A Brief Analysis: Agricultural Smallholders in a Developing World

This paper analyzes the critical role of smallholders in global food security and the technological and environmental risks they face in developing nations. By evaluating ACRE Africa’s Weather Index Insurance, it highlights how data-driven microinsurance can mitigate climate-related losses, while no

Introduction

Employment in agriculture is trending downwards globally yet it remains a primary, if not the sole, source of income for many families in most low-income countries. According to World Bank data, high-income countries have an average agriculture employment rate of about 3%, while low-income countries have a significantly higher rate of approximately 58% (World Bank, n.d.). This highlights the significant role low-income countries play in ensuring global food supply and food security.

Smallholders—small-scale agricultural producers, often family-driven, who cultivate and produce crops and/or raise livestock on land ranging from a few acres to a few hectares—oversee more than 80 percent of the approximately 500 million small farms globally, making them vital to food production worldwide (International Fund for Agricultural Development, 2013).

The role of smallholder agriculture goes beyond low-income countries; they are also vital in the EU, OECD countries, and in developing nations like Brazil, India, and China, which have transitioned to "middle-income" status. It’s important to note that the challenges faced by smallholders are not the same across these countries and that investing in smallholder agriculture is crucial globally, not just in low-income countries (HLPE, 2013).

The contribution of smallholders to global food supply shows significant variation across studies, possibly showing that the definition of what a smallholder is may vary, likely in regards to the farms size. For example, Ricciardi et al. (2018) estimate that smallholders produce between 30% and 34% of the world's food, while Giller et al. (2022) suggest their share to be as high as 50% to 70%. Despite challenges in analyzing these global figures, a 2011 report from the International Fund for Agricultural Development (2012) highlights that over 2 billion people rely on support from approximately 500 million smallholders, underscoring their critical role in the world. This significant role is not just part of global food security but also plays a crucial part in reducing poverty. By providing livelihoods for millions of families, smallholder farmers strengthen local economies and enhance the resilience of rural communities (International Fund for Agricultural Development, 2013).

This paper will examine how the production process works and eventual technologies smallholders might use specifically in developing countries, while exploring the risks they face and also evaluate a microinsurance product designed to mitigate one of these challenges.

The Stages and Technologies of Agriculture

According to Iversen et al. (2021), the production process typically consists of several key stages starting at the preparation- and production stage and ending at the processing and sale stage. Each stage is vital for ensuring a successful yield and output and can involve various traditional and modern technologies.

During the preparatory stage, smallholders determine what crops to grow, when to plant them, and where to cultivate them. This stage is vital for the farm's future output, with seed selection being one of the most critical decisions they will make. Farmers must also evaluate factors such as seed costs, yield potential, and weather conditions during this phase (Badiane et al, 2019). During this phase, land preparation may involve various tools, ranging from hand tools to animals, or even machinery (National Agricultural Advisory Services - Agriculture in Uganda, 2020), though in sub-Saharan Africa some 60% of the farms are worked without any animals or machinery, and therefore use only human labor and tools powered simply by hand (www.farmsahel.org, 2019).

Recent innovations in agricultural technologies have however made it easier to have a tractor prepare the soil or do other tasks on the farms, at least in some countries, thanks to sharing-apps spreading, “Hello Tractor” being one of them. Other innovations “range from SMS weather alerts and mobile apps offering credit, seeds and machinery to more advanced solutions such as precision farming, which uses satellite, drone imagery and soil sensors to provide real-time data on crop health” (Bhalla, 2021).

Once the preparatory stage is complete, the farm transitions into the production stage, which involves planting, monitoring, and harvesting the crops. A key resource during this stage is water (Iversen et al, 2021), and potential risks related to water shortages will be discussed later in this paper.

Finally, in the last stage, smallholders will either process their harvest or sell it in its raw form (Iversen et al, 2021). The way in which smallholders access markets vary, either the smallholder can sell its products directly on local markets, or they might involve other third-parties such as intermediaries, retailers and traders. Furthermore, “access to markets and the need to obtain bargaining power often play a catalytic role in triggering collective organization of farmers” (HLPE, 2013).

Risks Faced by Smallholders

Agriculture is the main global consumer of water resources and accounts for about 70% of global water usage (International Fund for Agricultural Development, 2013). One technology that addresses water supply and management is various techniques of irrigation, the process of supplying water to crops to assist in their growth, especially in regions with limited rainfall. Many of the poorest areas struggle with limited water resources, which severely impacts agricultural productivity(Badiane et al, 2019) and highlights the urgent need for better water management and investments in technologies targeting this issue has never been clearer (International Fund for Agricultural Development, 2013).

One of the biggest risks smallholders’ faces today is therefore water-related, along with changes in temperature and growing seasons, which greatly impact agriculture. These environmental shifts can promote the spread of pests and plants like insects, persistent weeds, and diseases (Sutanto, 2023). These events can leave farmers with less or without income unless properly insured, as the paper will point out later.

