bundling drought tolerance & index insurance to manage drought risk

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Bundling Drought Tolerance & Index Insurance to Manage Drought Risk. Travis J. Lybbert & Michael Carter University of California, Davis Intl. Consortium on Applied Bioeconomy Research Ravello , June 2013. Three Basic Ideas. - PowerPoint PPT Presentation

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Bundling Drought Tolerance & Index Insurance to Reduce Rural Household Vulnerability to Drought

Bundling Drought Tolerance & Index Insurance to Manage Drought RiskTravis J. Lybbert & Michael CarterUniversity of California, Davis

Intl. Consortium on Applied Bioeconomy ResearchRavello, June 2013Finance, Agronomy and Food Security: Bundling Drought Tolerant Crops & Index Insurance Synopsis: Seasonal weather fluctuations directly and dramatically shape food security in developing countries. In many contexts, drought presents a major weather risk, and drought tolerant crop varieties have thus attracted widespread attention. But long-term farm and community security require protecting farms from the financial shocks of droughtno matter what crop is used. Index insurance has garnered enthusiasm as an instrument for reducing producers vulnerability to weather. This presentation argues that in many rain-fed agricultural settings neither agronomic innovation in drought tolerance nor financial innovation in index insurance is sufficient in isolation to provide protection for farmers. The true potential for achieving enduring security might only be tapped when technical innovation in crops is bundled with Index Insurance. In many settings, such an innovation bundle may improve small farm viability and rural community vitality.

1Three Basic IdeasRisk and vulnerability as experienced by poor households is often complex and nuancedReducing household vulnerability requires an appreciation of these complexitiesPromising agricultural technologies may be necessary but are rarely sufficient

We illustrate these ideas using drought vulnerability and drought tolerance

The (Historic) Geography of Drought

Sharedgeographic distributionclimate change is showcasing the shared drought concerns of rich and poor farmers (DT!)3Drought Vulnerability

Largely an Africa and S. Asia burden. The nature of drought in developing countries is very differentrequiring new thinking and appreciation.

UN estimates 1.5 billion drought vulnerable (and desertification). Drought the universal farmers lament is always with us! (like the poor in the bible). Climate change adds urgency to an existing risk/problem.

4Food Security Implications of DroughtWe often think of subsistence agriculturebut most vulnerable households are net food buyersThe drought burden in food security terms is as much a reflection of local and regional agri-food markets as it is small-scale agricultural production

5Implications for Sociopolitical Stability?Precipitation change 1971-2010 (Hoerling et al. 2011)

Dry and hotgetting drier and hotterExtreme or prolonged drought as a threat multiplier

6The Smallholder Drought BurdenDrought may be a universal lament among farmers, but spatial drought heterogeneity is massiveA pure subsistence burden is the exception rather than the rulePoorly functioning or missing credit / insurance markets therefore amplify drought vulnerabilityDrought events can harm the poor directlyAn obvious, ex post burdenThe threat of drought is like a bullyA hidden, ex ante burden Can outweigh the ex post burden!

7Bundling Agronomic & Financial Innovation to Reduce Drought VulnerabilityRecent innovation in both drought tolerance and index insurance Investments, hype, hopesome resultsIn isolation, each has a limitationDT cant tolerate extreme droughtFull DII may be too expensive for manyProperly bundling the two may help resolve these limitations due to a natural complementarity

8Ex Ante v Ex Post Drought Burden (Elbers et al. 2007)

Hidden ex ante burdenZimbabwe2/3 of the magnitude of the drought burden is hidden in the ex ante response. 9Interventions to Reduce Drought BurdenType ExamplesAcute ReliefFood aid and humanitarian aidRefugee security and supportCash transfers and vouchersAgronomicBreeding staple crops for better drought resistance and early maturityResource conservation and other agronomic practicesSupplemental irrigationExtension to promote adoption of improved inputs and practicesFinancialIncome diversification and livelihood support programsMicrocredit and savingsInsuranceInfrastructural & InformationalDams, canals and drainsImproved roads to reduce transport and transactions costsImproved weather information and climate models Better daily, weekly and seasonal weather forecastsDrought Tolerance

Longstanding breeding objectivewith new tools, renewed promise and high hopesMassive private sector investments from Pioneer, Syngenta, Monsanto and othersNew DT seeds being released

Field trials of new generation of DT crops exploded in early and mid-2000smany of these are now coming online.

