104128 A g r i c u lt u r e G l o b a l P r a c t i c e N o t e 12 Paraguay Agricultural Sector Risk Assessment Carlos Arce, Diego Arias, and Jorge Caballero This Note is based on an assessment undertaken by the World Bank following a request by the Government of Paraguay. The study evaluated agricultural risks, proposing solutions for reducing the volatility of both agricultural output and incomes of family farmers. The methodology includes a two-phase process. In the first phase risks are identified, quantified, and prioritized from the point of view of the supply chains and from an analysis of the public and private sector capacity to manage risks. The second phase defines the details of solutions to reduce exposure to the prioritized risks, proposing a strategy and action plan. Given that agriculture is a key sector of the a great number of family farms. A particular Paraguayan economy (30 percent of gross focus was placed on risks and crops that domestic product [GDP] and 40 percent of provide employment to the majority of the exports), it is evident that agricultural risks rural population and that ensure national food have repercussions on economic growth, security. Therefore, in addition to soy, maize, exports, public finances, and the development wheat, livestock, and rice, the following crops of agricultural supply chains and rural poverty. were included: sesame, cotton, sugar cane, In particular, risks related to soy and livestock cassava, and vegetables. production have great importance in terms Paraguay loses approximately $US 237 million of country growth and economic stability. A on average every year, or 5.4 percent of significant drop in production and soy exports, agricultural GDP, due to production risks that as happened in 2011, has a significant impact could be managed along the main agriculture on global economic activity, which translated, supply chains. In the years in which extreme during the first quarter of 2012, into a drop in events have occurred, losses have reached $US agricultural GDP of 28 percent and in total GDP 1 billion. This represents a negative shock that of 3 percent. impacts the agricultural sector, as well as other This assessment was not limited to the economic sectors. The recent study on volatility commodities of macroeconomic importance; in Paraguay (World Bank 2014), shows that the it also analyzed supply chains and agricultural activities most affected beyond agriculture are commodities that are key from a social point input provision, such as machinery, storage, of view in Paraguay, given that they involve and transport, and sectors like construction and AGRICULTURE GLOBAL PRACTICE NOTE — MARCH 2016 financial services. In 2011, $US 920 million was Figure 1.1 Soy yield evolution and main lost in soy alone. This drop in soy production causes for losses produced a loss of several percentage points in national GDP. Also in 2011, family farming incurred extensive losses due to drought: Yield (kg/hectare cassava, $US 94 million or 38 percent of value of production (VOP); sesame, $US 13 million (46 percent of VOP); and cotton, $US 3 million (26 percent of VOP). Estimates of regional losses coincide with the supply chains with major production values (soy, maize, wheat) and with cassava. The departments with the largest losses in value have been Alto Parana and then Canindeyu, Itapua, Caaguazu, and San Pedro. The variability in the availability Figure 1.2 Maize yield evolution and main of basic staples, mainly cassava and beans, causes for losses represents a permanent threat for food security of rural households. Yield (kg/hectare Major Risks Given the nature of the impacts and dimen- sion of losses in the agricultural sector, it is clear that there is ample room to undertake investments in risk management programs. Paraguay could reduce losses significantly and make an important contribution to poverty reduction, stabilizing rural household income. Production Risks Figure 1.3 Wheat yield evolution and main Production risks are the most frequent type causes for losses of risk and have the greatest impact on the sector. The most notable risk, given the global magnitude of losses, is drought. In commercial Yield (kg/hectare farming, summer drought accompanied by high temperatures has a significant impact on soy, whereas maize, which is also relevant for family farming, is mainly affected by winter drought and early frosts. The family farming crops, like sesame, cotton, sugar cane, and vegetables, also suffer from the recurrent droughts. Cassava, the main consumption staple of family farms, is relatively tolerant to water deficits and is only affected by severe droughts. 2 | AGRICULTURE GLOBAL PRACTICE NOTE — MARCH 2016 Pests and diseases also impact production, disease (FMD) outbreaks have had catastrophic although in general, they do not represent economic consequences. Outbreaks have caused the main risks. Outbreaks occur every year, almost total paralysis of meat exports, resulting although intensity varies as a function of climatic in losses of foreign currency and fiscal resources, conditions and crop management (monocropping and affect all participants along the production contributes to the development of diseases like chain. Paraguay suffered FMD outbreaks in 2002 rust and other fungus). These events are generally and 2011. Currently, there is periodic vaccination, controlled by agrochemicals or resistant varieties, and the Permanent Veterinary Committee of the and therefore the main impact is