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Agriculture Risk management in Uganda; Potential for insurance in smallholder farming


Product proposal by:

M anagi ng you r pe rs onal an d bu si ness ri sks !!

Plot 731/732, Mawanda Road PO Box 37414, Kampala T: +256 (0) 414 534351 W: Mr. R Kigemuzi, General Manager, M: +256 (0) 772 592799 E:

Neon Inc Ltd

Contact Persons
Mr. Mathias Kamugasho, Executive Development, M: +256 (0) 772 689 197 E: ug Mr. Joseph Ndiho Kiiza, Chairman, M: +256 (0) 712 500 031 E:

Introduction Can agriculture be profitable in Uganda? This is a common question asked by many entrepreneurs interested in agriculture investment. Equally important, are the money lending institutions that have failed to extend financial services to rural agricultural producers due to inherent risks associated with this sector in the country. Risks associated with agricultural production include drought, floods fluctuating market prices, pests and diseases among others. According to the recent Bank of Uganda financial book, 2009, agricultural risks are broadly categorized into two; business risks and financial risks. Business risks include production and market failure, institutional as well as personal risks. Financial risks in agriculture on the other hand include the different hazards that hamper cash flow in agriculture production. The current warehouse receipt systems used to acquire finances from lending institutions before sale of produce by farmers to avoid cash flow shortfalls can be categorized as financial risk management. On a more specific level, agriculture risks have been categorized as production risks, where a producer encounters reduction of anticipated production levels due to pests and diseases, low rainfall precipitation or flooding which affects overall crop potential. Such extreme variation in weather is attributed to climatic changes and has been pervasive in Teso sub region. Secondly, market/price risks which involve uncertainty of product or input prices thereby affecting the expected value of the harvest. Thirdly, institutional risks associated with government policies and regulations. These include changes in tax regimes, subsidies and custom laws as the case of East Africa customs union. Lastly, personal or human resource risks associated with managerial failure to achieve the set goals in farming due to illness. In Uganda, farmers have been exposed to one or more of the above risks with little help from institutions that are supposed to assist where it is necessary. Therefore, progress in agriculture development has been curtailed due to existence of such catastrophes. To improve food security and increase incomes of the rural poor, agricultural risks need to be minimized to give better margins in farming, create sustained investment in agriculture and harness incomes for
Plot 731/732, Mawanda Road, PO Box 37414, Kampala, UGANDA, East Africa Tel. +256 (0) 414534351; Mob: +256772689197/ +256712500031


rural producers. The answer to improved profitability in farming lies partly in insurance of risks beyond farmers control. Existing insurance mechanisms among farming communities Local Adaptations In order to avoid risks associated with agriculture or crop production, farmers have undertaken crop diversification whereby one manages more crops on the farmland that exceeds managerial capacity rendering him ineffective and maintaining a subsistence lifestyle. This has constrained the economy as many farmers remain averse to risks and killing innovations to agriculture resulting in cyclic web of poverty where low usage of improved input leads to poor yields and subsequently poor returns. No wonder Uganda has been reported to have the lowest input usage in the region which affects output potential of farmers. The second aspect of risk management in agriculture by smallholder farmers in Uganda is by investing in livestock. These unlike crop enterprises tend to survive temporally shocks in weather changes and can easily be converted into cash than crop enterprise. The other rather peculiar method is the dependence on extended families that exist in Africa cultural setting. This represents an informal mechanism where distant relatives assist the affected families with food or resources in times of need expecting to be helped in return when such catastrophes happen to them. These include elements of intermarriages where poor families tend to marry from relative rich families to forestall bad times. Existing Agricultural Insurance platforms Agricultural insurance covers are used to guard against losses in production due to associated risks emanating from nature beyond the farmers control. The policy can as well provide a cover for revenue loss due to unprecedented poor price encountered when there is over production. Bank of Uganda agricultural financial year book, 2009, highlights two existing mechanisms for risk assessment in agriculture as being traditional insurance and weather index based
Plot 731/732, Mawanda Road, PO Box 37414, Kampala, UGANDA, East Africa Tel. +256 (0) 414534351; Mob: +256772689197/ +256712500031


insurance, though, it mentions crop revenue insurance as being common in the United States of America. Traditional insurance method caters for covers associated with loss of production due to hailstorms, death of animals or wind breakage. This method is considered expensive as a result of high costs for assessment in determining compensation. In Uganda where majority of producers are small scale farmers with land area less than 3 hacteres, it is impractical for this method to be applicable over wider scale to make business sense. On the other hand, weather index based insurance has been considered to offer better alternatives as payouts depend on weather changes other than actual loss. For this method to be appropriate, functional weather stations close to insured farmers should be in place. In Africa, pilot projects have been successful in Malawi and Kenya where uptake of insurance has increased tremendously in the project areas. In Kenya as reported by the BOU financial report, a pilot project involving collaboration of UAP and Syngenta, Government of Kenya and Safaricom in 2009, 200 maize farmers in Laikipia district insured against drought resulting in 80% payout for the loss. The resultant effect has been a roll over to 5,000 farmers in Western and Central Kenya also being insured. New opportunities on the frontier In Uganda, the pilot under weather index insurance (WII) failed to take off in 2009 due to poor infrastructure in the meteorology department. The scope for business is abundant as ascertained by the Microensure and ILO in 2009 (BOU, 2009) in the Eastern, Northern and Western region for mainly cereal crops and export crops like coffee, tea and vegetables. As the pilot is being planned, steadfast insurers could venture into crop revenue insurance. The Realistic Opportunity for Uganda Despite being a rare occurrence on the continent, crop revenue insurance could prove as profitable and possible in Uganda. Considering the fact that producer organisations continue to be organized in groups by the National agriculture advisory services (NAADS) and development
Plot 731/732, Mawanda Road, PO Box 37414, Kampala, UGANDA, East Africa Tel. +256 (0) 414534351; Mob: +256772689197/ +256712500031


