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Prices and the Global Economy

How do I reduce the risk of losing money?

For the farmers affected, the consequences of disease, adverse weather, or changes in the price of crops can vary from small reductions in profit to utter devastation. Such prospects may put farmers off using high cost inputs. In the example given if the price of wheat is $200/tonne, the potential gain from using high value inputs is $80, against $50 for the lowest value input. But if the price of wheat is only $180/tonne the losses for the highest value inputs are also much greater at $60, against $20 for the lowest value inputs.

One way to address the problem of variable prices of outputs is for farmers to sell their crop on forward markets. If a farmer can guarantee to sell his crop of wheat for $210/tonne, then he has a strong incentive to use the high value inputs. Indeed, he may even be able to obtain a lower cost loan – enabling him to purchase the high cost inputs – if he can show that he has sold his crop forward at a profit.

To address the problem of adverse weather and disease, in some places farmers are able to purchase crop insurance. In Kenya, there is an insurance product called Kilimo Salama, which is available to farmers who purchase inputs. For a premium of 5% above the cost of the product, farmers are covered against some proportion of losses on their purchase of inputs caused by drought or excess rain (the proportion varies according to a formula that incorporates information about the severity of the weather).