Enabling Productive but Asset-Poor Farmers to Succeed : A Risk Financing Framework

This paper examines how market-based risk financing instruments could enable asset-poor but productive farmers exposed to production shocks to engage in riskier but higher-return agricultural activities. The financing of these exogenous shocks is addressed in a conceptual framework based on an optimal allocation of capital where the farm is viewed as a business unit. The approach allows for (1) testing the business viability of a specified crop by assessing the minimum business capital required to ensure the continuity of the business after the occurrence of an adverse production shock; and (2) designing an optimal risk financing program to finance the minimum capital requirements using a combination of instruments (insurance, savings, and borrowing). The authors provide numerical and graphical examples to illustrate the relevance of this financial approach to the specific issues of agricultural risk management.

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Bibliographic Details
Main Authors: Gurenko, Eugene, Mahul, Olivier
Language:English
en_US
Published: World Bank, Washington, D.C. 2004-02
Subjects:RISK MANAGEMENT, AGRICULTURAL INSURANCE, FARM INCOME, CROP INSURANCE, FINANCIAL INSTRUMENTS, AGRICULTURAL ECONOMICS, AGRICULTURAL MANAGEMENT, POVERTY, FARMERS, FOOD & AGRICULTURE ORGANISATION ACTUARIAL SCIENCE, ADVERSE SELECTION, AGRICULTURAL ACTIVITIES, AGRICULTURAL BUSINESS, AGRICULTURAL PRODUCTION, AGRICULTURE, ANALYTICAL APPROACH, AVERAGE YIELDS, BANANAS, CAPITAL MARKETS, CAPITAL REQUIREMENTS, CATASTROPHE COVERAGE, CATASTROPHES, CATASTROPHIC RISKS, CDF, COCOA, COMMODITY, CONCEPTUAL FRAMEWORK, CONTRACTUAL SAVINGS, COVERAGE, CREDIT, CROP, CROP ROTATION, CROP YIELD, CROP YIELDS, CROPS, DEBT, DEFORESTATION, DISASTERS, ECONOMIC CONSEQUENCES, EXCHANGE RATES, EXPECTED RETURN, FAO, FARM, FARMER, FARMING, FARMS, FEASIBILITY STUDIES, FERTILIZERS, FINANCIAL PERFORMANCE, FINANCIAL RISK, FINANCIAL SECTOR, FINANCIAL STRUCTURE, GOVERNMENT INTERVENTION, GOVERNMENT SUBSIDIES, HERBICIDES, INCOME, INSURABILITY, INSURANCE, INSURANCE COMPANIES, INSURANCE MARKETS, INSURANCE PREMIUMS, INSURANCE PRODUCTS, INSURERS, INTEREST RATE, INTEREST RATES, LIQUID ASSETS, LIQUIDITY, MARGINAL PRODUCTIVITY, MARKET RISK, MORAL HAZARD, OPERATING LOSSES, POLLUTION, POOR FARMERS, PRICE RISK, PRODUCERS, PRODUCTION COSTS, PRODUCTIVITY, PROFIT MARGIN, PROFITABILITY, PROGRAMS, REINSURANCE, RESERVES, RISK MANAGEMENT POLICIES, RISK TRANSFER, SAVINGS, SOCIAL SAFETY NETS, SYSTEMIC RISK, TRANSACTION COSTS, VALUE ADDED, WEALTH,
Online Access:http://documents.worldbank.org/curated/en/2004/02/3916582/enabling-productive-asset-poor-farmers-succeed-risk-financing-framework
https://hdl.handle.net/10986/14743
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Summary:This paper examines how market-based risk financing instruments could enable asset-poor but productive farmers exposed to production shocks to engage in riskier but higher-return agricultural activities. The financing of these exogenous shocks is addressed in a conceptual framework based on an optimal allocation of capital where the farm is viewed as a business unit. The approach allows for (1) testing the business viability of a specified crop by assessing the minimum business capital required to ensure the continuity of the business after the occurrence of an adverse production shock; and (2) designing an optimal risk financing program to finance the minimum capital requirements using a combination of instruments (insurance, savings, and borrowing). The authors provide numerical and graphical examples to illustrate the relevance of this financial approach to the specific issues of agricultural risk management.