Another significant risk is market fluctuations and price drops. This can however be overcome in various ways, either through contract farming, which is an agreement made in the preseason, or when connected to private and public actors, arrangements include also fair trade schemes (International Fund for Agricultural Development, 2016). Arrangements like these are not often seen and only around 10% of farmers in the developing world are likely to adopt them (International Fund for Agricultural Development, 2016).

To list all of the risks that smallholders face is not possible in this paper as it includes everything from issues as simple as illness to more difficult topics such as weak governance or civil insecurity. One thing is clear however, smallholders in developing countries see significant challenges such as the lack of access to affordable financial products, low usage of technologies, and limited access to market value chain (Tinsley and Agapitova, 2018).

Insured vs. Uninsured

Another key risk is that farmers in developing countries tend to be uninsured. A study by Merry et al. (2024), covering 36 countries including countries such as Rwanda, Nigeria, Sri Lanka, and Ecuador, found that approximately 10% of farmers “were insured through an agriculture, aquaculture, or livestock insurance product”. The number of uninsured farmers stands at a staggering 1.5 billion in the developing world that live in smallholder households with fears of their uninsured risks (UKRI, 2021). Farmers without insurance tend to have lower profits than their insured counterparts, as they tend to invest less in the farm and instead engage in expensive mitigation strategies to prevent or reduce loss; it also makes them more likely to sell livestock or assets in the event of any loss. (World Bank Group, 2018).

Some of the reasons as to why many farmers are uninsured include low financial literacy, lack of economic power to buy insurance or the fact that reliable insurance simply does not exist. As for reasons why insurance firms may not want to provide insurance include reasons such as unreliable or unavailable data on weather patterns or a lack of historical data of previous yields (World Bank Group, 2018).

Looking at a specific Insurance Product: Weather Index Insurance

In this paper I take a closer look at a specific microinsurance product designed for farmers, and evaluate the advantages and disadvantages. For this paper, the company ACRE Africa was chosen, and their product: Weather Index Insurance. ACRE Africa have a presence in various African countries such as Kenya, Rwanda, Tanzania, Zambia and Nigeria, providing risk management solutions aimed at eliminating the stress and potential damage of climate-related losses. They currently have over 3 million farmers across Africa insured, highlighting their strong presence in these countries (ACRE Africa, n.d.).

The Weather Index Insurance utilizes advanced technologies to monitor weather patterns in specific regions. They then compare this gathered data with historical averages in order to pinpoint what is called the normal weather in this region. The farmer can then pick and choose from different types of plans and tailor these to whatever needs they might have, such as insuring specific phases in the production. This insurance is also simple as there are no individual assessments made for any specific crops. Payouts are then made by the insurance company whenever the weather goes beyond the agreed upon normal weather range (ACRE Africa, 2024).

As these insurances are built around and rely on data, the need for field visits are avoided, keeping the plans cheap for the farmers, and also makes payouts quick and automatic (ACRE Africa, 2024).

An analysis of the Weather Index Insurance

As with any financial product, The Weather Index Insurance has both advantages and disadvantages that merit careful analysis before formulating whether or not it is good or bad. The advantages are quite clear, as these are the ones the company uses in their marketing to sell and promote their product. Notably, the data-driven approach not only keeps prices low but also allows for a more objective assessment of risk. Another significant advantage is the quick and automatic payouts, which can provide farmers with rapid liquidity in immediate need for financial support during crises and also minimizes any bureaucratic delays. Additionally, the flexibility in tailoring insurance plans to meet specific needs empowers farmers to address their own unique circumstances.

However, despite the potential benefits and advantages of the Weather Index Insurance, several disadvantages can hinder its effectiveness and further adaptation among farmers in developing countries.

One of the risks noticeable would be the availability and accuracy of the weather data. As discussed previously many areas might have limited or unreliable data and a lack of historical data. This issue might render the insurance faulty or ineffective, or even unavailable.

Another risk in relation to this specific insurance is its limited coverage, it does not protect against any of the risks that may arise from specific weather anomalies, such as pests, prolonged market volatility, soil contamination, or crop diseases. The narrow focus of just using weather data, and having protection against shorter periods of extreme weather might leave the farmers facing new and uninsured risks which could impact the stability of the farm in the long-term.

In Conclusion

The disadvantages of this specific insurance underscore the necessity for farmers to engage in thorough risk management before committing to, at least this specific insurance policy. While the Weather Index Insurance provides significant advantages, its limitations must be carefully evaluated, as they can leave critical risks uninsured. Additionally, the observation that insured farmers generally fare better than their uninsured counterparts emphasizes the potential benefits for governments and private actors in ensuring the existence of effective insurance policies to address the risks that smallholder farmers face.

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