78604 Market-Based Agricultural Risk Management in the Caribbean June 2013 1 Authors: This material has been prepared by Diego Arias and Sara Giannozzi. The content is based on the 2013 World Bank report “Agricultural Risk Management in the Caribbean: Lessons and Experiences 2009-2012� which can be found online at https://openknowledge.worldbank.org/handle/10986/13242. The Caribbean Knowledge Series is an occasional series that presents World Bank knowledge in an accessible format. It is meant to assist knowledge sharing across the region and trigger policy dialogue on topics relevant for the Caribbean. This note was prepared to support the participatory policy dialogue in the context of the Caribbean Growth Forum (CGF). The CGF is an initiative facilitated by the Compete Caribbean Program, the Inter-American Development Bank, the World Bank and the Caribbean Development Bank, with the support of the Canadian International Development Agency, the United Kingdom’s Agency for International Development, CARICOM Secretariat, the University of the West Indies, the European Union and Caribbean Export. It aims to facilitate a multi-stakeholder dialogue to identify practical solutions for the growth challenge in the Caribbean. To learn more about the CGF methodology and progress in each Caribbean country visit: http://caribgrowth.competecaribbean.org/ Disclaimer: This work is a product of the staff of The World Bank with external contributions. The findings, interpretations, and conclusions expressed in this work do not necessarily reflect the views of The World Bank, its Board of Executive Directors, or the governments they represent. The World Bank does not guarantee the accuracy of the data included in this work. The boundaries, colors, denominations, and other information shown on any map in this work do not imply any judgment on the part of The World Bank concerning the legal status of any territory or the endorsement or acceptance of such boundaries. Visit the entire “Caribbean Knowledge Series� collection at: http://worldbank.org/lac Design & Concept by Room Grupo Creativo | www.room.com.do Cover Photo: Shutterstock 2 3 Market-Based Agricultural Risk Management in the Caribbean Caribbean countries are highly vulnerable The difficulties in making affordable insurance to natural disasters (between 1990 and 2010, available to small farmers have to do with: (i) a Caribbean countries affected by weather hazards multi-cropping structure of smallholder farming had lost on average between 9 and 1 percent of (some small farmers in Jamaica have up to 15 its GDP every year) and exposed to commodity crops on 1 plot of land), which complicates the price fluctuations because of the openness of their evaluation of exposure of different crops to the economy. At the same time, agriculture remains an various production shocks; (ii) the lack of affordable important source of income for many of them, as delivery mechanisms for insurance companies well as a significant employer (around 20 percent to offer insurance to small individual farmers; (iii) of total employment in the region, with higher the insufficient quality of the information available peaks in countries like Grenada and Haiti, where it about the agro-climate to undertake probabilistic represents 50 percent). analysis at a disaggregated level; (iv) the insufficient capacity to design and administer agricultural Despite this high vulnerability, however, apart insurance contracts; and (v) the provision of ex- from a few exceptions1, the Caribbean agricultural post support programs, which reduces famers’ sector does not have access to market-based willingness to pay for insurance. agricultural risk management instruments (insurance and hedging) in case of major shocks Between 2009 and 2012 the World Bank such as international price fluctuations and provided advisory services on market-based disasters. Farmers and agribusinesses must rely agricultural risk management to a total of six on a combination of informal (crop diversification, countries in the Caribbean: Jamaica, Haiti, off-farm income), traditional financing (saving, Guyana, Belize, Grenada, and the Dominican borrowing), as well as more formal risk Republic. The World Bank first began in the early management tools (government support, mutual 2000s providing advisory services in the area of funds and other forms of risk-sharing through agricultural risk management by financing pilot commodity boards) to deal with these type of projects related to agricultural insurance and shocks. As a consequence, most of the costs from commodity price risk management. In 2007, a weather hazards and commodity price shocks are more regional approach to risk transfer of weather absorbed by farmers, local agribusinesses, and/or events started in the Caribbean with the launch of governments, lowering income levels, increasing the Caribbean Catastrophic Risk Insurance Facility rural poverty and reducing economic growth and (CCRIF)2. More recently, technical assistance has competitiveness. It is important to emphasize also incorporated a more country-specific and the role of the government given the small size of comprehensive approach towards agricultural the average farmer in the region and the fact that risks based on the countries’ particular demands. the agricultural sector is subject to frequent and The technical assistance described here has taken intense weather events. into account these two approaches: considering a regional approach but also local country conditions in the implementation of agricultural risk management instruments. 