Peter Book, Head of Agriculture, Asia Pacific
Food security exists when all people, at all times, have physical, social and economic access to sufficient safe and nutritious food that meets their dietary needs and food preferences for an active and healthy life.¹
Fundamentally food has to be safe, nutritious and available in sufficient quantity. On a global scale these are always achievable. It is at a country or smaller geographic territory-level where problems often arise. These concepts encompass the first part of the opening statement and relate to access:
• Physical: a sufficient quantity must be produced
• Social: the “correct” type must be available
• Economic: it must be affordable despite supply shocks.
What role can risk transfer play in influencing these factors?
Physical: Diversification versus specialization and optimization of investment.
Food production is inherently exposed to the vagaries of the weather and farmers constantly deal with its impact. While effective risk transfer cannot eliminate the impact it can help to mitigate it and, over the longer term, optimize production through two avenues:
• Diversification versus specialization: Without access to off-farm risk transfer farmers retain risk and affect their own risk management practices. One practice may involve diversifying across uncorrelated enterprises such as winter cropping versus summer cropping or animal grazing versus intensive horticulture. This requires a diversion of resources to each enterprise and prevents specialization, which in turn, reduces the opportunity for achieving economies of scale and maximizing return on investment.
While diversification may result in a wider variety of output, the total value of output is normally lower than what might be achieved under specialization. However, specialization increases exposure to the risk that a specific peril or event will reduce or destroy the total output. To reduce or eliminate this risk farmers need an effective means of off-farm risk transfer and this is where traditional insurance products have the greatest application.
• Optimization of investment: Minimization of investment may be used to reduce the risk of ruin if the enterprise(s) fails. This can be actioned in the following forms:
o Sub-optimum fertilizer application
o Use of retained seed instead of certified or improved variety seed
o Reduced disease and pest control methods
o Avoidance of improved strains of livestock
o Failure to utilize farm extension services
While these practices reduce financial exposure they also limit production and reduce the overall level of farm output.
Risk transfer products may alleviate farmers’ concerns about risk of failure and the associated loss of investment. The products may provide them with increased confidence to optimize the investments in their enterprises.
¹ Committee of World Food Security website, January 2014