due to increases Southern Cone and Panaftosa are monitoring in production costs, which particularly affect family the National Animal Health and Quality Service farming. (SENACSA). Weather risks, like drought, floods, and frosts, also cause important losses to farmers, but Animal health problems like foot and mouth Box 1. Family Farming in Paraguay Conceptually, Family Farming (AF) is defined as “the rural productive activity that is executed using mainly family labor for production in a farm; and that hires in one year over 20 days of temporary labor in specific seasons related to the productive process, residing in the farm and/or nearby com- munities and that do not utilize—under any condition of ownership, rental or other relation—more than 50 hectares in the Eastern Region and 500 hectares in the Western Region, independently of the product produced.” The rural population segment defined as AF possesses an important representation in numbers and in production in the country. AF represents 91 percent of all farms under the CAN 2008, above other countries in the region. In productive terms, according to the last census (CAN 2008), the contribution of AF reached more than 90 percent of the volume produced in maize chipá, beans, cassava, banana, and pineapple; between 50 percent and 90 percent of sesame, milk, and sugar cane for industrial production; and less than 50 percent for maize tupí regular harvest and peanuts. However, even with the relevant economic and social weight, the capacity of the family farming units to be integrated competitively in productive chains and dynamic businesses has been varied, with a high percentage of them staying below productive efficiency levels. Average physical yields from most productive activities of AF (cassava, beans, peanuts, sugar, cotton) have remained stagnant and, in some cases, experienced decreasing trends compared to averages from 1981–89, 1990–99, and 2000–08. Some exceptions to the rule are tomatoes, locote, and maize, crops that have shown significant increases in yields for those periods. The lack of productive efficienty is in part attributable to weak access to strategic resources that could promote change, including institutional credit and technical assistance. The proportion of AF produc- tive units serviced by institutional credit has decreased from 33.6 percent in 1991 to 17.7 percent in 2008. Technical assistance covers only 44,000 farms, about 15 percent of total farms responding to the census in 2008. These characteristics contribute to high poverty levels, which in 2011 affected almost 45 percent of the rural population, or 1.2 million people, of which 782,000 people were in a situation of extreme poverty. AGRICULTURE GLOBAL PRACTICE NOTE — MARCH 2016 | 3 Enabling Environment Risks Enabling environment risks are important for the agricultural sector of Paraguay, partially due to its landlocked situation and to previously low levels of public investment in basic Photo credit: Commonwealth Scientific and Industrial Research Organisation infrastructure and technology. Both commercial and family agriculture are exposed to these risks. For example, the market oversupply due to the extraordinary entry of commodities from neighboring countries motivated by exchange rate differentials (tomatoes) or the frequent regulatory changes in boarding ports in Argentina resulting in costs and business losses (soy). In rice, the erratic policies followed by Brazil regarding imports, and with frequent changes in sanitary and tariff barriers, impact exporters and the entire rice supply chain. unlike foot and mouth disease, which can be mitigated with vaccination, extreme weather events have more limited mitigation potential. Adverse Impacts of RiskS The distributional impact of risks throughout the Market Risks supply chains varies. The stakeholders most Prices of agricultural products from family affected tend to be producers, and the final farms, like sesame and cotton, are subject to result is often increased indebtedness and high volatility, which is directly transmitted to reduced investment capacity. At the family farm producers. In cotton, the significant domestic level, drought can cause severe losses to crops price fluctuation associated with low- and have significant impacts on farm income, productivity results have been progressively resulting in unsustainable debt levels, to the discouraging farmers and causing the decline of point of forcing households to sell assets. A production in this crop. portion of the production and loss variations faced by supply chain actors, especially family In soy, on the other hand, prices received by farmers, is the result of unmitigated risks. These producers are subject to international price risks could be managed ex ante with good volatility and a strong seasonal and interannual agricultural practices, infrastructure investments, variation of price differentials (specific price and timely access to information. discounts for Paraguay in relation to the prices in Chicago). But given the high level of current The rural poverty situation of Paraguay (almost prices, the volatility has resulted in a relatively half of the rural population is poor) is intrinsically low impact on production decisions, although connected to the vulnerability to agricultural risks. it does impact significantly the family farming Family farmers and their households are the cooperatives and small-scale traders, due to ones most at risk of continuing or falling into changes in the