Building resilience in the eye of the storm – Agriculture in the Caribbean and Central America

By 2050, the farmers of our world are expected to have to feed a staggering 9.8 billion people, up from 7.5 billion today. With fertile soils and a conducive climate, Central America and the Caribbean are uniquely positioned to supply farm products to growing markets worldwide. But the outdoor business of farming is exposed to many perils in the region: hurricanes, droughts, floods and storms, all of which are set to increase with climate change. So what needs to be done to harvest the economic opportunities that lie ahead? Find out on the following pages where the region stands today and what measures will ensure resilient and profitable farming in the Caribbean and Central America.

Preparing for a growing number of floods and droughts is clearly a first priority. Planting the right crops and managing them with new digital tools for precision farming are further essential measures for farmers to implement.

To establish climate-resilient operations, farmers in Central America and the Caribbean need access  to new tools, seeds and other input materials. And this requires support from governments, multilateral donor organisations, NGOs and the private sector.

Governments will not be able to shoulder the financial burden of adopting new resilient practices without additional support, however. Investors must be attracted,  and this is where the insurance industry can play a key role. Insurers pay out in the event of a lost harvest, for example, and thus assure lenders that their clients will remain solvent even if disaster strikes. This makes it easier for investors to finance the sector.

A resilient farming sector will help to diversify economies and make them more resilient against external shocks. It will also provide employment for many. This is especially important in countries with growing populations.

Insurers, governments,  NGOs, international organisations and other players in the sector have the risk management expertise to educate farmers on how to manage their operations in the future. We can all grow in this together – agriculture, insurance, finance and suppliers – making society as a whole more resilient not only with regard to food security but also in economic terms.

Call us to discuss how we can collaborate to make the key economic pillar of farming in the Caribbean and Central America resilient for generations to come.

El Niño brought no rain …

... to Honduras, Guatemala or El Salvador in 2014, nor was there any rain until March 2016.1 It was the worst drought in decades, stretching out over two consecutive years and leaving parched fields and empty reservoirs. Day labourers, subsistence farmers and the poorer population in general were hit particularly hard as food prices soared. Almost one in ten people were dependent on aid.

The drought was hardly over in 2016 when Hurricane Otto travelled straight across Central America from the Atlantic to the Pacific.2 This was remarkable as no hurricane had managed to cross Central America from one ocean to the next since Hurricane Cesar-Douglas3 in 1996. Hurricane Otto left a trail of destruction as it made its way along the border of Nicaragua and Costa Rica, claiming many lives, triggering mudslides and floods and causing havoc to the infrastructure in both countries. In Panama, the hurricane brought devastation to the agricultural and livestock industry.

Unfortunately, these two extreme weather events may well be a harbinger of things to come. The Intergovernmental Panel on Climate Change (IPCC) expects that a warming atmosphere will bring more extreme weather to Central America and the Caribbean in the coming decades.4 What does this imply for agriculture in the region, particularly considering that growing this industry will be key to food security, employment and diversification of the economies in the region?

Storm clouds on the horizon

Various weather model scenarios for the year 2100 predict hotter days and dryer conditions. In Central America and the Caribbean, precipitation is projected to decrease by up to 12 mm/day, depending on the global warming scenario. While a few isolated areas show an increase, the general trend is downwards.

Temperatures are set to increase by 2–9°C, depending on the given scenario. Here, the trend is more uniform across the region, as rain by its very nature is far more variable than temperature.

Drought is a key concern for the agricultural industry. The scenarios predict longer dry spells for the vast majority of the region, echoing the drought it experienced from 2014–2016. Dry spells are likely to become  more extensive, lasting up to 100 days, with only some minute areas being spared.

How weather patterns develop depends on the way El Niño and La Niña, the two big weather driving phenomena of the region, play out going forward. A study published in the journal Nature Climate Changein 2014 predicts a higher frequency of extreme events.6 However, the scientific community is still debating whether the events will actually manifest themselves as predicted in the paper.7 One thing is certain, though: we can expect to see more variability.

El Niño

The El Niño8 weather phenomenon creates challenges for agriculture on a global scale. It is associated with warm and dry conditions affecting farming operations with drought and decreasing yields in southern and eastern inland areas of Australia as well as in Indonesia, the Philippines, Malaysia and central Pacific islands, such as Fiji, Tonga and Papua New Guinea.

During the summer season in the northern hemisphere, the Indian monsoon rainfall tends to be less than normal in an El Niño phase, especially in the north-west of India, prompting a huge challenge to food security in this most populous country of the world.


