Comment on the paper by J' Anderson, G' Feder and D'F' Larson, Policies and commodity price insuranc

1
Comment on the paper by J. Anderson, G. Feder and
D.F. Larson, Policies and commodity price
insurance for risk management by firms and farms

• Christopher L. Gilbert
• (University of Trento and CRMG (ARD), World Bank)
• 4 February, 2005

2
International Task Force for Commodity Risk
Management

• Established in 1999
• Public/Private sector partnership
• Members include international organizations,
  donors, researchers, practitioners, developing
  country clients
• 1999-2001 - feasibility assessments
• 2002 on technical assistance

3
Market-based risk management

• CRMGs mission is market-based risk management
  facilitation of the market intermediation of
  existing or new instruments to the commodity
  sectors of developing countries.
• facilitation because CRMG is not a provider
• intermediation because the problem is one of
  access
• markets because willingness to pay is the most
  reliable measure of value
• new as well as existing instruments because
  some markets may currently be poorly developed
• commodity sectors because they experience high
  revenue variability and CRMG has relevant
  expertise.

4
Type of Assistance

• CRMG provides training and education to local
  organizations to help them
• Identify and quantify commodity price risks
• Evaluate different risk management strategies
• Implement a risk management program and initiate
  pilot transactions
• No grants / funding involved
• CRMG is never a commercial counterparty to
  transactions
• Work is demand driven and responds to parties
  specific requirements

5
When will this work well?

• Where established free markets prevail with
  well-functioning rural finance, these markets
  will efficiently assess the costs and benefits
  associated with the intermediation of risk
  management instruments.
• In these markets, CRMG is unlikely to offer
  improved access unless it can provide subsidies.
• In countries with weak or poorly developed
  institutions, the costs of capacity building may
  be too large to justify in terms of the likely
  benefits.
• CRMG should work in intermediate contexts in
  which benefits are attainable but where markets
  are not currently providing these market
  development.

6
Examples

• Weather risk instruments are new, even in
  developed economies. CRMG can assist in the more
  rapid propagation of these ideas to the
  developing world. This may involve financing of
  the provision of weather records - a public good
  required by the market.
• Market liberalization newly liberalized markets
  often lack the knowledge and experience to make
  use of risk instruments. CRMG can assist in the
  transition process, ensuring continuity of
  indigenous institutions.
• Parastatal institutions continue to operate in
  many developing countries. Where these
  institutions are reasonably efficient, it may be
  preferable to assist them in evolving a market
  orientation than to campaign for their abolition.

7
Measuring value

• CRMGs costs are clear. How can value be
  measured?
• This is an important question CRMG needs to
  justify its costs to the World Bank Board and to
  donors.
• CRMG does not sell a product but facilitates
  others in so doing. It is in the business of
  public good provision.
• There will not be a single simple dollar measure
  of value. Instead, one should look at a range of
  indicators cost and availability of credit to
  producers, cooperatives and exporters, proportion
  of exporters who hedge, share of indigenous
  exporters.

8
Delivery to Stakeholders

• From the start, CRMG has focused on delivery
  local transmission mechanisms. How can access
  to market instruments be transmitted to the poor
  farmers?
• There needs to be intermediation farmers cannot
  buy risk management instruments directly few
  farmers do this even in rich countries and
  providers are not interested in retail provision
  for cost and regulatory (know your client)
  reasons.
• CRMGs primary efforts were devoted to
  cooperatives, but recently the focus has shifted
  onto banks.

9
Cooperatives

• CRMGs experience with cooperatives has not been
  positive, particularly in Africa.
• Cooperatives have an immense appetite for
  technical assistance, but are not good at
  standing on their own once the consultants have
  returned home.
• African cooperatives have time consuming decision
  making processes. There is insufficient
  delegation of authority to allow efficient and
  rapid decision making.
• Cooperatives are often weak on accounting,
  managerial skills, telecommunications and
  computing. It is optimistic to attempt to bring
  them up to best practice only on risk management.
  What is required is a more general strategy -
  beyond CRMGs remit.

10
Banks

• Banks are stronger and have the required skills.
• Most countries have one or two agricultural banks
  who are active lenders to the commodity sector
  providing input finance and/or working capital to
  cooperatives and other intermediaries.
• They are in a position to require their clients
  to purchase risk management instruments as a
  precondition of obtaining new loans or to obtain
  lower interest rates. CRMG can assist the client
  organizations.
• To the extent that bank clients do not hedge, the
  banks themselves have default exposure, and may
  choose to hedge this.

11
Example Cotton 2004

• Cotton prices fell steadily during the 2004-05
  crop year.
• Ginners make preseason price commitments to
  farmers.
• Cotton is fertilizer-intensive farmers purchase
  fertilizer on the basis of these price
  commitments.
• The fall in prices through 2004 have implied that
  ginners have been commited to purchase seed
  cotton above the eventual sale price of cotton
  lint. African ginners (coops, private and
  parastatal institutions) all failed to hedge and
  have all lost money. Agricultural banks have high
  exposure. Donor finance is now being sought.
• This could all have been avoided by hedging
  pre-season price commitments.

12
Do the Poor Benefit?

• The new CRMG model aims to reinforce
  intermediaries. It does not feed through directly
  to farmers, except in so far as farmers benefit
  from efficient intermediation.
• The CRMG model only provides offset for
  intra-annual price variation, not for
  inter-annual variation. It does not offer price
  stabilization.
• The main concern of farmers is the avoidance of
  low prices. CRMG is not offering this.
• Are there alternative models?

13
Alternative Models

• The emphasis on market based risk management
  grew out of the perceived failure of commodity
  agreements and price domestic stabilization. I
  take it that no-one wants to go revisit those
  approaches.
• There are severe limits on the extent that the
  private sector (banks etc.) can offer products to
  poor farmers.
• Can governments step in? Possibilities might
  include
• variable export taxes (governments can hedge
  revenues)?
• government-sponsored lottery-type insurance
  government acts as the retail intermediary
  bypassing regulatory constraints.