1 The Windward Island Crop Insurance (WINCROP) provides insurance for banana growers in the Eastern Caribbean and a public agricultural insurance company that has been able to reach 7 percent of the area cultivated under multi-peril insurance in the Dominican Republic. 2 CCRIF is a risk pooling facility designed to limit the financial impact of catastrophic hurricanes and earthquakes to Caribbean governments by quickly providing short term liquidity when a policy is triggered. It is the world’s first and, to date, only regional fund utilizing parametric insurance, which allows Caribbean governments to purchase catastrophe coverage with lowest- possible pricing. 4 Given the importance of the agricultural sector •Demand-driven: an important principle for and the heterogeneity of its production structure delivering the technical assistance was the across the Caribbean, a country-specific approach implementation of a demand-driven approach. The was an essential part of the technical assistance. central purpose was to implement market-based The primary objective was to support the strategies and tools based on countries’ demands development of country-specific risk management with the final objective of possible mainstreaming strategies for the agricultural sector. In order and scaling up successful experiences. Although to achieve this objective, the Bank facilitated most of the work was country-specific, the NLTA rapid sector-wide risk assessments, and, where also provided capacity building at the regional appropriate, the feasibility studies for the design level, through institutions like IICA and CaFAN of innovative risk management mechanisms, with (Caribbean Farmer Association). a focus on market-based instruments targeted to reducing the vulnerability of small and medium- •Potential for scaling up: It was important to quickly sized producers. The coordination with the private identify the potential to provide valuable lessons sector was an important element of the program. at the regional level. For example, similar projects The approach included the following basic in Central America proved to be a good channel principles: for further developments in commodity risk management policies (e.g. agricultural technology, •Multi-sectoral collaboration: the Bank ensured micro-finance and climate change). the participation of a multi-sectoral team that was able to bring an integrated approach including The technical assistance was implemented in sectoral knowledge, regional perspectives and four stages. Stages one and two were conducted financial sector expertise. in all six countries with different participation and constituted an overall evaluation and a public •Public-Private Partnership: the Bank worked sector strategy for coping with systemic agricultural jointly with the public and the private sectors risks. During stage three, a feasibility study was providing technical assistance to local insurance conducted, based on specific requests from two companies, banks, governments, agro-industry countries, in order to evaluate the possibility of groups, and donors to help assess the countries’ implementing market-based risk management particular challenges and finding common instruments; finally, stage four built on the work approaches to design and implement market- done in previous stages by implementing specific based solutions in the agricultural sector. pilot projects. •Comprehensive risk management framework: the Bank used a comprehensive risk management framework in order to assess the countries’ agricultural risks. Those risks mainly included vulnerabilities related to short-term weather events as well as long-term hazards, including price risks and animal and plant health threats. The framework incorporates the different actors and phases (mitigation/prevention, transfer, and coping/ response) in the risk management spectrum. The final objective was to improve current public sector risk management strategies from reactive responses (ad-hoc or ex-post) to more proactive approaches (ex-ante) to weather events. 