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Public Disclosure Authorized AGRICULTURE GLOBAL PRACTICE TECHNICAL ASSISTANCE PAPER Public Disclosure Authorized PARAGUAY AGRICULTURAL SECTOR RISK ASSESSMENT IDENTIFICATION, PRIORITIZATION, STRATEGY, Public Disclosure Authorized AND ACTION PLAN Carlos Arce, Jorge Caballero, and Diego Arias WORLD BANK GROUP REPORT NUMBER 93943-PY JUNE 2015 Public Disclosure Authorized AGRICULTURE GLOBAL PRACTICE TECHNICAL ASSISTANCE PAPER PARAGUAY AGRICULTURAL SECTOR RISK AssESSMENT I dentification, Prioritization, Strategy, and Action Plan Carlos Arce, Jorge Caballero, and Diego Arias © 2015 World Bank Group 1818 H Street NW Washington, DC 20433 Telephone: 202-473-1000 Internet: www.worldbank.org Email: [email protected] All rights reserved This volume is a product of the staff of the World Bank Group. The findings, interpretations, and conclusions expressed in this volume do not necessarily reflect the views of the Executive Directors of World Bank Group or the governments they represent. The World Bank Group does not guarantee the accuracy of the data included in this work. The boundaries, colors, denominations, and other information shown on any map in this work do not imply any judgment on the part of World Bank Group concerning the legal status of any territory or the endorsement or acceptance of such boundaries. Rights and Permissions The material in this publication is copyrighted. Copying and/or transmitting portions or all of this work without permission may be a violation of applicable law. World Bank Group encourages dissemination of its work and will normally grant permission to reproduce portions of the work promptly. For permission to photocopy or reprint any part of this work, please send a request with complete information to the Copyright Clearance Center, Inc., 222 Rosewood Drive, Danvers, MA 01923, USA, telephone: 978-750-8400, fax: 978-750-4470, http://www.copyright.com/. All other queries on rights and licenses, including subsidiary rights, should be addressed to the Office of the Publisher, World Bank Group, 1818 H Street NW, Washington, DC 20433, USA, fax: 202-522-2422, e-mail: [email protected]. Cover images from left to right: Andrea Pavanello, Milano; soy in drought-affected soil: CSIRO; drought-affected soil: Abriles; cow (from Paraguay). EXECUTIVE SUMMARY The present study was undertaken by the World Bank following a request by the Government1 of Paraguay and has an objective to identify, quan- tify, and prioritize agriculture risks, proposing solutions for reducing the volatility of agriculture output and incomes of family farmers. The meth- odology includes a two-phase process. In the first phase, risks are identified, quantified, and prioritized from the point of view of the supply chains and from an analysis of the public and private sector capacity to manage those risks. The second phase objective is to define the details of the solutions to reduce the exposure to the prioritized risks, proposing a strategy and action plan. Given that agriculture is a key sector of the Paraguayan economy (30 percent of gross domestic product [GDP] and 40 percent of exports), it is evident that agriculture risks have repercussions on economic growth (and its exports), public finances, and the development of agriculture supply chains and rural poverty. In particular, risks related to soy and livestock production have great importance in terms of growth and economic stability of the country. A significant drop in production and soy exports, as happened in 2011, has a significant impact in global economic activity, which has translated, during the first quarter of 2012, into a drop in agriculture GDP of 28 percent and in total GDP of 3 percent. But the study was not limited to the commodities of macroeconomic importance; it also analyzed the supply chains and agriculture commodities that are key from a social point of view in Paraguay, given that they involve a great number of family farms. A particular focus was placed in risks and crops that provide employment to the great majority of the rural population and that, to a great extent, ensure the national food security. Therefore, in addition to soy, maize, wheat, livestock, and rice, the following crops were included: sesame, cotton, sugar cane, cassava, and vegetables. Paraguay losses approximately $237 million on average every year, or 5.4 percent of agriculture GDP, due to production risks that could be managed along the main agriculture supply chains. In the years in which 1 Ministry of Finance (MOF) and Ministry of Agriculture and Livestock (MAG). Identiﬁcation, Prioritization, Strategy, and Action Plan 1-iii extreme events have occurred, losses have reached although their intensity varies as a function of climatic $1,000 million. This represents a negative