Agro-biodiversity as natural insurance and the development of financial insurance markets

Farmers traditionally grow a variety of crops in order to decrease the adverse impact of uncertain environmental and market conditions. That is, they use agro-biodiversity as a form of natural income insurance. In this chapter, we study how risk-averse farmers manage their portfolio of agro-biodiversity to hedge their income risk from uncertain environmental conditions, and how this management decision is being affected by the availability of financial insurance. Obviously, the two options-natural insurance through agrobiodiversity and financial insurance from the market-are substitutes for risk-averse farmers (Baumgärtner 2007). So, the price of financial insurance has an impact on the level of agro-biodiversity cultivated on the farm for riskmanagement purposes: as financial insurance becomes cheaper, it drives out agro-biodiversity as a form of natural insurance.