Risk management in agriculture

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Agricultural Insurance in Latin America: Where Are We?

Paper prepared for the conference “Paving the Way Forward for Rural Finance”, June 2-4, Washington (2003)

This paper reviews the weaknesses of traditional crop insurance programs and highlights new developments, especially as they regard Latin America, that hold promise of making agricultural insurance more accessible, more efficient, and more sustainable. Risk is an unavoidable but manageable element in the business of agricultural production and marketing. Agricultural production can vary widely from year to year due to unforeseen weather, disease/pest infestations, and/or market conditions causing wide swings in yields and commodity prices. Table 1 provides a list of the types of risks common in agriculture. These wide swings in yields and output prices generate high variability in farmer household income. The uncertainty in future incomes complicates both short-term production and long-term planning, that is, whether to expand or reduce production, whether to invest in acquisition of fixed and moveable assets, whether to stay in farming or to exit. When the swings significantly reduce income in the short-term, there can be serious repercussions in the absence of effective risk management tools, especially when those swings are systemic shocks to the whole sector. The negative shocks, for example, can affect farmer’s ability to repay financial obligations and lead to a loan default. Lending institutions may then be less inclined to extend loans to this sector in general due to high probability of loan default. The inability to easily access external financing over times limits farmer’s abilities to expand, diversify, and modernize.

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