- Agriculture’s contribution to African economies remains phenomenal.
- Africa’s agricultural sector has always depended on weather and climate patterns.
- Agricultural insurance has been identified as an essential tool in assisting farmers, herders, and governments to mitigate some negative financial impacts of adverse natural events.
Risks in Africa’s agricultural sector
Developed countries have few farmers participating in agricultural production to meet global food demands. Conversely, a prominent trend in developing countries, particularly in Africa, is domination by smallholder farmers in meeting food security demands.
In Africa, the scarcity of economic opportunities outside urban areas obliges most rural dwellers to engage in agriculture. Agriculture’s contribution to African economies remains phenomenal. The smallholder farmer, however, appears to be less sophisticated and vulnerable to various risks in agricultural production, including production and weather risks.
These risks are due to unforeseen weather, disease, pest infestations, and market conditions, causing wide variations in yields and commodity prices. The type and severity of risks vary by crop, farming system, agroecological conditions, and policy and institutional settings.
Weather and climate change risks
Weather remains an essential factor in agricultural production but remains unpredictable. Climate change and variability has changed rainfall patterns and caused extreme events, including drought and floods. Consequently, farmers and their families must confront tragic crop failure, livestock mortality, food insecurity, displacement, and migration.
Africa’s agricultural sector has always depended on weather and climate patterns. However, climate change has recently made growing cycles more unpredictable. Africa has more than 50 million smallholder farmers. Since they rely on rainfed crops to feed their families, they have experienced these changes first-hand. For families who live season to season, a bad weather year can mean months of hunger until the next harvest.
Moreover, climate-related hazards constrain agricultural economic prospects, thus disrupting rural economies. This is particularly important given broader sector policy documents such as Agenda 2063, Comprehensive African Agriculture Development Programme (CADEP), and Sustainable Development Goals (SDGs) meant to promote food security and ensure zero hunger.
Consequently, droughts often result in lower crop productivity, while drought risk disincentivizes otherwise optimal investments in new technologies and modern farm inputs. And although risks to Africa’s agricultural sector reduce both the level and variability of income or consumption in the short run, they do so at the expense of constrained long-run economic growth.
Climate-related hazards can completely thwart efforts to boost Africa’s agricultural sector to address food security concerns. It is, therefore, imperative to have innovative ways of mitigating agrarian risks.
Also Read: Addressing cross-border Insurance in Africa.
Food security and economic concerns
Climate change has intensified food security concerns across Africa, where the Russia-Ukraine conflict and the pandemic added to food shortages and spikes in commodity prices. The weather-sensitive Africa’s agricultural sector has heavy import dependence, with the region importing nearly 85 percent of its food. While food imports offer a buffer to domestic shocks, inflation spurred by weather shocks in regions where imports are produced can pass on to consumers. Similarly, climatic events that raise transportation costs also pass on to consumers.
High food-import costs can erode foreign reserves and weigh on exchange rates, contributing to more rapid price hikes and cascading macroeconomic effects, including slower economic growth compounding the resulting rise in poverty and other human costs.
Against this backdrop, governments often try to rescue the situation by intervening in agricultural production and food distribution. Untargeted interventions could be more efficient by weighing on national budgets, inflating food prices, impeding competition, and reducing crop yields. For example, price controls, numerous and lengthy regulatory processes cause shortages by disincentivizing production, storage, and trade.
Mitigation strategies
Africa’s agriculture sector remains vital to socioeconomic growth, contributing between 20 per cent to 25 per cent of the continent’s GDP. However, the sector has persistently remained an “open roof” industry exposed to loss-triggering risks. These loss-triggering risks contribute to reduced food security in Africa. Therefore, finding appropriate risk mitigation and lasting solutions to raise production for sustainable food security in the continent remains a priority.
However, the penetration of risk management solutions in Africa’s agricultural sector remains low, despite the sector’s high vulnerability to destructive climate change, weather conditions, and market inefficiencies. But thanks to technological advancement and modern agricultural practices, various interventions have emerged to cushion Africa’s agricultural sector against risks and vulnerabilities.
Governments and other relevant stakeholders have stepped up investments in infrastructure, technological innovations, crop management practices, and financial and credit instruments. Unfortunately, most of these strategies are often unavailable or not feasible for many resourced, constrained smallholder farmers in developing countries.
The crucial role of agricultural insurance
The insurance sector has progressively curated products to cushion the different aspects of living, individuals and corporations. As such, agricultural insurance has been identified as an essential tool in assisting farmers, herders, and governments to mitigate some negative financial impacts of adverse natural events. Many countries have used insurance to help manage agricultural risks. The usefulness of agricultural insurance in risk mitigation is not in question.
Agricultural insurance can now provide the appropriate cushion to mitigate the impact of loss-triggering events on Africa’s agricultural sector and food security. Insurance companies offer timely and adequate financial compensation for sourcing food resources, eliminating dependence on government or donor assistance.
In the short term, insurance can help reduce food security concerns in Africa. When weather harms their crops, farmers will get reimbursed for a portion of their upfront investment in seeds and fertilizer, easing the immediate financial pressure of a poor harvest.
In the long term, insurance can increase resilience. Farmers who purchase hybrid seeds suited to their local climate reliably harvest more food. But many farmers are understandably nervous about spending money on high-quality seed if they fear a bad year. When farmers are confident of insurance coverage, they are more willing to try modern farming methods—a key to bigger harvests.
Government’s role in making progressive agricultural insurance policies
The idea is simple, but the challenge is scale. Insuring 50 farmers in a single village is risky because they will likely have similar harvests. But insuring 50,000 farmers in a more extensive area means the risk is more evenly spread, making it a better bet for insurance companies and more affordable for farmers. This is why governments’ support is so essential.
Progressive policies can create an essential incentive for agricultural insurance. In Kenya, for instance, agricultural budgets prioritize the farmers’ resilience to “climate shocks,” with a critical focus on insurance for smallholder farmers. This encourages insurers, traditionally focused on commercial farms, to add coverage options for the small-scale farms that produce 70 percent of Kenya’s maize. Rwanda and South Africa have also developed a policy to guide investments in agricultural insurance.
Subsidies can also help build demand. Since 2016, the Kenya Agriculture Insurance Programme has offered a 50 per cent insurance subsidy for smallholders growing maize and wheat, one of the first large-scale schemes in Africa. In Uganda, the government provides a 70 per cent subsidy for smallholder and commercial farmers.
Finally, education is critical. Given the low awareness of insurance in the region, farmers may be hesitant to buy insurance. Through sensitization campaigns, governments can explain how insurance works to build farmers’ confidence in the coverage.
Also Read: Risk fear affecting investment in Africa.
