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Innovative Methods to Manage Risk

Innovative Methods to Manage Risk: Futures Price Information for Farmers in India

 

Faculty: Shawn Cole (Harvard Business School), with Nilesh Fernando (Oxford University), and Stefan Hunt (Fellow, Center for International Development at Harvard University). 

 

Project supported by Empowerment Lab (funding the Fellow) and a BASIS/USAID grant for operations and fieldwork.

 

Background

Most of the world’s poor rely on agriculture for subsistence. The most vulnerable of these – small farmers and small traders – face difficult investment decisions, such as what to plant and where to sell, that have significant consequences for themselves and the economy. Providing access to price and market information as well as weather insurance can assist farmers in managing risks to their agricultural output and prices.  

  

Summary of Research

This project developed, offered, and evaluated innovative solutions to help farmers manage risk, make efficient planting decisions, and receive the maximum return on their investment. In this large, multi-year effort, researchers focused on three sustainable and scalable interventions for farmers:

 

• Weather insurance: this financial derivative linked to rainfall and marketed to poor farmers for as little as $2 per policy helps reduce risk of bad weather or a bad harvest

• Training and information about commodity futures prices: this empowered farmers to make decisions about which crops to plant and when to harvest and sell

• Mobile phones: these provided information about agricultural decisions (planting, application of fertilizer), as well as spot and futures prices.

 

Funding from The Empowerment Lab leveraged an existing research program, which studied the effect of price information posted on chalkboards in villages in Gujarat. Preliminary results suggested that farmers were not entirely satisfied with the generic board service. Researchers persuaded Nokia to donate 400 telephones, on the condition of hiring a graduate student to oversee the mobile phone intervention. A $20,000 grant from the Empowerment Lab funded doctoral fellow Stefan Hunt to manage the mobile effort to disseminate customized, timely, low-cost agricultural information directly to farmers. Researchers conducted a randomized controlled study in 108 villages in Gujarat, India, providing information and training to farmers and surveying the respondents twice per year on the effects of futures price information.

  

Implications & Impact
The research informs design and dissemination of market-based products that are accessible and attractive to rural households with limited financial literacy. Providing access to price information assists in risk management by informing planting decisions, reducing variability in the price received for goods, and ensuring farmers can best negotiate with traders. Financial liberalization, combined with efforts from development agencies and the private sector, will increase the range of products available to agricultural households around the world. It is important to understand the products and ensure that households obtain the education necessary to make informed financial decisions and manage agricultural risk.

 

Empowerment Lab funding allowed us to scale up our pilot programs, refine design, evaluate effectiveness, and communicate findings to policymakers. It also seeded collaboration with India’s National Commodity and Derivatives Exchange Limited (NCDEX), the Self-Employed Women’s Association (SEWA), and international groups to develop a product well-suited for poor households. Future plans include further development of training, including interactive games; expansion of the survey to understand farmers’ cultivation decisions; exploration of how information sharing between farmers influences decision-making; and broader communication of all of the learnings to policymakers in India and elsewhere.

 

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