Monsanto forecasts a 2020 market potential for its DroughtGard technology (trait) of $500 million.

USDA RMA pilot Biotech Endorsement offers a premium rate reduction on corn planted to specified triple stack GM corn hybrids. The pilot ran 2008-2011 (2012?), but is being cancelled this year due to low uptake. Because this is individual insurance, it requires monitoring at the farm level. The possibility of spot checks / audits by seed company reps, etc. is too invasive and complicatedfarmers worry about their insurance being cancelled due to minor compliance problems spotted during these checks. 11US Drought Tolerance ProspectsThe reported average DT maize yield benefit in U.S. in 2012 was 5-10 bu/ac (5-17%)This yield benefit is conditioned on drought severity and is therefore stochastic

Drought Tolerance For SmallholdersPublic research and development funding has prioritized DT in a big way in the past decadeDrought as the universal lament of farmersPublic-private partnerships (e.g., Drought Tolerant Maize for Africa, Water Efficient Maize for Africa, etc.)But rich droughts and poor droughts are not alike

* Sort of. Maybe. Sometimes.

*DT Benefits & the Nature of Drought

50 bu/ac is the 90th percentile of maize yield in Ethiopia!ModerateExtremeSevereModerateThe non-monotonicity of DT benefits implies that DT crops may do much less to lift the ex ante drought burden than one might thinkwith DT drought in the most vulnerable places will still be a bully!14Non-Monotonic DT Benefits Reduce Value of DT to Smallholders and Slow Learning (Lybbert and Bell 2010)

Index InsuranceChampioned recently as a promising alternative to conventional crop insuranceContract tied to index that is correlated with individual outcomes to dodge moral hazard and adverse selection problemsBasis risk and transparency tradeoffs A growing set of experiences and rigorous evidence suggests that it may reduce both the ex post and the ex ante drought burdenUnlike DT, drought index insurance payouts are monotonically increasing in drought pressure

Index Insurance ExperimentationRainfallChina, India, Malawi, Nicaragua, EthiopiaSatellite Mexico, Kenya, EthiopiaSatellite + RainfallEthiopia, Kenya, MaliArea-yieldPeru, EcuadorENSOPeru

Drought Index Insurance (DII) ProspectsWill smallholders pay actuarially fair prices?How sustainable will index insurance markets be?

In contrast to DT, the marginal costs of providing DII are highBeyond pilots public support for DII will be limitedFinancial and commercial viability critical for DIIPrice elasticity of demand for DII is thus criticalPrice has often limited uptake of index insuranceDT-DII ComplementarityNet Benefit

CAN this be animated?? Canvassearch online.19Calibrating a DT-DII Product: EcuadorRainfed, drought-prone maize production in Guayquil (2001-2011)Assume DT maize confers yield benefit of 20% at optimal drought, which fades with less/more severe drought pressureArea-yield index insurance product calibrated and priced according to historic maize yieldHow would a DT-DII bundle compare to DT and DII in isolation?Traditional v (Stylized) DT Maize Yield Distributions

Yield-Earnings Profiles

Whats a bundled DT-DII product worth?Ecuador Calibration ResultsLessons from the Biotech Yield Endorsement pilot of USDA/RMABundling with index insurance eliminates threat of audits and monitoring but other implementation challenges remainparticularly in developing countries

In SummaryAll farmers fear drought, but spatial heterogeneity implies important differences in the drought burdenDT crops may partially lift the ex post drought burden, but drought will continue to bully many poor householdsIndex insurance is promising but can be expensive and is harder than DT to sustain through public supportA DT-DII bundle may resolve these limitations now is the time to calibrate, experiment and evaluateImproving food security will require more than a technocentric build it and they will come approach must appreciate the smallholder perspective on climate change adaptation and associated risks

Good time to experiment with projected releases in the coming year or two or three!

Hidden drought burden: the conceptual advantages of DII (more reliable payoffs when needed) to reduce the hidden ex ante burdenthe bundle makes this advantage accessible to smallholders who otherwise get priced out of DII market!

Need big picture reflections on food security, farm and community viability, sustainability. 24Thank you25

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