Daniel E. Osgood

Economic Value of Seasonal Climate Forecasts for Agriculture: Review of Ex-Ante Assessments and Recommendations for Future Research

Advanced information in the form of seasonal climate forecasts has the potential to improve farmers’ decision making, leading to increases in farm profits. Interdisciplinary initiatives seeking to understand and exploit the potential benefits of seasonal forecasts for agriculture have produced a number of quantitative ex-ante assessments of the economic value of seasonal climate forecasts. The realism, robustness, and credibility of such assessments become increasingly important as efforts shift from basic research toward applied research and implementation. This paper surveys published evidence about the economic value of seasonal climate forecasts for agriculture, characterizing the agricultural systems, approaches followed, and scales of analysis. The climate forecast valuation literature has contributed insights into the influence of forecast characteristics, risk attitudes, insurance, policy, and the scale of adoption on the value of forecasts. Key innovations in the more recent literature include explicit treatment of the uncertainty of forecast value estimates, incorporation of elicited management responses into bioeconomic modeling, and treatment of environmental impacts, in addition to financial outcomes of forecast response. It is argued that the picture of the value of seasonal forecasts for agriculture is still incomplete and often biased, in part because of significant gaps in published valuation research. Key gaps include sampling of a narrow range of farming systems and locations, incorporation of an overly restricted set of potential management responses, failure to consider forecast responses that could lead to “regime shifts,” and failure to incorporate state-of-the-art developments in seasonal forecasting. This paper concludes with six recommendations to enhance the realism, robustness, and credibility of ex-ante valuation of seasonal climate forecasts.

Poverty Traps and Climate Risk: Limitations and Opportunities of Index-Based Risk Financing

The objective of this paper is to frame the key issues and summarize the current state of knowledge about and innovations in index-based risk transfer products (IBRTPs) as they relate to the management of climate risk for poverty reduction, especially of chronic or persistent poverty. In the past several years, interest in and experimentation with weather index insurance and other IBRTPs has grown rapidly. Though no one should expect that these innovations alone can solve the problem of chronic poverty, index-based financing opens up a range of intriguing possibilities. The remainder of this paper is comprised of five major sections that discuss: 1) how weather risks and climate shocks impact the poor in developing countries; 2) the concept of poverty traps, highlighting how conventional risk management strategies typically do not work well for managing covariate weather risk; 3) the limitations and opportunities of financial innovations using index-based risk transfer products (IBRTPs) for reducing or transferring weather risks and climate shocks; 4) a poverty traps-based typology of IBRTPs; 5) key remaining challenges in developing and implementing index-based risk financing for use in the global struggle to end chronic poverty.

Effectiveness of malaria control during changing climate conditions in Eritrea, 1998-2003.

Objective  To assess the effectiveness of impregnated mosquito nets, indoor residual spraying and larval control relative to the impacts of climate variability in the decline of malaria cases in Eritrea.

Innovations in climate risk management: protecting and building rural livelihoods in a variable and changing climate

We argue that more effective management of climate risk must be part of the response of the international agriculture community to the double crisis of persistent poverty and a changing climate. The most promising opportunities to adapt to climate change involve action on shorter time scales that also contributes to immediate development challenges. Climate risk management (CRM) combines systematic use of climate information, and technology that reduces vulnerability and policy that transfers risk. The cost of climate risk comes both through damaging extreme events and through forfeited opportunity in climatically-favorable years. Effective CRM therefore involves managing the full range of variability, balancing hazard management with efforts to capitalize on opportunity. We discuss several innovations for managing climate risk in agriculture, which have not yet been fully mainstreamed in international agricultural research-for-development. First, effective rural climate information services enable farmers to adopt technology, intensify production, and invest in more profitable livelihoods when conditions are favorable; and to protect families and farms against the long-term consequences of adverse extremes. Second, information and decision support systems synthesize historic, monitored and forecast climate information into forms that are directly relevant to institutional decisions (planning, trade, food crisis response) that impact farmer livelihoods. Third, innovations in index-based insurance and credit overcome some of the limitations of traditional insurance, and are being applied to pre-financing food crisis response, and to removing credit constraints to adopting improved technology. We present a typology of CRM interventions around the concept of dynamic poverty traps.

Long-term Impacts of Droughts on Labour Markets in Developing Countries: Evidence from Brazil

Abstract Climate shocks have well-documented impacts on the short-term welfare of rural households in developing countries. We investigate the impact of droughts on Brazilian labour markets. We find long-term rural wage losses beyond the immediate impact of the drought, with affected workers taking five years to catch up with their peers. Findings are robust to model specification. The severity of the losses varies with the dependence on agricultural income, supporting the notion of diversifying portfolio strategies in rural areas to reduce climate-related income risk.

