Farmer and Farmers’ Associations in Developing Countries and their use of Modern Financial Instruments

This paper begins by noting that since the beginning of the 1990s, with the liberalisation of commodity trading and pricing in developing countries and countries with economies in transition, the burden of risks has been shifted from Governments to farmers. In most of these countries, farmers, previously largely insulated from the day-to-day vagaries of the world market, now bear most of the brunt of volatile and unpredictable prices. The paper also suggests that when farmers receive prices that are unstable and uncertain, they run price risks from the moment they decide to plant a crop, and every time that they buy and apply inputs such as fertilisers or pesticides, or use paid labour. Furthermore, farmers’ associations too may run price risks: if they advance their members credits which are to be reimbursed through future deliveries of crops, they run the risk that, at the moment that the crop is sold, prices have fallen to levels too low to enable loan reimbursement.

Following this, the paper argues that whilst risk management markets are not a panacea for farmers’ problems – they do not exist and are never likely to exist for all commodities, and can only give temporary reprieve from a secular fall of prices – they could, nevertheless, greatly help developing country farmers to improve their lives. In addition, the paper points out that transfer of price risk is not the only facility that financial mechanisms and techniques can offer to farmers. Financial techniques can also be used to reduce farmers’ counterparty risk – to shift the risk of lending from the farmer (a credit risk) to the crop (a performance risk).

This paper looks at the practical applications of “new” financial techniques for enabling farmers to manage price risk and facilitating their access to credit. The first chapter provides an overview of farmers’ attitude towards risk, and the possible role of farmers’ associations in helping farmers cope with price risk and in facilitating agricultural financing. The next chapter describes various applications of financial techniques for price risk management and agricultural finance. The final chapter focuses on possibilities for farmers’ associations to enhance their use of these techniques, including through the use of modern communication and information technologies.

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