Small-scale farmers are the backbone of global food security. According to new data from the UN Food and Agriculture Organisation (FAO), more than 600 million family farms are responsible for supplying around four-fifths of the world’s food. Five out of every six farms are less than two hectares, and for the farmers and their families, it’s a precarious business at the best of times.
Now, however, many farmers are caught in the worst of times. COVID-19, climate change and increasingly volatile global commodity prices have combined to create a perfect storm of risk for both crop and livestock farmers in emerging economies. From cotton growers in India to banana plantations in the Caribbean, from coffee cooperatives in Latin America to rice farmers in South-east Asia, uncertain prices, disrupted supply chains and erratic weather patterns are taking their toll.
Paradoxically, while the pandemic drives up supermarket prices in many consumer countries, the farmers who actually grow what we eat and drink are getting an ever-smaller slice of the value chain. One recent study estimates that, on average, coffee farmers receive just 2% of the cost of a cup of coffee bought in the US, despite the price of coffee on global trading markets reaching a record high in 2021. The value of raw cocoa as a percentage of the price of a chocolate bar has slumped from 50% in 1980 to just 6% today.
Small wonder then, given the tiny fraction of many commodity value chains which make it back into the hands of the farmer, that many of them are unable to afford to take risk reduction measures – including insurance – which could mitigate the worst impacts of shocks such as a pandemic or extreme weather events. According to one estimate, fewer than 20% of smallholder farmers worldwide have some kind of insurance cover to protect themselves against crop damage or livestock loss.
“COVID-19 hit small-scale farmers and farm workers in emerging economies particularly hard, and has shown just how vulnerable they can be to unexpected shocks,” says Carla Veldhuyzen van Zanten, Senior Advisor for Sustainable Livelihoods at Fairtrade International. “If they were paid a sustainable price for their produce they would be in a much better position to manage their risks. All too often, the low prices paid to farmers are not enough for them and their families to enjoy a decent standard of living day-to-day and invest in their farms for better yields, let alone pay for insurance premiums as part of an overall risk reduction strategy. This means that when they are hit by a crisis such as the pandemic or an extreme weather event, they are at risk of falling back into extreme poverty.”
Coffee farmers have been particularly badly hit in recent years. Coffee is highly susceptible to changing weather patterns, and rising global temperatures have seen increasing outbreaks of the dreaded coffee rust disease – or La Roya – which can wipe out entire crops. From 2012 to 2017, coffee rust caused more than USD 3 billion in damage and lost profits and forced almost 2 million farmers off their land across Central and South America. The pandemic added to these woes, even for those who could still work on their land and harvest their crops. Migrant workers returned home, lockdowns stopped transport between farms, markets and ports, and biosafety measures added to production costs. As we have noted in previous editions of this newsletter, COVID-19 highlighted once again the protection gaps in many lower-income economies, especially those heavily reliant on farming, MSMEs and informal working.
Scaling up insurance for smallholder farmers remains a major challenge, but one player aiming to reverse that trend is Blue Marble, who partnered with Nespresso in 2018 to launch Café Seguro, an index insurance product for smallholder coffee farmers in the Eje Cafetero (or “coffee-arc”) in the western mountains of Colombia. The insurance is underwritten locally by Seguros Bolívar, with international reinsurance provided by Blue Marble’s owner companies, and aims to protect farmers against both excessive rain and drought. The farmers of the Fairtrade-certified cooperatives opted to use part of their Fairtrade Premium funds – the extra payment they get for selling on Fairtrade terms – to pay for the insurance premiums.
“The first pilot from July to September 2019 spanned the two annual harvest periods and saw a payout to all 1,858 insured farmers,” says Blue Marble CEO Bilal Mughal. “Receiving payouts served to build trust in the programme, vital for long-term adoption by a community with little prior experience with insurance.” Since then, the scheme – now enjoying government subsidy – has expanded to cover 7,000 coffee growers farming 13,500 hectares.
Index insurance – whether to cover crop or livestock losses – has been pioneered by MiN members for more than a decade, with mixed results. For example, a recent assessment by the MicroInsurance Centre at Milliman of the Kenya Agriculture Insurance Programme (KAIP) – a government-subsidised public-private partnership (PPP) launched in 2015 backed by a consortium of insurers led by MiN member APA Insurance – concludes that “one of the greatest challenges for the consortium has been lack of awareness by the farmers of the benefits of insurance.”
But there have been some noticeable successes. The R4 Rural Resilience Initiative by the World Food Programme (WFP) and Oxfam – helps farmers in Bangladesh, Burkina Faso, Ethiopia, Kenya, Madagascar, Malawi, Mozambique, Senegal, Zambia and Zimbabwe to access crop insurance. R4 provided USD 25.4 million worth of microinsurance protection in 2020, and crucially, more than half of those who received policies last year were women. WFP cites the case of Esther, a farmer from Malawi, who says “This year, I engaged in farming with a very positive mind knowing that if my crops failed because of drought, I would be supported by insurance compensation and not be desperate to find food.”
Despite these and other encouraging examples, it’s clear the protection gap for smallholder farmers remains alarmingly wide. Insurers should be pushing against an open door – yet uptake remains a fraction of the potential market. A recent study in Ghana found that while smallholder farmers’ “access and acceptability” of agricultural insurance is low – around 14% – up to 90% thought insurance is an effective tool to deal with agricultural risks.
Uncertainty in global food supply chains, driven in part by the pandemic and climate change, affects us all – but it is small-scale farmers who receive an ever-shrinking percentage of the end value. It is in all our interests, whether as growers or consumers, to ensure farmers are better protected against those risks for a more sustainable future for all.