The potential for index-based crop insurance to stabilize smallholder farmers' gross margins in Northern Ghana

Context

Smallholder farmers in semi-arid West Africa face challenges such as weather variability, soil infertility, and inadequate market infrastructure, hindering their adoption of improved farming practices. Economic risks associated with uncertain weather, production and market conditions often result in measures such as selling assets and withdrawing children from school, resulting in long-term impoverishment. To break these poverty traps, there is a need for affordable and sustainable risk management approaches at the farm level. Proposed strategies include risk reduction through stress-resistant crop varieties and diversification, additional investments transfer options like crop insurance and contract farming. Despite experimentation with insurance products in sub-Saharan Africa, low adoption persists due to many factors including high premiums, imperfect indices, and cognitive factors.

Objective

The objective of this study is to assess the probability of two different index-based insurance products to stabilize smallholder farmers' income and limit asset losses in Northern Ghana using an integrated bio-economic modelling approach.

Method

We adapted an existing integrated bio-economic model comprising a process-based crop model, farm simulation model, and annual optimization model by including insurance contracts to assess their impacts on farmers' income and assets. We collaborated with an insurance service provider in sub–Saharan Africa to design and compare two weather index-based insurance contracts—one covering seeding costs and another addressing full input costs. Additionally, we considered the impact of management adaptations, such as replanting after crop establishment failure.

Results

The result from the study suggests that except for the most resource constrained, farmers would be better off purchasing seed insurance and replanting in the event of weather shocks, stabilizing their incomes and reducing the sale of their assets. These insurance options are less expensive than full weather index insurance for the resource-constrained farmers considering that extreme weather conditions do not occur regularly.

Significance

This study is significant for smallholder farmers in semi-arid West Africa, who are faced with economic and environmental challenges, challenging efforts to improve livelihoods. Focusing on Northern Ghana, the research assesses the viability of two index-based insurance products using an integrated bio-economic modelling approach. By presenting the probability of outcomes for income and farm assets, particularly through seed insurance incentivizing replanting after extreme weather shocks, the study offers a cost-effective solution for resource-constrained farmers. The results suggest the potential for weather-index insurance contracts to help smallholder farmers avoid bankruptcy or fall into poverty traps, especially after shock years.