partners especially international and local NGOs. For instance, NAADS is reported to have over 80,000 farmer groups countrywide and other international NGOs like ACDIVOCA having over 4000 groups in Northern Uganda. Identifying progressive groups among these could provide a base line for piloting and rollout of this insurance policy. Implementation Initiation of crop revenue insurance will need collaboration of a multidisciplinary sectoral approach with partner ranging from NGOs, input companies, mobile telephone operators and financial lending institutions for it to succeed. The NGO will provide a platform for meeting and interacting with farmer groups. Trust setting is important in the initial phases, therefore the need for the NGO in the equation. The input companies will provide improved crop varieties to increase chances of survival of the enterprise. Secondly, for provision of proof that indeed the farmer bought seed and quantities utilized. Infotrade will provide information trends in the regions of operation to ascertain the probability and assessment of risk. Infotrade has been providing regular price updates on biweekly basis across major districts in the country, therefore, they form a major partner in this business. Uniform plot size in a farmer group (30 members) like an acre for maize would be considered and its anticipated yield estimated based on seed quantity planted as indicated in seed company records. Farmers would pool resources equivalent to say 10 % (or whichever value the Insurance company will give) of the expected crop value and send it through mobile money or any other suitable means. When the crop is harvested, prices in a given locality will be monitored on a weekly basis from a local price information gathering company and deviations considered after two or three months.

It should be noted that, this procedure is flexible and does not limit a farmers level of insurance. For instance, a farmer may decide to insure crop output from 5 acres, all that is needed is depositing of 10% of the anticipated outcome. However, it will be restricted by
Plot 731/732, Mawanda Road, PO Box 37414, Kampala, UGANDA, East Africa Tel. +256 (0) 414534351; Mob: +256772689197/ +256712500031


researched yield figures in the region and the area planted. Assessment will be based on figures found by input stockists as a means to estimate yield. For effective payout, remittance will be based on produce prices after two or three months of harvest. This period is considered adequate for evening out of prices that could be deflated due to excess supply experienced on the market during that time. Payments will be made where the observed market prices in the area fall below pre- agreed level and channeled through mobile money or banks. This will go a long way to enable farmers meet production costs, increase investments and fight food insecurity in the country. For instance, growing of Hybrid maize 7H results in yield of between 1500- 2500 Kgs/acre among farmers. If a farmer expects to sale at 350 shillings, an acre will result in Shs 600,000. The premium payable will be 60,000 shs per farmer per acre. For 30 farmers in a group will generate about 1,800,000 for a farmer group involved in maize production. To have a clear set target, WFP P4P 1 groups could be targeted in the initial phase, reason being they have clear records for amounts sold and price levels. Therefore, if a farmer group at the end of 2 months, a farmer group has not managed to receive Shs 350, and maize is due for selling, farmers will be compensated for the difference. Take an example of selling price being 250 and farmer sells 1400kgs instead of 2000 Kgs, then the difference in value would be shs 100/ Kg and equivalent payout of Shs.140,000 per farmer after 6 months of operations since planting. This amount will boost farmers by availing additional resources for investing in maize production suffice to mention the confidence that they will be guaranteed of some revenue to replace their initial costs. Limitations and way forward Poor infrastructure in the countryside affecting penetration of input stockists. This hampers accessibility of improved input by farmers and thus insurance to such groups. Once there is

P4P is purchase for progress of the World Food Program. A local purchase initiative of agricultural produce in Uganda Plot 731/732, Mawanda Road, PO Box 37414, Kampala, UGANDA, East Africa Tel. +256 (0) 414534351; Mob: +256772689197/ +256712500031


an organized way of dealing with farmers, the stockists would find their way into the un served farmer markets. Lack of production records among farmers given the poor reading and writing culture in the country. It is very possible that records are non-existent and not helping farmers in decision making. There are some farmers who have some level of records and there are donor agencies that can set up this collaboration to help farmers keep better records. Once a farmer sees value from keeping records, they will keep them. Weak farmer institutions in the country where their existence depend on political donations for survival. With this mentality, few groups would find it profitable to invest in insurance. The positive side to this is that once a section of farmers highlight the advantages of taking up such Insurance, the others will join in. Lack of technical skills and knowledge for training groups in insurance concepts and benefits. This training can be availed through the existing farmer organization groups. The potential for agriculture insurance from a revenue assurance angle is enormous in the country given the persistent changes in climate that affect crop output and returns. Weather Index based Insurance will still face some challenges due to the limitations of inexistent infrastructure in the implementing areas. What is critical is to have different stakeholders coming together to forge a way forward. Potential clients include, World Food program (WFP), International agriculture agencies, National agriculture advisory services (NAADS) and FAO. This is an opportunity to extend Insurance services to the largely untapped market in a bid to diversify from the usual insurance products that are offered on the market.

Plot 731/732, Mawanda Road, PO Box 37414, Kampala, UGANDA, East Africa Tel. +256 (0) 414534351; Mob: +256772689197/ +256712500031