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As farmers face an expected income-risk tradeoff, they can only obtain a higher expected income by increasing their exposure to risk. Many farmers choose low-yielding technologies (e.g., traditional varieties) with lower yield variability over high-yielding technologies (e.g., modern varieties) with higher yield variability. Farmers' lack of liquidity at planting time exacerbates the income-risk tradeoff by raising the cost of investing in modern varieties--hence, making yield uncertainty even more daunting.
The objective of this study is to assess the potential of a credit-insurance package to increase farmer adoption of modern bean varieties and complementary inputs (e.g., fertilizer) and thereby increase bean farmers' gross income in Honduras. The specific objectives are to: 1) assess if the change from a traditional variety to a modern variety is profitable, and if the change from a traditional variety package to a modern variety package is profitable, 2) assess farmers' exposure to price risk, perceived yield risk, and consumption risk, 3) identify how farmers currently cope with shocks, 4) evaluate the existing insurance policies for bean farms adopting modern varieties to observe the extent of risk transfer and load in excess of the actuarial fair rate, and propose alternative policies that improve risk transfer, and 5) assess the benefits of a credit-insurance package for bean farmers in Honduras.
The change from a traditional variety package to a modern variety package is profitable as it is shown with partial budgets together with the marginal income from fertilizer compared to its marginal cost. However, farmers face price risk at a level of approximately 20% coefficient of variation (CV) for both beans and corn, and a yield risk at a range of approximately 32%-34% CV for beans depending on the bean technology, and 32% CV for corn.
Currently farmers in Honduras are offered catastrophic crop insurance policies (i.e., coverages of 45%) with high loads to the premium (i.e., 3-5) that do not provide high levels of risk transfer, although it provides the means to grow another crop in case of a peril striking. Thus, farmers decide to mainly cope with shocks by working in another job besides their crop enterprise (50%), selling their assets (24%), and asking for a loan from friends, family or other person (14%).
Simulations, using a multiperiod stochastic model where households maximize expected consumption utility, were used to evaluate farmers' decisions on obtaining credit and purchasing crop insurance. Farmers' elicited probability distributions together with secondary data and expert opinion were used for specifying the stochastic element in the simulation.
Farmers under general conditions would be benefited by a subsidized credit-insurance package (i.e., load of 1.0) that enables them to change from a traditional variety package (i.e., low fertilizer and traditional seed) to a modern variety package (i.e., high fertilizer level and modern seed). The specific conditions in which insurance would benefit are when farmers are highly risk averse and do not need credit for crop production and living in villages with relatively high prices, or, moderately risk averse farmers that need credit in villages with relatively high prices. It is advisable to revisit the approach of estimating the yield probability distributions due to the problems encountered.