 

The changes in atmospheric circulation associated with El Niño are of such magnitude and scale that the effects on the regional climate extend beyond the tropical Pacific basin. In a northern hemisphere winter, conditions are typically dryer than normal over south- eastern Africa and northern Brazil in an El Niño phase. In Africa, the phenomenon affects the local population directly, as many are subsistence farmers. Extensive droughts have a severe direct impact on food security on this continent. Meanwhile, in Brazil, agriculture is one of the main pillars of the economy, and declining exports caused by poor harvests have a direct impact. Brazil is also highly dependent on hydropower, meaning that industrial output can also suffer alongside that of agriculture.

By contrast, El Niño typically brings conditions that are wetter than normal along the Gulf Coast of the US, the west coast of tropical South America (Colombia, Ecuador and Peru) and from southern Brazil to central Argentina. In Brazil, these effects may not be sufficient to compensate for the decline in other areas of the country.

Parts of eastern Africa also tend to receive above-normal rainfall in an El Niño phase. However, similar to Brazil, this increased rainfall normally does not offset the negative effects in the south.

El Niño is associated with milder winters in north-western Canada and Alaska, as there are fewer cold air surges from the Arctic. This is the result of a vast low pressure region centred on the Gulf of Alaska and North Pacific Ocean.

La Niña

Another important aspect for the region is La Niña, the alternating counterpart of El Niño. La Niña triggers a rise in the number of hurricanes in the Caribbean and on the east coast of Central America.9,10 Models currently being discussed also indicate that climate change  will prompt a further increase in hurricane activity – which is alarming news indeed for exposed regions.

Tropical Storm Erika in 2015 is a good example of what may come. It wiped out 90% of GDP in Dominica, according to the World Bank.11 Within a matter of hours, wind and rain destroyed countless roads and bridges which will take five times the country’s standard annual investment volume to rebuild. For a small nation with only 700 000 inhabitants, this is an impossible task. And Dominica is not alone: other countries in the region face the same risk.

Dryer and warmer conditions hit the southern United States and Mexico as well as southern China. Dry conditions can prevail in eastern Argentina, Uruguay and southern Brazil as well as in northern Kenya.

Weathering the storms ahead for resilient societies

The trends we examined above already manifest themselves today in the “Long-Term Climate Risk Index”.12 It lists Honduras, Haiti, Nicaragua and Guatemala among the top ten of the most affected countries globally in the period from 1996 to 2015.

All of these countries are still developing, and, depending on the country, agriculture employs up to four out of ten people, which underscores the threat – but also highlights the opportunities.13

The fertile soils in the region offer great potential for agriculture – for staple crops to feed the local population as well as for flowers, coffee, fruit and other produce for growing middle classes around the world. Increasing the production of these in a sustainable manner will boost employment rates and both diversify and stabilise local economies – and with it society at large.

One in three people in the region live in the countryside, and more than one in ten work in agriculture. GDP agriculture grew by 1.5% in the last decade.

Insurers can help maintain and accelerate this process. They give private lenders the assurance that farmers will be able to pay back their loans even if disaster strikes. This will help to unlock capital to grow the sector, and free up scarce state resources to improve other aspects of resilience, such as infrastructure and public health facilities.

The insurance industry can also contribute to the region by sharing its global know-how from other countries where insuring farmers is already commonplace. This is important because the best thing beyond receiving insurance payouts is not to suffer any losses in the first place. We can also help by making decisions on where to invest and where to insure with the Economics of Climate Adaption methodology described below.

The Economics of Climate Adaption

To prepare for a future climate, decision makers are faced with the following questions:

  • What is the potential climate-related damage to our economies and societies over the coming decades?
  • How much of that damage can be averted, with what measures and where?
  • What investment will be required to fund those measures – and will the benefits of that investment outweigh the costs?

The Economics of Climate Adaptation14 (ECA) methodology helps to answer these questions. The methodology ensures that decision makers engage the right stakeholders, understand the impact of climate change  on their economies and identify actions to minimise the effects at the lowest cost to society.

The result creates transparency regarding the costs, benefits and effectiveness of a wide range of adaptation measures. It thus allows decision makers to select what makes most sense to them. Integrating adaptation with economic development and sustainable growth is another aspect decision makers can consider and examine for the right way of action.

These are large-scale, long-term measures. But our know-how does not stop here. Having gained experience from losses in agriculture over decades and across the globe, we have collected valuable findings that can be integrated into the way farmers run their businesses.

Climate resilient farm management

Growing insurance on virgin territory

Once active risk mitigation is exhausted,  insurance is there to help when disaster strikes. Many farmers around the world receive payouts if flood, hail, drought, storms or pests destroy their harvest. This enables them to plant for the next season, thereby keeping the economy going and ensuring food security in general.

