Enabling Productive but Asset-poor Farmers to Succeed: A Risk Financing Framework,” World Bank Policy Research Working Paper 3211

Gurenko and Mahul examine how market-based risk financing instruments could enable asset-poor but productive farmers exposed to production shocks to engage in riskier but higher return agricultural activities. The financing of these exogenous shocks is addressed in a conceptual framework based on an optimal allocation of capital where the farm is viewed as a business unit. The approach allows for (i) testing the business viability of a specified crop by assessing the minimum business capital required to ensure the continuity of the business after the occurrence of an adverse production shock; and (ii) designing an optimal risk financing program to finance the minimum capital requirements using a combination of instruments (insurance, savings, and borrowing). The authors provide numerous numerical and graphical examples to illustrate the relevance of this financial approach to the specific issues of agricultural risk management