Index Insurance, Probabilistic Climate Forecasts, and Production

Index insurance and probabilistic seasonal forecasts are becoming available in developing countries to help farmers manage climate risks in production. Although these tools are intimately related, work has not been done to formalize the connections between them. We investigate the relationship between the tools through a model of input choice under uncertainty, forecasts, and insurance. While it is possible for forecasts to undermine insurance, we find that when contracts are appropriately designed, there are important synergies between forecasts, insurance, and effective input use. Used together, these tools overcome barriers preventing the use of imperfect information in production decision making.

Quantifying spatial basis risk for weather index insurance

Purpose - The purpose of this paper to develop an empirical methodology for managing spatial basis risk in weather index insurance by studying the fundamental causes for differences in weather risk between distributed locations. Design/methodology/approach - The paper systematically compares insurance payouts at nearby locations based on differences in geographical characteristics. The geographic characteristics include distance between stations and differences in altitude, latitude, and longitude. Findings - Geographic differences are poor predictors of payouts. The strongest predictor of payout at a given location is payout at nearby location. However, altitude has a persistent effect on heat risk and distance between stations increases payout discrepancies for precipitation risk. Practical implications - Given that payouts in a given area are highly correlated, it may be possible to insure multiple weather stations in a single contract as a “risk portfolio” for any one location. Originality/value - Spatial basis risk is a fundamental problem of index insurance and yet is still largely unexplored in the literature.

Integrating Seasonal Forecasts and Insurance for Adaptation Among Subsistence Farmers: The Case of Malawi

Climate variability poses a severe threat to subsistence farmers in southern Africa. Two different approaches have emerged in recent years to address these threats: the use of seasonal precipitation forecasts for risk reduction (for example, choosing seed varieties that can perform well for expected rainfall conditions), and the use of innovative financial instruments for risk sharing (for example, index-based weather insurance bundled to microcredit for agricultural inputs). So far these two approaches have remained entirely separated. This paper explores the integration of seasonal forecasts into an ongoing pilot insurance scheme for smallholder farmers in Malawi. The authors propose a model that adjusts the amount of high-yield agricultural inputs given to farmers to favorable or unfavorable rainfall conditions expected for the season. Simulation results - combining climatic, agricultural, and financial models - indicate that this approach substantially increases production in La Nina years (when droughts are very unlikely for the study area), and reduces losses in El Nino years (when insufficient rainfall often damages crops). Cumulative gross revenues are more than twice as large for the proposed scheme, given modeling assumptions. The resulting accumulation of wealth can reduce long-term vulnerability to drought for participating farmers. Conclusions highlight the potential of this approach for adaptation to climate variability and change in southern Africa.

Bridging critical gaps in climate services and applications in africa

Sound climate risk management requires access to the best available decision-relevant climate information and the ability to use such information effectively. The availability and access of such information and the ability to use it is challenging, particularly throughout rural Africa. A gap analysis published by the International Research Institute for Climate and Society (IRI) and the Global Climate Observing System (GCOS) in 2005 explored these challenges in detail and identified four key gaps: (i) gaps in integration of climate into policy; (ii) gaps in integration of climate into practice at scale; (iii) gaps in climate services; and (iv) gaps in climate data. Though this document was published nearly nine years ago, the gaps it highlighted are still relevant today. In the last decade, IRI has been making efforts to address these critical issues in a systematic way through projects and partnerships in Africa. This paper describes IRI’s efforts in Ethiopia, a country particularly prone to climate related risks. Here we outline a creative solution to bridge the gaps in the availability, access and use of national climate information through the Enhancing National Climate Services (ENACTS) initiative. We then discuss how policy and practice has changed as a result of IRI engagement in the development of climate services in the water, public health and agricultural sectors. The work in Ethiopia is indicative of the efforts IRI is implementing in other countries in Africa and in other parts of the world.

Evidence of Demand for Index Insurance: Experimental Games and Commercial Transactions in Ethiopia

Abstract We present results of experimental games with smallholder farmers in Tigray, Ethiopia, in 2010, in which participants in the games allocated money across risk management options. One of the options was index insurance that was the same as commercial products sold locally. Participants exhibited clear preferences for insurance contracts with higher frequency payouts and for insurance over other risk management options, including high interest savings. The preference for higher frequency payouts is mirrored in commercial sales of the product, with commercial purchasers paying substantially higher premiums than the minimal, low frequency option available. This combined evidence challenges claims that the very poor universally choose minimal index insurance coverage and supports concerns that demand may outpace supply of responsible insurance products.