differential between selling and poverty, first due to their initial vulnerability buying the commodity. situation and second due to their low capacity to efficiently manage agricultural risks. In order to change this situation, it would be necessary 4 | AGRICULTURE GLOBAL PRACTICE NOTE — MARCH 2016 both to improve the conditions by which small technological and market problems that produce farmers manage risks and to modify the causes of the initial exposure of family farms to great the initial vulnerability situation of those families. production risks, and in the case of catastrophic events, to provide orderly and objective emergency support to those families. Risk Management The most important family farming crops suffer The Government of Paraguay is implementing from weather risks, particularly severe droughts. a series of programs and projects that address There are innovative technologies and practices resilience and many of the identified risks. A that can reduce the vulnerability to weather special mention is warranted for the Agriculture risks. The following is recommended for the Risk Management Unit of the Ministry of family farming sector in Paraguay, as their Agriculture and Livestock of Paraguay (MAG), implementation would allow farmers to mitigate which represents the most clear institutional risks associated with weather variability: response to agricultural risks in the context of sectoral public policies. For the moment, it is a • Diversify crops project in development that does not reach the • Increase soil capacity to store water, requiring producers at a massive scale and that would improving and conserving soils, vegetative be necessary to strengthen and integrate with cover, and adequate soil management other ongoing initiatives. Other relevant projects • Use cultivars and/or drought resistant seed include the Pequeños Perimentros de Riego varieties (International Fund for Agriculture Development • Use greenhouses and half-shade vegetable [IFAD]), Proyecto de Desarrollo Rural Sostenible crops (World Bank), Agriculture Supports (Inter-American Development Bank), Proyecto de Manejo de • Introduce irrigation where feasible and with Recursos Naturales, Paraguay Inclusive Project appropriate techniques (IFAD), the Family Farming Food Production • Improve efficiency of water management Development Program (MAG), and others. • Implement pest monitoring and early warn- ing systems. Priority Solutions It is important to have a research agenda that Given the ongoing programs and projects, the proposed strategy intends to tackle risks in an integrated manner through better management and with the objective of reducing rural poverty and increasing the resilience of family farms. The priority solutions proposed include instruments for responding, transferring, and mitigating production and market risks, and for providing public services and agricultural innovation. 1. The best risk management for family farmers is through the development of a more efficient Photo credit: Andrea Pavanello and coordinated Agricultural Innovation System, and through a mechanism for compensating incomes in case of extreme weather contingencies. The objective is to respond to AGRICULTURE GLOBAL PRACTICE NOTE — MARCH 2016 | 5 Photo credit: Andrea Pavanello includes adapting technologies to the local center and are, to a great extent, directed toward context. Although almost all techniques and the mitigation of FMD risk and other important technological practices mentioned can be disease risks to meat exports and national adopted without major difficulties by family production. However, the strategy does not stop farmers (taking into account that some of them at the external requirements but also goes into the require investments), in many cases a higher level consequences of the sanitary deficiencies related of detail will be needed in terms of the techniques to human health. and the agricultural research background needed This improvement requires the consolidation and to adapt them to the local conditions of family sustainability of animal and food safety services, farms. IPTA should develop a specific research which will also contribute to increase national agenda for the generation of technological production of quality livestock products for innovations adapted to family farming, in national consumption and export, improve public particular to mitigate risks and achieve greater health, and protect the environment. resilience. Specifically, the strategy prioritizes the following 2. With respect to animal health risks, the objectives: strategy includes measures for protection of export markets and for improving the country’s • Maintain the free of FMD with vaccination sanitary conditions and safety of food products. status The proposed measures have SENACSA at its • Move forward in the eradication of prevalent AGRICULTURE GLOBAL PRACTICE NOTE — MARCH 2016 | 6 diseases of economic and human health level of investment required to launch; and importance like bovine brucellosis and tuber- estimates the financial viability of the ex- culosis change • Reach the free of PPC and free of Newcastle • Establish a working group composed of the status public and private sectors • Extend the control and inspection of slaugh- • Design a business plan that contains a work terhouses for national consumption program with precise objectives; a strategic • Establish an integrated system that can offer plan to define the commercial aspects linked efficient technical