Bearing risk is hard to do: crop price risk transfer for poor farmers and low-income countries

Abstract

This article takes the food crisis that began in 2007 as an occasion to draw attention to the deleterious impact of agricultural market volatility on poor farmers and food importing low-income countries. The article presents a menu of mechanisms that may reduce volatility or farmer and low-income country exposure to it. This is followed by a discussion of mechanisms that allow for the transfer of price risk through the use of instruments such as futures and options. Surveying empirical cases and experimental studies, the article focuses on potential applications of such mechanisms in low-income country settings.

Supporter le risque, ce n'est pas facile: transfert des risques relatifs au prix des cultures pour les agriculteurs pauvres et les pays à faible revenu

Cet article prend la crise alimentaire qui a débuté en 2007 comme l'occasion d'attirer l'attention sur l'impact délétère de la volatilité du marché agricole sur les agriculteurs pauvres et sur les pays à faible revenu importateurs de produits alimentaires. Cet article présente une carte de mécanismes qui peuvent réduire la volatilité ou l'exposition des agriculteurs et des pays à faible revenu à cette volatilité. Vient ensuite une discussion des mécanismes qui permettent le transfert des risques relatifs aux prix au moyen d'une utilisation d'instruments comme les marchés à terme et les options. Sur la base d'un passage en revue de cas empiriques et d’études expérimentales, cet article se concentre sur les applications potentielles de ces mécanismes dans le contexte de pays à faible revenu.

Suportar risco é difícil: transferência do risco dos preços do cultivo para produtores rurais pobres e países de baixa renda

Este artigo seleciona a crise alimentar que teve início em 2007 como momento para chamar atenção para o impacto prejudicial da volatilidade agrícola e do mercado sobre produtores rurais pobres e países de baixa renda importadores de alimentos. O artigo apresenta um leque de mecanismos que podem reduzir a volatilidade ou a exposição de produtores rurais e países de baixa renda frente a ela. Em seguida, o autor realiza uma discussão sobre mecanismos que permitem a transferência do risco dos preços através do uso de instrumentos como os mercados futuros e opções. Analisando caos empíricos e estudos experimentais, o artigo focaliza as aplicações em potencial de tais mecanismos em ambientes de países de baixa renda.

Afrontar el riesgo es difícil: transferencia de riesgo para campesinos y países de bajos ingresos, ante la volatilidad de los precios de los cultivos

Este ensayo usa el ejemplo de la crisis alimentaria que comenzó en 2007 para llamar la atención sobre la volatilidad de los precios agrícolas y sus efectos negativos sobre los campesinos y los países de bajos ingresos importadores de alimentos. El ensayo presenta una serie de mecanismos que pueden reducir los riesgos de la volatilidad, o la exposición a ella que experimentan los campesinos y los países de bajos ingresos. Asimismo, se analizan los mecanismos que permiten la transferencia del riesgo de los precios a través de instrumentos como futuros u opciones. Basándose en una revisión de casos empíricos y estudios experimentales, el ensayo se centra en las posibles aplicaciones de estos mecanismos en países de bajos ingresos.

Keywords:

• Labour and livelihoods
• Globalisation

Notes

A broad range of illustrative local price trends is available online from the Famine Early Warning Systems Network. See Sarris and Mantzou (2005) for a detailed study of Tanzanian regional maize markets, Stephens and Barrett (2008) for maize in Kenya, and Zant (2005) for an in-depth examination of Malawi's food-crop markets. Coulter and Onumah (2002: 330) cite average six-month wholesale price increases for maize of 80 per cent between 1994/5 and 1997/8 in African markets; see Byerlee et al. (2006: 277) for similar examples.

See Jayne and Jones (1997) and Jayne et al. (2002) for overviews of the history of marketing boards with a particular focus on African countries. Marketing boards in Kenya, Malawi, Zambia, and Zimbabwe, for instance, frequently import maize and then release it at a loss into local markets (Jayne et al. 2006: 336–7).

In a context of normal into-store prices of maize of around $90 per ton, Poulton et al. (2006: 345, 349) cite annual maize-storage costs per ton of $20 in South Africa; in Zimbabwe, these costs are between $30 and $60. Typical storage losses are 5 per cent per year in a well-managed store. Maintaining buffers is thus very costly, even without taking into account the opportunity cost of tying up large funds.

Several Asian economies have quite successfully stabilised rice prices, although – with the partial exception of the earlier experience of Indonesia's BULOG system – this success appears to have been bought at relatively high and escalating costs (Timmer and Dawe 2007).

Despite the high rate of participation in rice production of poor households in Asia, which might lead one to expect positive welfare implications of higher prices, Timmer and Dawe (2007: 5) report elasticities of poverty incidence with respect to the price of rice of between 0.32 and 0.45. In typical African settings, significant food-surplus production tends to be highly concentrated, with the vast majority even of rural households being net food purchasers or (semi)-subsistence producers: as such, they suffer from higher food prices (Stephens and Barrett 2008; Poulton et al. 2006; Jayne et al. 2006).

While there are benefits to local and hence specialised exchanges, complex operations such as futures trading draw upon scarce resources and require deep markets to be viable. Hedging can, however, be effected without local exchanges or even exchange-traded contracts on specific local markets as long as close-enough proxies for local markets exist: SAFEX maize, for instance, is a good proxy for Malawi's maize market (Zant 2005; Dana et al. 2006). UNCTAD (2006) presents a comprehensive overview of commodity exchanges, as well as a discussion of the pros and cons of establishing local exchanges.

Additional information

Notes on contributors

Leander Schneider

Leander Schneider is Associate Professor of Political Science at Concordia University, Montréal, Québec, Canada.