5 Initial rapid assessment to appraise public and private Stage 1 capacities to manage risks as well as the availability of market- Agricultural Risk based instruments (Belize, Grenada). Additional rapid Assessments assessments conducted for specific supply chains (ex. coffee in Haiti and rice in Guyana)3 Stage 2 Bank engaged in conversations with the public sector to Development of Public facilitate the development of a strategy to manage systemic Sector Strategies for risks at the micro, meso and macro level, focusing mainly on Coping with Systemic weather risks (hurricane, tropical storms, etc). These strategies Agricultural Risks were developed in Jamaica and Haiti In-depth feasibility studies, including a modeling exercise for Stage 3 weather risks to correlate farm losses with weather variables Feasibility Studies for and determine trigger variables for index-based insurance, as Market-based Risk well as an assessment to evaluate the type of coverage and Management and transfer mechanisms (public/private) to reach farmers. The pre- Transfer Instruments. feasibility studies were done for insurance products in Guyana, Jamaica and Dominican Republic.4 Based on the feasibility studies, additional support provided to Stage 4 facilitate the design of market-based instruments or Implementation of mechanisms on a pilot basis (i.e. Jamaica index-based Pilot Projects insurance pilot for the coffee industry)   Conclusions Some regional level lessons have emerged from Farmers in the Caribbean tend to use informal this engagement. risk management approaches, which can be successfully complemented by more formal, Market-based financial agricultural risk market-based instruments, as well as other public management instruments are difficult to or private risk transfer mechanisms. Informal risk implement in the Caribbean region at the farm management strategies include personal savings, level because of the high proportion of small household buffer stocks, community savings and farmers (ranging from 1.4 ha in Haiti and Jamaica non-formalized cooperatives (i.e. commodity to around 2 ha in Belize) with a very diverse boards). A more formal risk management approach production structure. Assessing the particular implemented by the government involving risk production losses at the individual level is mitigation, risk transfer and risk coping mechanisms technically challenging. Furthermore, commercial would be very beneficial for small farmers as well banks and/or insurance companies usually do not as for the efficiency and effectiveness of public have the infrastructure to reach small farmers in expenditures in response to natural disasters and remote areas. crisis in the sector. This approach would provide farmers with an additional source of financing to manage both weather and production risks without solely relying on their own savings and farm income. 3 A short note with more information on supply chain risk assessments in the Caribbean can be found online at http://siteresources.worldbank.org/INTLAC/Resources/257803-1269390034020/ EnBreve_182_Eng_web.pdf 4 A short note with more information on the agricultural risk insurance market in the Caribbean can be found online at http://siteresources.worldbank.org/INTLAC/Resources/257803-1269390034020/ EnBreve_183_Eng_web.pdf 6 Public intervention in past catastrophic events specific, but the fact that Caribbean countries are has been necessary to cover extreme agricultural very indebted economies limits their capacity of losses for small farmers. While these public using additional financing through credit lines, interventions are crucial, they can be made more so CCRIF insurance makes up a big part of the effective and efficient. In particular, disaster countries’ risk financing structure for natural payments to farmers can be structured through disasters. Additional analysis is required for the clear ex-ante rules for triggering and distributing development of instruments to cover agriculture public sector assistance, and a clear process sector risks (e.g. non-cyclonic rainfall and for registering and becoming eligible for such droughts). The CCRIF recent announcement of the ex-post support should also be considered. In future launch of a new excess rainfall product to addition, for an adequate financing of the farmer’s supplement its earthquake and hurricane policies disaster support system, it is essential to improve is a step in the right direction. the financial structure behind such a program by allowing the Government to transfer part of its Awareness by the public and private sector fiscal exposure to the international market and on the potential benefits of market-based thus, leveraging public resources in bad years. products, as well as technical capacity, needs to be strengthened in the medium and long-term. A risk layering approach could be used to finance The fact that market-based instruments are mostly public interventions in the agricultural sector in absent in the Caribbean is partly explained by response to systemic hocks. For example, low the fact that public sector officials, the financial cost (high frequency) events could be financed sector (lending to agriculture) and agribusinesses with reserves and personal savings, while more do not have access to or know of the potential catastrophic (lower frequency) events could benefits of agriculture insurance or commodity be financed with contingent credit lines and/or price risk hedging. Moreover, currently the region insurance instruments. A macro-level risk transfer lacks technical capacity in the public sector and mechanisms was introduced in the region through in the insurance and financial sectors to design the implementation of the CCRIF in 2007. The and offer these instruments, which constrains the optimal mix of risk financing strategies is country- development of such instruments. 7 worldbank.org/lac 8