As the figure below shows, the protection gap for natural catastrophe losses is large in Latin America, reaching USD 15 billion or more than 60% of the overall losses in 2016. While agriculture makes up only part of this figure, natural catastrophes invariably hit farmers, so it stands to reason that the protection gap in farming is at least as large as it is for the general economy. Protecting farmers in all areas of agricultural activity is therefore key.

Overall insurance penetration is very low, as the chart below shows. Insurance penetration in agriculture stood at a mere 0.04% of GDP in 2016. This demonstrates the huge protection gap in agriculture – and the opportunity to make economies in the region more resilient.

Coverage is not restricted to the plants in the fields. If greenhouses are damaged, there is insurance to pay for repairs; if aquacultures are swept away by floods, insurance helps to rebuild the dikes. And if livestock is affected by drought or disease, coverage is available to address  this issue.

The overview on pages 16–17 outlines how farmers today can be covered along the entire value chain. This holds true for all types of farmers. Index solutions, for example, provide affordable coverage for subsistence farmers. If these farmers make the transition to commercial farming – which is a must to respond to the needs of growing urban populations – they can opt for indemnity-based coverage, which offers protection on a more comprehensive scale.

 

 

Partnering for a more resilient world

Agriculture is a huge growth opportunity for farmers, farm suppliers, banks and insurance companies across Central America and the Caribbean. Tapping into this potential will have a stabilising effect on the economies in the region and thus help combat poverty. According to the World Bank, growth in agriculture is twice as effective in reducing poverty as any non-agricultural activity. By focusing on this area, societies follow a sustainable development path which will also make them more resilient to external shocks.

Given that the natural perils in the region are set to increase as climate change progresses, corresponding measures must be taken to provide better protection for farmers. Insurance reduces volatility in farmers’ incomes and in this way helps to make agriculture more attractive both for the farmers themselves and for banks and investors operating in the sector. Their income is ensured even if disaster strikes.

This approach is tried and tested in markets where insurance is already standard business practice for farmers. With their in-depth know-how of climate change  and loss prevention, insurers can also help to educate farmers and enable them to prepare for farming in a changing climate.

Tremendous benefits can be obtained by increasing insurance coverage among farmers, thus narrowing the wide protection gap in agriculture. Farmers, the insurance industry, local companies and governments can all harvest these benefits if they partner up now. At Swiss Re, we have in-depth underwriting expertise and dedicated agriculture experts readily available for knowledge exchange and client discussions. Contact us on swissre.com to discuss how we can collaborate on making farming in Central America and the Caribbean resilient.

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1 http://www.redhum.org/documento_detail/18219

2 http://www.nhc.noaa.gov/data/tcr/AL162016_Otto.pdf

3 http://www.nhc.noaa.gov/data/tcr/AL031996_Cesar.pdf

4 IPCC (2014). Climate Change 2014: Impacts, Adaptation and Vulnerability. Chapter 29 (p16). https://cdkn.org/wp-content /uploads/2014/08/CDKN_IPCC_Whats_in_it_for_SIDS.pdf

5 Projections of climate change  impacts on central America tropical rainforest Climatic Change (2017) 141:93–105  DOI 10.1007/s10584-016-1790-2

6 http://www.nature.com/nclimate/journal/v4/n2/full/nclimate2100.html

7 http://blogs.ei.columbia.edu/2016/02/02/el-nino-and-global-warming-whats-the-connection/

8 El Niño/ Southern Oscillation WMO http://www. wmo.int /pages/prog/wcp/wcasp/documents/ JN142122_WMO1145_EN_web.pdf

9 https://www.climate.gov/news-features/ blogs/enso/impacts-el-ni%C3%B1o-and-la- ni%C3%B1a-hurricane-season

10 https://www.climate.gov/news-features/ featured-images/global-impacts-el-ni%C3%B1o- and-la-ni%C3%B1a

11 http://www.worldbank.org/en/news/ feature/2015/12/01/dominica-lost-almost-all- gdp-climate-change

12 https://germanwatch.org/en/cri

13 http://databank.worldbank.org/data/reports.aspx?source=2&Topic=1#

14 Economics of Climate Adaptation, www.swissre.com/eca

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Title
Building resilience in the eye of the storm – Agriculture in the Caribbean and Central America
Authors
Christina Ribeiro, Isabel Camargo Ponce de Leon. Rodrigo Soares Rocha, Fernando Ham
Editing and realisation
Bernd Wilke, Giuseppe Rebuffoni
Data research
Swiss Re Institute Nadin Schweizer
Maps unless otherwise mentioned
Swiss Re Geo Services Divya Mishra
Managing editor
Urs Leimbacher
Layout
Swiss Re Corporate Real Estate & Services / Media Production, Zurich
Photographs
IStockphoto
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