DO SEASONAL CLIMATE FORECASTS AND CROP INSURANCE MATTER FOR SMALLHOLDER FARMERS IN ZIMBABWE? USING CONTINGENT VALUATION METHOD AND REMOTE SENSING APPLICATIONS DISSERTATION Presented in Partial Fulfillment of the Requirements for the Degree Doctor of Philosophy in the Graduate School of The Ohio State University By Ephias M. Makaudze, B.S., M.S., M.A. ****** The Ohio State University 2005 Dissertation Committee: Professor Brent Sohngen, Advisor Approved by Professor Timothy Haab Professor Mario Miranda _______________________________________________ Professor Carolyn Merry Advisor Agricultural, Environmental and Development Economics Graduate Program Abstract As smallholder farmers in Zimbabwe face inevitable drought, the need to develop drought- mitigation strategies and risk transfer mechanisms becomes an important and challenging task for policy makers. Rather than treating drought as a natural disaster that warrants emergency declarations whenever it strikes, countries in Southern Africa could alter their policy to embrace drought as an integral part of their national policy framework. Although drought cannot be eliminated, its impact can be reduced through implementation of pro-active and pro-poor risk management policy programs. This study explored two potential policy programs. One program proposes wide-scale adoption of improved seasonal forecasts by smallholder farmers as a drought mitigation strategy, and the second program proposes implementation of area-yield drought- indexed insurance as a risk-transfer and risk-protection mechanism for the smallholder farmers. To investigate whether adoption of seasonal forecasts and drought insurance is possible in Zimbabwe this dissertation explored three hypotheses: First, do seasonal forecasts really matter to smallholder farmers in Zimbabwe? Second, given the prevalence of food-aid in Zimbabwe, does drought insurance really matter for smallholder farmers? Third, given drought is a catastrophic risk, will a drought-index insurance scheme intended for smallholder farmers be viable and/or feasible? The first two questions were empirically investigated via surveys based on the contingency valuation method (CVM). More than 1,000 smallholder farmers were surveyed throughout Zimbabwe’s agro-ecological regions II-V where willingness-to-pay (WTP) for the proposed programs was elicited. With respect to the first hypothesis, results showed that for the improved seasonal forecasts program, estimated WTP (Z$) based on a single-bound model ranged from Z$2,427 to Z$4,676. For a double-bound model, WTP ranged from Z$2,532 to Z$4,225. A distinct differential pattern in WTP was observed across districts and natural regions, where ii households in wet districts revealed WTP that was consistently lower than those in drier districts. In fact WTP for households in natural region II was 36% and 30% lower than in regions IV and V, respectively. A similar pattern was observed for households in natural region III whose WTP was 17% and 9.3% lower than in regions IV and V, respectively. Because the perceived drought risk is more ominous in drier regions (IV and V) than in wet regions (II and III), households in the former are willing to sacrifice more for the provision of improved seasonal forecasts. With respect to the second hypothesis, results showed that in the presence of food-aid, WTP or rather potential demand for drought insurance decreases by more than 35% for households in regions IV and V, while for regions II and III it decreases by 10.6%. The results imply that disincentive to purchase insurance in the presence of food-aid is greatest in drier regions IV and V and least in wet regions II and III. Across all regions/districts the demand for insurance is likely to decrease by more than 20% in the presence of food-aid. Thus, food-aid will discourage farmers from seeking more efficient drought risk protection mechanisms such as formal drought insurance. With respect to the third hypothesis, results indicate that VCI showed appreciably high correlation with crop yields sufficient to consistently track yield losses and these results were fairly comparable with rainfall index. In addition, reasonable premium rates were recovered that are actuarially sound and inexpensive enough to attract participation of the rural poor. In as far as hedging against extreme drought events is concerned, a VCI-based contract could be sufficient. Basis risk becomes an issue, if the index is used to protect drought events of moderate intensity. iii Dedicated to my parents and my late sister EnRose ”….for God has other plans……” iv ACKNOWLEDGEMENTS I wish to thank my major advisor Professor Brent Sohngen, who was my pillar of support throughout my graduate school at OSU. I would also like to thank Professor Tim