assistance to family farmers to the project; and an organogram with func- tions • Consolidate the management and admin- istration of animal health and food safety • Establish the projected cash flow services. • Develop the bylaws and operating regula- tions. The working group should write the 3. The strategy also proposes the development bylaws and operating regulations for the of an Agricultural Commodity Exchange to functioning of the exchange, and the organi- mitigate and eventually transfer market risks. zation and operation of each contract Price volatility was assessed as a significant risk • Finally, launch. It is recommended that de- not easily mitigated by large- and medium-sized tailed activities be established in order for the soy producers, producers of other commercial exchange to fully function from day one. commodities (maize, wheat, rice), or family farmers for whom price volatility (international prices and Risk Financing Strategy exchange rates) can be critical for survival (cotton producers). Addressing price volatility requires The financing of agricultural risks is done through strong institutions to enable more transparent a structure based in different simultaneous markets and mechanisms for price coverage, instruments designed to cover various risks which can be achieved by the development of an efficiently, based on estimated risk impact per agricultural commodity exchange. frequency and severity. This risk financing modality allows for integral coverage and for maximum The process for the development and financial efficiency, in addition to providing implementation of an agriculture commodity transparency to public management and very exchange should start with a feasibility analysis likely achieving a higher level of effectiveness in about which commodities and instruments could ex post emergency assistance. Furthermore, it is be introduced for the launching of operations. considered that the optimization of agricultural The launch of an exchange with a series of insurance would have positive impacts on family products and successful instruments is crucial to farming and other agricultural segments. generating trust in the market and thus attract further commodities and actors. This allows the development of more instruments (cash or Implementation: Proposed risk financial). To launch an Agricultural Commodity management policy measures Exchange, the following is recommended: The proposed measures are not easily • Develop an integrated proposal that exam- implemented and require a concerted effort ines the current legal framework; analyzes between public and private sectors. It is worth which products and type of contracts could highlighting, however, that the annual cost for this be negotiated; designs a model that is most strategy is significantly lower ($223 million over appropriate for Paraguay; determines the five years) when compared with the actual annual AGRICULTURE GLOBAL PRACTICE NOTE — MARCH 2016 | 7 TABLE 1: Estimated costs for the Agricultural Risk Management Action Plan (US$) Strategic line 2014 2015 2016-19 Total Solutions for sanitary and food safety risks of livestock 19,883,660 51,296,167 126,905,167 198,085,001* supply chains Strengthening of the Agricultural Innovation System for 3,105,000 6,726,500 13,541,500 23,373,000 the mitigation of family farming risks Price risks and the development of an agricultural 70,000 58,000 128,000 commodity exchange Agricultural risk financing strategy 123,400 874,300 1,067,150 2,064,850 Total $223,650,851 * This cost includes all actions identified in the gap analysis undertaken by the World Animal Health Organization (OIE). losses of non-mitigated risks, which average $237 • Strengthening of the regional coordination of ac- million. The short-, medium-, and long-term costs tions related to family farming risks are presented in Table 1. • Approval of a new regulatory framework for In parallel, a series of policy measures was agricultural commodity exchanges, differentiating identified as essential to achieving an appropriate between the physical and financial market agricultural risk management framework and to • Approval of incentives for agricultural sector put into practice the identified actions. These actors to trade/register physical goods at the measures include: exchange • Expansion of the control and inspection of • Establishment of weather contingency financing slaughter houses for local consumption mechanisms for family farmers (such as drought) • Establishment of a coordinating body for family • Guarantee that agroclimatic information is per- farming risks that facilitates the creation of an manently shared among data producers and user agricultural innovation system institutions. • Budget approval of the Integrated System for Agricultural and Rural Development’s institutions in a coordinated fashion and with MAG participation This Note was based on the publication: Arce, Carlos; Arias, Diego; Caballero, Jorge. 2015. Paraguay Agricultural Sector Risk Assessment: identification, Prioritization, Strategy, and Action Plan. Washington, D.C. : World Bank Group. This work was funded by the World Bank and a Multi-Donor Trust Fund on Agricultural Risk Management financed by the Ministry of Foreign Affairs of the Government of the Netherlands and the State Secretariat for Economic Affairs (SECO) of the Government of Switzerland, and was conducted by the World Bank’s Agricultural Risk Management Team. Internet: www.worldbank.org/agriculture, Twitter: @wb_agriculture