The key for us was to create a scalable crop insurance product that works.
Tete Mozambique, 2014.
Mrs Joyce Phiri could not believe her luck. Having struggled her whole life as a smallholder farmer in the remote rural areas of Mozambique, especially after her husband passed away leaving her with 7 children, she was finally making real progress.
Life as a farmer in this part of the world was not easy. Through hard work and perseverance, she had finally achieved her ambition to expand her field with tobacco and other crops for food. Tobacco was by now her main crop, bringing in much needed cash for the family’s needs. However, food had to be produced during the year to feed the family, and the corn she always planted was not growing so well. Poor seeds, lack of fertilizer, or bad weather and growing conditions all affected her production. Often, profits made from growing and selling the tobacco would go to buying the additional corn needed to feed the family.
Last year however, good quality high potential seeds and fertilizer had been made available not only for tobacco but also for corn as well. She had considered similar offers in the past but always declined. Typically, the input package was provided at credit, to be repaid with the sale of the product after harvest. That was all very well for tobacco, which would be sold anyway and with a decent profit even in the bad years. However she was very reluctant to do this for corn when she could barely produce enough for the family, especially in bad years. So, if there was a drought, she would not only need to buy extra food to feed her family but would also have to repay the debt on all of the inputs, such as seed and fertiliser.
The difference this time was that the seeds and fertiliser came with added features: no repayment obligation in the event of drought or crop failure, and the immediate availability of new seeds in case of early crop failure during the season. It also meant that if the crop failed she would not have to pay back the loan, and would still be able to get the high potential seeds and fertiliser that she needed for the start of the next season.
She had long debated the case with her neighbors, especially as she had been told that the occurrence of drought and crop failure would be measured by satellite, which sounded a bit fishy! However, the satellite had accurately pointed out the bad years of 2001 and even 1994, when the drought had been very local. So she had decided to take the offer, unlike her less adventurous neighbors. What swung it was that she was fed up with always just scraping by, and this new offer seemed worth a go.
And it paid off! With the improved seeds and fertiliser, the crop had really thrived. It had been something of a learning process. For instance, she was told not to put five seeds in one hole, and to space the plants further apart than usual, but a bit of advice from the technical advisors had worked miracles.
Now, while her neighbors had harvested the usual 14 bags, Joyce had done a tremendous 49! This was 2-3 times more corn than she had ever managed to grow before in her life. She had already sold two-thirds of the harvest on the local village market since she only needed a third for her family, and after paying off the loan, there was enough left over for school fees and to buy a sewing machine, one of her longest standing dreams. With this result, she had even convinced her brother (who had left to try his luck in Maputo, without much success) to return home and help expand the farm.
Smallholder farmers in tough ecological and logistical environments such as those in parts of Africa, often lead marginal lives because of a vicious circle of subsistence agriculture and poverty. Lack of capital leads to lack of basic investment (e.g., in good seeds, fertilizer or irrigation systems), which in turn leads to minimal production output and lack of profits. Often this causes the rural population to quit their risky farming existence, and to leave for the cities (usually the slums) in the search for a better life.
Attempts have been made to help farmers break this vicious circle, but too often the uptake of debt finance to fund basic crop inputs has not happened. Usually this was because funds were not available in time for the planting season. More importantly, farmers were reluctant to risk their livelihood by taking out loans with the possible occurrence of drought, crop failure and unpayable debt.
The solution could lie in crop insurance. This would guarantee the farmers forgiveness of debt in the occurrence of crop failure due to adverse climate conditions, and reduce the repayment risk for the lender. If the loans and the appropriate input package could be provided in time for planting, along with sound basic agronomic advice on best farming practices, farmers could escape the vicious cycle of poverty in one season.
The key for us at Cardano Development is to create a scalable crop insurance product that works. Many other existing pilots provide the product in a way that is hard to scale up, using subsidies to solve high operational costs. We believe that index insurance, triggered by highly precise satellite data and measurements at affordable costs, is the first part of the solution.
The second part is that the product can only be properly managed by the buyers of the crops that are already in contact with the farmers and who can provide the necessary advice as well as the relevant inputs such as seeds and fertiliser.
Finally, as with any good product, the devil is in the detail. Finding the right measurement point to trigger the insurance payout requires a skilled understanding of the crop. In addition, pricing the product properly requires professional insurance skills and understanding. Coin Re, the Cardano Development vehicle for this product, has coordinated the efforts of a number of players in a successful pilot for 17,000 smallholder farmers in Mozambique. They are now ready to take this product to scale globally.