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IFPRI Weather-Securities Proposal Wins $100,000 Grant

March 30, 2010

Miguel Robles from MTID (front center) leads a group exercise involving weather securities in Ethiopia.

Ruth Vargas Hill and Miguel Robles, research fellows in IFPRI’s Markets, Trade, and Institutions Division, recently won a grant competition at the Marketplace on Innovative Financial Solutions for Development conference in Paris. Hill and Robles’s proposal on weather securities for rain-dependent Ethiopian farmers was selected from among 800 applicants as one of the five winners to receive a $100,000 pilot grant.

The Marketplace conference and competition focused on improving the use and channeling of development funds through innovative mechanisms; it was co-hosted by the Agence Française de Développement, the Bill & Melinda Gates Foundation, and the World Bank. The grant competition called for cutting-edge financial solutions to concrete development problems that could be scaled-up and replicated broadly.

“Weather Securities: Reducing Risk for Farmers,” Hill and Robles’s winning proposal, describes a system of simple weather securities with fixed payments created to protect rural farmers against the risk of erratic rainfall and drought. Farmers, traders, and others whose income is affected by drought purchase weather securities (or, tickets) that pay out based on objective cut-offs of reduced rainfall. The securities are not limited to particular crops but rather are designed around multiple crop needs. The system is simpler, more flexible, and more inclusive than traditional index-based weather insurance policies, which are designed for specific crops. While the project currently targets farmers in Ethiopia—in collaboration with Ethiopian-based Nyala Insurance S.C.—it can be expanded to benefit millions of other rain-dependent farmers.

The project, which began 18 months ago, developed from conversations with Ethiopian farmers about their individual rainfall needs. “We realized,” Hill explains, “that different farmers had very different rainfall needs depending on the crops they grow and the way they plant their crops. The fact that individual farmers within the same village and area are very different is something well known to researchers, but something we tend to forget.” With this in mind, Hill and Robles began “to design flexible insurance products that could meet the needs of individual farmers.”

“In this project, we propose a new approach to providing weather index-based insurance products to low-income populations by drawing on a theoretical foundation in financial economics,” Robles says.

The researchers will use the prize money to test weather securities in focus groups, train farmers to use the securities correctly and to their benefit, and invest in weather stations in Ethiopia.

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