Ajai Nair is a Consultant with the Agriculture and Rural Development department of the World Bank

1. Ajai Nair is a Consultant with the Agriculture and Rural Development department of the World Bank • He is involved in both analytical and operational work at the World Bank in the area of microfinance and rural finance. • He has published papers on commercial banks and financial access, rural leasing, savings and credit groups, and financial cooperatives. • He currently advises three livelihoods projects in India and is leading a six country study on agricultural finance. • Ajai also consults occasionally for the International Fund for Agricultural Development. • Before starting to work with the World Bank, Ajai worked with DHAN Foundation and PRADAN, two leading NGOs in India, in their community-based microfinance programs. • Ajai has graduate degrees from the Princeton University in the US and Tamil Nadu Agricultural University in India.

2. Financing Agriculture: Risks and Risk Management Strategies Ajai Nair, Consultant, World Bank 3rd Agribanks Forum, theme ‘Africa Value Chain Financing’, October 16-19, Nairobi, Kenya .

3. What are the major risks agricultural financing? • Systemic/Correlated Risks • Production Risks –weather, pests, farming practice. • Price Risks – for inputs and outputs. • Political Risks – export bans, price caps, debt write offs • Idiosyncratic/Independent Risks • Willful default • Over-financing, under-financing, wrong pricing. • Life, Health, Asset

4. What is the impact of these risks? • At a proximate level, • Low availability of finance for farming and agribusiness. • Slow adoption of agricultural technology and private sector investments in agribusinesses. • Ultimately, • High volatility in household income / food security for households • Higher impact on low income households because of reduction in consumption and liquidation of assets.

5. What are the solutions? • Reduce / better manage Systemic and Idiosyncratic Risks • Development and improved access to seeds, farming practices and technology, agricultural development services. • Development and improved access to physical (forward sales, minimum price guarantee contracts, etc) and financial tools (insurance, derivatives) • Better credit-risk assessment and management by lenders.

6. World Bank’s work on Commodity Risk Management • Ongoing work • Price Risk Management: Options (Tanzania, Zambia, Mozambique, Malawi) • Weather Risk Management: Rainfall Index Insurance (India, Malawi, Ethiopia, Thailand) • Users: Governments, Financial Institutions, Producer Organizations, Agribusinesses, and producers. • Services offered • Policy advice • Technical assistance: Risk Assessment, Contract Design, Pricing, and Program management.

7. Experience so far: Price Risk Management • Price risk management products have been offered: • Product for intermediaries linked to financial services • Product for governments to manage food-security. • Pilot in Tanzania • CRDB, a local bank, has offered product tthrough coffee producer organizations and cotton ginning companies • Hedging helped coffee producer groups offer a higher purchase price to farmers • Demand for contracts has varied with rise and fall in commodity prices. • Better ability of bank and borrowers to manage price risk.

8. Experience so far: Weather Risk Management • Index based weather insurance offered as: • a stand alone insurance contract, • part of a loan package or linked to other services such as seed provision, and • portfolio coverage for a bank or lending institution` • Pilot in Malawi: • 3rd year of program development through NASFAM. • Insurance contracts helped ground-nut farmers use improved varieties as contracts enabled access to finance from MRFC and Opportunity International.

9. Lessons Learned: Price Risk • Data: Robust historical commodity price data needed to design good contracts. • Technical Skills: Local institutional capacity needs to be developed in price risk assessment (duration, volume) and accessing derivatives markets. • Institutions/Markets: • Presence of robust, liquid market in the specific commodity to transfer risks. • Local supply chain participants willing to undertake the significant investment in staff time and financial resources, and market the product and provide necessary education. • Link to finance critical for take up.

10. Lessons Learned: Weather Risk • Data: Good quality historical data required to design contracts and reduce basis risk. • TechnicalSkills: Local expertise in contract design, pricing, reinsurance, and program management are critical and must be developed. • Institutions/Markets: • Local insurer willing to take risk or intermediate transaction • Marketing organization able to market the product and provide necessary education • Link to finance critical for take up

11. In Conclusion… • Risks in financing agriculture involves not only production and price risks, but also risks to life, health, and assets. • Optimal production and price risk-management involves a combination of physical and financial tools. • There are no silver bullet solutions.

12. Contacts • Price Risk: Roy Parizat royparizat@hotmail.com • Weather Risk: Erin Bryla ebryla@worldbank.org