Haab who cultivated my interest in discrete modeling and contingent valuation method. Professor Mario Miranda provided invaluable support and guidance especially in agricultural insurance and risk modeling. Further, I want to thank Professor Carolyn Merry for motivating my interests in remote sensing and GIS techniques. I want to extend special thanks to Drs. Akin Adesina, Peter Hazell and Reneth Mano whose comments on earlier drafts gave more depth to this research study. I also owe gratitude to the following who helped me in various capacities: Dr Lovemore Rugube (Chairman, Department of Agricultural Economics,UZ) who provided office space and logistic support; Dr Kennedy Masamvu and Mr Blessing Siwela (SADC Remote Sensing Unit) who assisted in satellite data collection; Dr Leonard Unganai (Department of Meteorology) who provided meteorological data and Ms Charity Mutonhodza (Agricultural Research and Extension Services) who provided crop yield data. Special thanks go to my team of enumerators. I also would like to thank Dr Patrick Jeffers for proof reading some earlier chapters. I would like to thank my wife Tsitsi for standing with me through thick and thin. To my three kids, Minanayashe, Kuzivakwashe and Kunashe I say your hugs were sources of encouragement. I also want to thank family members and relatives in Zimbabwe for their prayers and love and special thanks go to Rev Elias Makaudze and wife and Mr B.and W. Mrs Chinemhute. Finally I want to thank the Rockefeller Foundation for financial support throughout my graduate study. Once again, God permitting, I dedicate to use my acquired expertise for the benefit of the rural poor in Zimbabwe and Africa. v VITA November, 11, 1964………………Born – Buhera, Zimbabwe 1987…………………………………………B.S. Agricultural Economics (Hons), University of Zimbabwe 1991-1993…..……………………………M.S. Agricultural Economics, Texas A&M University 2001…………………………………………M.A. Economics, The Ohio State University 1999—present………………………Rockefeller Fellow PUBLICATIONS Research Publication J. Phillips, E. Makaudze and L. Unganai. 2001 ‘Current and Potential Use of Climate Forecasts for resource-poor Farmers in Zimbabwe’, American Society of Agronomy, Impact of El-Nino and Climate Variability on Agriculture, ASA special publication. No.3, Vol. 63 E. Makaudze, D. Bessler and S. Fuller. 1998 ‘A Time series analysis on Zimbabwe’s Maize supply to the Grain Marketing Board’, Development Southern Africa, Vol. 15, No. 3, (Spring) E. Makaudze. 1997 ‘The challenge facing users of Methyl Bromide World-wide is to develop superior substitutes: What are alternative substitutes?’ Journal of Zimbabwe Tobacco, Vol. 6, No. 4 (April) FIELDS OF STUDY Major Field: Agricultural, Environmental, and Development Economics Minor Fields: Agricultural Insurance and Drought Risk Management vi TABLE OF CONTENTS Page Abstract………………………………………………………………………………………………………………………………………………………………………………..ii Dedication………………………………………………………………………….…………………………………………………………………………….iv Acknowledgements…………………………………………………………….…………………………………………………………………………..v VITA………………………………………………………………………………………………………………………………………………………………….vi List of Tables…………………………………………………………………………..……………………………………………………………………….x List of Figures…………………………………………………………………………………………………………………………………………………xii CHAPTERS: 1. Nature of Problem…………………………………………….……………………………………………………………………………….1 1.1 Background………………………………………………………………………………………………….……………………….1 1.2 Causes of Drought and its Impact on Zimbabwe’s Economy …………….....…..……………3 1.3 Early Warning Institutions and Drought Monitoring………………..……………………………..5 1.4 Review of Agricultural Policies in Zimbabwe…………………..…………………………………………7 1.4.1 Pre-Reform Agricultural Policies……………………………………………………………………………………7 1.4.2 Post-Reform Agricultural Policies…………………………………………………………………………………11 1.5 Lessons Learned………………………………………..……………………………………………………….……………..12 1.6 Defining the Problem Statement……………………………………………………………………………………14 1.7 Study Objectives………………………………………………………..……………………………………………………..16 2. Literature Review……………………………………………………………….…………………………………………………………..18 2.1 Remote Sensing and Drought Monitoring…………………………………………………………………..18 2.2 Agronomic Condition Assessment……………………………………………………………………………….21 2.3 Smallholder Drought Mitigation Strategies…………………………….…………………………………25 2.3.1 Inadequacy of Traditional Drought Mitigation Strategies……………………….. …………..26 2.4 Experience with Multiple Peril Crop Insurance……………………………………………………….27 2.5 Index-based Area-yield Drought Insurance……………………………………………………………….30 vii 3. Research Methods………………………………………………………………………………………………………….……………….32 3.1 Contingent Valuation Method………………………………………………………………………………………32 3.2 Adoption of Improved Seasonal Forecasts…………………………………………………..…………….35 3.3 Characterizing Demand for Drought Insurance………………………………………………………..36