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Examining Effects of Crop Price Insurance for Farmers in Ghana
Many small-scale farmers in the developing world face significant income uncertainty, and rural farmers who live from harvest to harvest don't have much room for error. Variables beyond the farmers' control, such as fluctuating crop prices, can make a significant difference in how much a family earns for the year. Farmers may be unwilling to take on additional risks by borrowing and making long-term investments due this uncertainty. Crop price insurance could help solve this problem, reducing the risk to farmers and providing them with encouragement to make investments in their farms. Lenders, too, may feel more confident in lending to farmers with greater income certainty, facilitating even more capital investments.
Researchers developed an agricultural loan product in coordination with MRB that had an insurance component that partially indemnified farmers against low crop prices. Borrowers were not required to pay any premium for the insurance product. The intervention targeted maize and eggplant farmers in particular because the crops are both commonly grown in the region and subject to volatile (but historically well documented) prices. For this project, Mumuadu employees approached community leaders to obtain a list of all maize and eggplant farmers in the village. The same community leaders then invited farmers to attend one of the bank's information sessions. Farmers on the list were randomly assigned to one of four groups, each of which received a variation on the Mumuadu marketing pitch. The four groups were:
Results
Take up of loans among farmers was quite high, with 86% of farmers in the control groups choosing to borrow and 92% of farmers in the treatment groups taking out a loan. This high takeup across both treatment and control groups made an analysis of the features that predicted take up difficult. In fact, the researchers found no systematic difference across the treatment and control groups when considering which features predicted borrowing. Overall, those who borrowed tended to be older, with higher scores on tests of cognitive ability. They were also more likely to have a record of previous borrowing. Apart from predictors of borrowing, researchers were interested in whether crop price insurance changed farmers' investment behavior. There is evidence that it did, but it is not overwhelming. The small sample and high takeup across both groups may have played a role in this outcome. Farmers offered the insurance spent 17.9 percentage points more on chemicals than those who had not been offered the product. Farmers offered the insurance were also between 15 and 25% more likely to bring their produce to markets rather than sell to brokers who come to the farm to pick up the crop. Anecdotally, it is believed that the so-called "farmgate" sellers offer guaranteed purchase contracts, but at lower prices locked in before harvest. Selling in the market, on the other hand, is a potentially more profitable but riskier option. There are a number of potential reasons why the researchers did not find large effects of the crop price insurance product on either takeup or investment, and further research is necessary to determine their roles. It is uncertain, for example, whether farmers truly understood the benefits of the insurance. Farmers may also have been reluctant to make long term investments changes before an insurance product demonstrates an established presence in the area. Alternatively, crop price uncertainty may not be as important of an indicator of investment decisions as previously thought. Further research, with a larger sample size, is needed to better understand the roles of risk, financial literacy, and product design in determining microinsurance impact.
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Project Overview
Researchers
Dean Karlan, Margaret McMillan, Edward Kutsoati, Chris Udry
Research Areas
Mechanisms Matter
Themes
Credit, Insurance
Research Questions
What is the impact of crop price insurance on farmers’ investment decisions?
Country
Ghana
Sample
Farmers in the Eastern Region of Ghana
Status
Complete |
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Research |
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