Agriculture is an inherently risky business. Ask any farmer – particularly one trying to scratch a living on a small plot in a climate-vulnerable country – and they will tell you just how hard it can be. The challenges are seemingly endless: volatile global prices; a system which maximises profits for multinational commodities traders whilst minimising returns for farmers; extreme weather events; crop and livestock diseases; climate change; poverty and inequality. It’s a wonder most small-scale farmers don’t simply give up – although many do.
As most emerging economies depend heavily on farming, any additional risks put even greater pressure on their agricultural supply chains – and this, according to the UN FAO, is precisely what has happened with the COVID-19 crisis, which has disrupted both the demand and supply side for food, with worrying implications for global food security.
Farmers, their families and rural communities have for many years developed ways to reduce and cope with risks both old and new. However, these risk protection mechanisms often fail to protect their livelihoods when faced with catastrophic shocks. When crops fail and livestock dies, it’s the farmers and their families who are hit first and hardest, while those further along the supply chain tend to be less affected. And while insurance can help manage risk, it is by no means the complete solution.
There is a tendency to focus on yield or output insurance, but farmers face many other types of risk including health, accidents, assets and price fluctuation. So looking beyond risk transfer, to risk management, and beyond even that, to the broader role of financial inclusion must be factored in, as well as other constraints on the agricultural sector such as energy, transport, policy or regulation.
Agricultural supply chain risks come in many forms – one 2017 report presciently placed “non-damage business interruption” such as pandemics, as well as extreme weather events, in the top five risks for food and farming businesses. A more recent study lists “supply risks, demand risks, financial risks, logistics and infrastructure risks, management and operational, policy and regulation, and biological and environmental risks” as having a “significant impact” on agricultural supply chains. It’s increasingly clear that insurance alone cannot solve these challenges.
A narrow focus on risk transfer through insurance may hinder opportunities to make meaningful, systemic, holistic change. Taking a comprehensive value chain approach, with risk management and transfer being key ingredients is needed. Currently, however there is a major constraint: access to finance.
With challenges to overcome, an approach focusing on a better, deeper understanding of the value chains of small and medium enterprises (SMEs) – including farms – in order to create and distribute tailored resilience solutions may be a way forward. In the agricultural sector, understanding the different players in the value chain and how they interact with each other from farm to fork enables insurers and others to consider holistic resilience solutions, rather than only focusing on risk transfer. Building resilience requires a holistic approach to risk that incorporates understanding, prevention, management and mitigation.
Such holistic approaches include, for example, nature-based solutions, climate-smart agriculture and sustainable land management. The importance of sustainable landscape management is underlined in a 2020 EU report which notes that nature-based solutions are “essential to enable sustainable agriculture production systems” and that nature-based farming practices can “simultaneously address climate change mitigation and adaptation, biodiversity protection, soil and water management objectives.” Africa’s Great Green Wall initiative, for example, encourages communities in the Sahel not only to plant trees but to adopt sustainable farming methods and create integrated agri-forest systems. The project aims to strengthen community resilience to climate-induced migration and food insecurity by creating 10 million jobs in rural areas by 2030.
Climate-smart production technologies, the dissemination of climate information services, and access to financial and insurance services are clearly useful, but according to a recent report from CGIAR, the current focus on creating farm-level resilience risks diverting attention – and finance – away from other parts of the agriculture supply chain. Away from the field, significant investment is needed to boost supply chain resilience, including better transport infrastructure, storage facilities, access to markets, processing facilities and marketing.
Small-scale farmers, especially those in emerging markets, have for too long been regarded as being at the “bottom” of the supply chain, with consumers, retailers and traders in the Global North at the “top”. By rebalancing the value chain so that farmers are seen as equal partners in a horizontal, rather than hierarchical system, will help them build their own resilience and help them gain access to investment and financial services.
Insurers are part of the solution and can act as risk management partners to their clients by getting them to adopt certain practices that reduce risk. When it comes to climate change, it’s important that schemes go beyond just risk transfer and risk management and create a wider ecosystem that encompasses food security, energy, transport infrastructure and creates sustainable incentives.
If agricultural value chains are resilient enough in the face of multiple risks, then insurance becomes redundant. Until that happens, insurance remains one essential element in a holistic approach which should help ensure small-scale farmers don’t slip back into extreme poverty when the worst transpires.