London School of Economics, Asia Research Centre, Working Paper 31, July, London Roger Montgomery, Rohandi and Rilus Kinseng (2010)

A field assessment of smallholder farming in villages of Nusa Tenggara Islands in Indonesia reveals the various forms of cultivation risks that farmers face and explores the various formal and informal risk mitigation strategies that they adopt.

Risks have always been an integral part of agriculture, more so now, with the phenomenon of climate change. The nature of risks involved in cultivation as well as suitable mitigation strategies, however, is not homogeneous but changes widely with geographical and organizational variations in farming. The study by Montgomery et. al. assesses the specific risks, and differentiates them from the more regular constraints, encountered by smallholder farmers in the villages in Nusa Tenggara Islands in East Indonesia. As part of the study, the authors also inquire into the several formal and informal measures adopted by the farming community for dealing with the risks.
           
The paper interrogates the risk and mitigation strategies of the small-scale East Indonesian farmers as part of an assessment study of the Program Nasional Pemberdayaan Masyarakat (PNPM) or National Program for Empowering People.

Smallholder Agribusiness Development Initiative (SADI), the new pilot programme launched under PNPM is examined in West and East Nusa Tenggara (NTT and NTB).

Farming risks are identified as those processes that have an occurrence probability of less than 1, while those with a probability of 1 is designated as constraints. Based on this criterion, three categories of risks, namely, yield risk, resource risk and price risk, are identified for the small farmers in NTT and NTB.

Yield risk is primarily caused by weather fluctuations and natural disasters like storms or drought, but also sometimes due to non-availability of (or inability to buy) crucial intermediate inputs. Resource risk emanates mainly from the unavailability of purchased inputs but also caused by lack of secure access to land, (unsettled ownership or un-guaranteed tenancy). The latter, being a major problem in East Indonesia, create hurdles for farmers in accessing institutional credit at favourable terms. Finally, price risk plays an important role in Indonesian agriculture as crop prices plummet during the short and uniform harvest season. Inadequate storage facilities leave farmers vulnerable to such price fluctuations. There is also an artificial depression of farm-gate prices, compared to the wholesale prices, orchestrated by a concentrated crop collection network taking advantage of information asymmetry among farmers.

The field study and focused group discussions with the farming community revealed that erratic rainfall was a major source of yield risk in both NTT and NTB.

While the annual rainfall between 1996 and 2005 was higher than the historical average of the past century, there is evidence of high fluctuations in rainfall during the onset months (December, January) and the tail-end months (March, April) of the rainy season. Delayed start of rainy season elongates the food shortage period by delaying planting of maize. On the other hand, early end of rainy season damage crops, leaving them drought-stressed. In both cases, farmer households are faced with declining food availability. The study found ample evidence that poverty incidence and malnutrition among children was more severe in Nusa Tenggara Islands compared to the national average.

Yield risks arising out of erosion and consequent loss of soil fertility was common to farmers in both regions. Rice cultivators in NTB also faced the risk the Tunggro Rice Disease while in NTT, fatal cattle diseases were more prevalent.

The other major risk that Nusa Tenggara farmers faced was that of falling into debt.

The study region was typically characterized by local moneylenders and ‘roving banks’ which provided farmer households, particularly women, with much needed cash credit. Access to institutional credit was low. The informal credit sources provided loans to farmers at their doorstep with minimum paperwork, but at exorbitant interest rates. The enquiry revealed that interest rates charged by the private moneylenders (Rentenir) ranged anywhere between 60-600 percent. With interest being collected daily, farming households easily slipped into enduring debt cycles, correctly identified by the authors as ‘negative equity’. Such risks actually transformed into regular constraints for farming when moneylenders eventually start controlling the cropping patterns and cultivation processes.

Formal risk mitigation measures like insurance did not work for agriculture in Nusa Tenggara due to usual problems like moral hazard and adverse selection and the difficulty to estimate agricultural risks accurately. Other formal risk-sharing arrangements that were operating with some degree of success were the PUSKUD Cooperative’s cattle fattening programme and the cultivation of peanuts by small farmers in contract with Garuda foods. The PUSKUD provincial cooperatives in NTT supplied farmers with young cattle for cattle-rearing, thereby not requiring farmers to make any initial investments and reducing risk considerably. Contract farming of peanuts have expanded enormously in Lombok Islands in NTB. Cash and input advances by Garuda Food, without reimbursement clauses in case of crop failure, acted as an in-built insurance against risks.

Farmers also resorted to some informal arrangements to ward off cultivation risks.

Lift irrigation from streams using pumps is becoming popular among farmers in NTT.

This enables them to deal with water shortages caused by irregular rains or cultivate maize twice, thereby reducing seasonal food insecurity. The study, however, notes that for lift irrigation to benefit majority of farmers, cooperative management of the expensive pumps (priced at 2.5 million Rupiah) are necessary.

The other effective measure that helped farmers to reduce price risks is the SMS price enquiry facility initiated by IFC. This provided information about prices in the destination markets to farmers and helped reduce information asymmetry and unwarranted exploitation of farmers by the crop collection networks. This facility is presently functioning only for maize and cacao and needs to be operational for other crops also in future.

Innovations in maize storage facility by using oil product drums, after thorough cleaning, allowed maize growers to store their harvests for a longer period. This helped in avoiding the low output prices during the harvest season to some extent as well as increased the availability of maize for household consumption. This reduced post-harvest crop loss significantly compared to the traditional smoking method.

Identifying the major risks faced by the small-scale farmers in Nusa Tenggara and the feasible risk mitigation strategies, the study recommends that formal/informal measures that have seen limited success needs to be supported strongly by the PNPM. The study also felt the need for the local programmes to work in closer cooperation with smallholder agriculture in order to significantly reduce various farming risks.