Insuring Ethiopians against a poor harvest

By Orla Ryan
BBC News website business reporter

Farmers act quickly when the rain fails and children are frequently taken out of school

For Ethiopian farmers, August is a crucial month.

If there is no rain, they sell what they have, rather than risk famine in the months ahead.

A firesale may insure farmers against the tough months ahead but leaves them with nothing, trapped in poverty.

The World Food Programme raised $600m to help Ethiopians during the 2002 drought, saving thousands of lives.

But the late arrival of aid money money can lead to millions of lost livelihoods, millions of people falling into "pool of those who need chronic assistance", the UN agency's head of business planning Richard Wilcox said.

We do not have to wait for crisis to go out and appeal to governments, (if), instead of waiting for it to happen, there is the way to make a steady contribution Richard Wilcox, World Food Programme

The WFP now wants to protect farmers, not just against the risk of starvation, but against the risk of chronic poverty. To do so, it needs to provide aid when the rain fails, not - as it currently does - when the harvest fails.

It plans to use weather derivatives, a sophisticated financial instrument, pioneered on Wall Street, and their use represents a shift in the thinking behind emergency aid.

Weathering the blues

Wall Street is a long way from the Ethiopian lowlands, both literally and figuratively.

But it is the multi-billion dollar market of weather derivatives that is providing inspiration for how aid agencies and the Ethiopian government can manage weather risk better.

Even in a good year, the WFP can spend $250m in Ethiopia

The profitability of several businesses depend on the weather - ice cream makers rely on a sunny July to boost their bottom line and even brewers say people are more likely to enjoy a cold beer when the temperature nudges a degree or two higher.

Weather derivatives can offer some protection - businesses sign a contract which triggers a payout if a certain temperature or rainfall level is hit.

Currently, the Ethiopian farmers carry the risk of bad weather but under the proposed pilot scheme, the insurer carries the risk of poor rainfall, paying out to the WFP when the rainfall hits or fails to hit a certain level by a certain date.

Storm brewing

The system is currently at a pilot stage and problems could emerge.

For a start, the insurer needs reliable rainfall data before it signs up to the contract.

As the WFP's Menghestab Haile points out, Ethiopia has more than 40 rainfall data stations and has been reliably measuring rainfall for more than 30 years.

However, many 'problem' areas don't have rainfall stations.

On top of that, setting the 'trigger' level for the contract looks set to be tricky, given the difficulty of establishing a reliable link between millimetres of rainfall and loss of livelihood.

Shift in mindset

Logical as the use of weather derivatives may appear for the WFP, their adoption represents a shift in the agency's thinking from an emergency mindset to one where risk is identified and managed.

"If there is a commitment to Ethiopia, we do not have to wait for crisis to go out and appeal to governments, instead of waiting for it to happen, there is the way to make a steady contribution," Mr Wilcox said. The scheme is just one of many that have sought to reduce smallholder farmers' risks in the developing world, by providing them with some financial protection from the weather.

About 10,000 farmers in southern India have now bought weather insurance from a local microfinance company, in a project designed by the World Bank which began in 2003.

The rainfall insurance contract, at a starting price of 450 rupees, has proved hugely popular with farmers, many of whom earn between $1 and $2 a day.

However, there is little evidence that the availability of insurance, and the increased certainty that that entails, is encouraging farmers to invest more in their crops. For the WFP's Menghestab Haile, the sheer fact of linking rainfall to livelihoods is an achievement.

"When we look at the Millennium Development Goals, at least more than 80% of the population are dependent on rainfall. If you don't start investing in them, you are not going to make any difference," he said.