulnerabilities of small
• traditional risk mitigation, risk spreading strategies and solidarity
solutions are no longer as effective
• this affects risk perceptions and depresses investment behaviour, which
• threatens longer-term world food security
• serious efforts are required to: mitigate smallholder risks, assist
producers to adapt to risks, and put in place risk markets, supported
with modern risk transfer mechanisms
Concluding message 2: What will it take?
• Coordinated:
– research; technical, financial and other innovation, related to risk;
– impact assessments (randomised control trials, participatory RRA, …);
– systematisation, scaling-up;
– market information management;
– partnerships, beyond agriculture, involving the financial sector
– private & (risk-tested) public investment; and
– effective global solidarity and governance (of agricultural markets); and
• Leadership: OECD, BRICS and other MICs
– price makers
– internalising externalities of restrictive policy actions
• South-south cooperation and Trilateral cooperation
Thank you for the attention
[email protected]