How profitable is adaptation to climate change?

Assessing drought and flood-resistant rice seed in Lao PDR

By Judson Peck

April 27, 2017 - As climate change impacts unfold and its effects intensify, investing in adaptation strategies that increase the resilience of agricultural production to climate change is crucial for millions of farmers. However, there are many social and economic barriers that prevent small-scale farmers in developing countries from making the necessary adaptation investments that will help them survive in a changing climate. Assessing the profitability of investing in adaptation strategies is an important method to identify potential barriers and is a critical consideration when trying to encourage farmers to invest. Increasing profit and lowering risk is a primary consideration for any investor, but is especially important for vulnerable populations already struggling to survive on two dollars a day to feed their families and send their children to school.

Case Study – Rice in Lao PDR
The United Nations Development Programme (UNDP) recently investigated this question of profitability using the case study of an adaptation project in Lao PDR supported by UNDP and financed through the Global Environment Facility’s Least Developed Country Fund. The project focused on supporting rural farmers in Lao PDR to adopt a new variety of rice that is resistant to weather extremes of both drought and flooding in order to reduce crop losses. A critical question in this context is whether the introduction of the new rice seed increased the profitability of their crops and what factors could promote or hinder such an investment. For development organizations like UNDP, understanding what these factors are and how to overcome them is crucial to support farmers in becoming resilient to climate change.

Methods – Determining Probabilities / Improving Accuracy
Data for our analysis was compiled from field demonstrations that planted the new rice seed in several communities across the country as part of the UNDP-supported Improving the Resilience of the Agriculture Sector in Lao PDR to Climate Change Impacts project. The new rice variety (called TDK) was developed through traditional breeding methods (not genetically modified) for drought and flood resistance by the International Rice Research Institute and the National Agriculture and Forestry Research Institute in Laos.

We compared TDK seed to the dominant rice variety (called CR) during Lao PDR's rainfed and irrigated growing seasons. The rainfed season relies on monsoon rainfall and is thus prone to drought and flooding depending on the timing and amount of rainfall. The irrigated season, in contrast, relies on a steady supply of irrigated water from the Mekong River to grow crops. This season is therefore less susceptible to climate hazards, but irrigation is expensive for farmers. As a result, only 12% of rice acreage in Lao PDR is irrigated, leaving the vast majority (88%) of rice production and the livelihoods dependent on it vulnerable to climate change.

In order to account for the fluctuation of yields and market prices over time in calculating profits, historical price and yield data from the previous decade was used to determine a more accurate baseline of CR profits. Yield data for TDK was based on three years of field demonstrations. These baseline parameters were used to extrapolate results in order to more accurately determine profits and their probability of occurring. In doing so, we provide a range of profits with their respective probabilities, rather than just the average profit.

Results – Profits Increase 78% on Average
Our analysis indicates significant increases in profits from investing in drought/flood-resistant rice seed. On average, profits in the rainfed season increased 78% from $277.49 to $492.36 per hectare from the previous seed variety (CR) to the new resistant seed variety (TDK) (Graph 1). The drought/flood-resistance of TDK seed thus has a profound positive impact on profits during the rainfed season.

TDK seed also generated slightly higher profits under irrigated (non-stressed) conditions. Average profits in the irrigated season increased 3% from $513.24 to $525.51 per hectare (Graph 1). This small percent increase in profits compared to the rainfed season is actually profound because stress-resistant varieties (TDK) tend to yield lower than non-stress resistant varieties (CR) under non-stressed growing conditions.

Probability Results – Profits Double 36% of the Time
In addition to determining average profits, our analysis calculated the probability of certain profits occurring, which provides a more detailed analysis of the profits farmers can expect to earn.

For example, the probability that TDK seed generates higher profits than CR seed is 71% during the rainfed season (Graph 2). Furthermore, the probability that profits are double is 36%. In addition, the probability of not making a profit was reduced from 16% for CR to only 1% for TDK. These probabilities further highlight the substantial benefit of TDK seed during the rainfed season.

During the irrigated season, TDK profits were greater 51% of the time (Graph 2). The few farmers that have irrigation may thus choose to plant the less expensive CR seed in the irrigated season given the likelihood of comparable profits.

In order to reduce the higher cultivation risks in the rainfed season, our results suggest that farmers should plant TDK seed since there is a 71% probability that profits are greater than CR seed, with the average profit 78% higher, and a 36% probability that profits are double. Although TDK seed was three times more expensive than CR seed, the substantial increase in profits during the rainfed season results in a large return on investment of $25 for every $1 invested.

Looking at it from a human development perspective, Lao PDR has made significant progress in reducing poverty over the past 15 years, moving from 39% in 1997 to 23% in 2012. However, climate change threatens to derail national efforts to reduce poverty. With improved profits during the rainfed season, farmers have the chance to break the cycle of poverty, and build more resilient income streams to feed their families and thrive.

Barriers and Potential Next Steps – Access to Seed is a Barrier
Several potential barriers were identified through our analysis for farmers to adopt the new resilient rice variety. Although the TDK rice variety increased the cost of seed, it remained the lowest expense at only 2% of total seasonal costs and thus should not be a barrier to farmers’ use. However, accessing the improved seed and lack of awareness about its existence and positive benefits may be barriers as it was only available in the capitol city. Governments and seed markets will play an important role in providing farmers access to the seed and educating them about its benefits. Adoption of drought/flood-resistant rice seed, such as TDK, is especially important because 88% of rice fields in Lao PDR are rainfed – making production highly vulnerable to climate change.

Conclusion – Adaptation is Profitable
The Lao PDR case study illustrates the benefits and challenges for small-scale farmers in developing countries to invest in climate change adaptation. Generating empirical evidence, such as this study – which shows that investing in adaptation can not only increase the resilience of agriculture to climate hazards, but also increase farmer’s profits – is critical for changing the mindsets of farmers and grabbing the attention of policymakers. It also helps identify barriers that governments then need to remove in order to give farmers the opportunity to invest in adaption strategies that are crucial to both food supply and livelihoods.

In order to facilitate the spread of adaptation strategies in Lao PDR and around the world, we must change the way we think about adaptation – realizing that it is not only vital to increase the resiliency of agriculture in the face of climate change, but can also be a profitable financial investment.

About the Author
Judson Peck, M.S. in Environmental Policy, is a consultant for UNDP’s Climate Change Adaptation Program. He interned with UNDP in Bangkok, Thailand and traveled to Lao PDR to conduct this research for his master’s thesis at Bard College’s Center for Environmental Policy in New York.