shock that not conditions and crop management (monocropping con- only impacts the agriculture sector as a whole but also tributes to the development of diseases like rust and other other economic sectors. The recent study on volatility fungus). These events are generally controlled by agro- in Paraguay (World Bank, 2014), shows that the activi- chemicals or resistant varieties, and therefore the main ties most affected beyond agriculture are input provision, impact is due to the increases in production costs, which such as machinery, storage, and transport, but also other particularly affects family farming. sectors like construction and financial services, which suffer with agriculture shocks. In 2011, $920 million were The animal health problems like the foot and lost in soy alone. This drop in soy production produced a mouth outbreaks have had catastrophic eco- loss of several percentage points in national GDP. Also in nomic consequences. They have resulted in the almost 2011, due to drought, family farming incurred the follow- total paralysis of meat exports, resulting in the losses of ing losses: cassava, $94 million or 38 percent of value of foreign currency and fiscal resources. Its effects reach all production (VOP); sesame, $13 million or 46 percent of participants along the production chain. Paraguay suffered VOP; and cotton, $3 million or 26 percent of VOP. Esti- foot and mouth disease outbreaks twice in the past few mates of regional losses coincide with the supply chains years: The first outbreak happened in 2002 and the last with major production values (soy, maize, wheat) and with one in 2011. Currently, there is periodic vaccination, and cassava. The departments with the largest losses in value the Permanent Veterinary Committee of the Southern have been Alto Parana and then Canindeyu, Itapua, Caa- Cone and Panaftosa are monitoring the National Animal guazu, and San Pedro. The variability in the availability of Health and Quality Service (SENACSA). Weather risks, basic staples, mainly cassava and beans, has represented a like drought, floods, and frosts, also cause important losses permanent threat for food security of rural households. to farmers, but unlike foot and mouth disease, which can be mitigated with vaccination, extreme weather events Given the nature of the impacts and dimension have limited mitigation possibilities. of losses in the agriculture sector, it is clear that there is ample room to undertake investments in Prices of agriculture products from family farms, risk management programs. Paraguay could reduce like sesame and cotton, are subject to high vola- losses significantly and make an important contribution tility, which is directly transmitted to producers. to poverty reduction, stabilizing rural household income. In cotton, the significant domestic price fluctuation associ- ated with low productivity results have been progressively Production risks are the most frequent and of discouraging farmers and causing the decline of produc- greater impact in the agriculture sector of Para- tion in this crop. In soy, on the other hand, prices received guay. The most notable one, given global magni- by producers are subject to international price volatility tude of losses, is drought. In commercial farming, and a strong seasonal and interannual variation of price summer drought accompanied by high temperatures has differentials (specific price discounts for Paraguay in rela- a significant impact on soy, whereas maize, which is also tion to the prices in Chicago). But given the high level of relevant for family farming, is mainly affected by winter current prices, the volatility has resulted in relatively low drought and early frosts. The family farming crops, like impact on production decisions, although it does impact sesame, cotton, sugar cane, and vegetables, also suffer significantly the family farming cooperatives and low- from the impacts of recurrent droughts. Cassava, the main scale traders, who can lose significant resources due to consumption staple of family farms, is relatively tolerant changes in the differential between the selling and buying to water deficits and is only affected by severe droughts. of the commodity. Pests and diseases also impact production, Enabling environment risks are important for the although in general, they do not represent the agriculture sector of Paraguay, in part given its main risks. They manifest themselves every year, landlocked situation and for the past weaknesses 1-iv Paraguay Agricultural Sector Risk Assessment of public investments in basic infrastructure and institutional response that recognizes the importance of agri- technology. Both commercial and family agriculture are culture risks in the context of sectoral public

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