The Land Bank is lobbying government to implement subsidised insurance as a risk mitigation tool. Why has this become necessary?
Agriculture is a tough and unpredictable industry and the country’s food supply is dependent on our farmers staying in business. We simply cannot leave the agricultural sector to find solutions within the private sector only. When farmers have done everything they can, and the weather doesn’t come to the party, we need government support.
As weather patterns are only going to become more extreme, we need to prepare for these changes now. Thus, government must be involved in managing natural disasters through an insurance system. Without insurance, farmers, who suffer losses as a result of extreme weather, cannot continue farming.
Small-scale farmers find themselves in a situation where they either have to borrow money from relatives to keep on farming, which is not a long-term solution, or seek alternative employment. The fact is that many farmers do not have risk management plans that can carry them through disasters.
In response to this situation, the Land Bank has submitted a proposal to the Department of Agriculture, Forestry and Fisheries [DAFF] to enter into a public-private partnership with the state, insurance companies and reinsurers to provide emerging and commercial livestock and crop farmers with index-based insurance.
What is index- based insurance?
This is also known as weather insurance. It uses satellite images that track aspects such as degradation of vegetation and rainfall. Farmers are compensated for several hazards, such as droughts, floods and/or disease outbreaks.
Unlike compensation based on an individual claim, index- based insurance compensates farmers based on a transparent index, such as rainfall measured at a nearby weather station, and uses the same index and premium rate for all farmers in a specific area. It therefore does not need the services of claims assessors.
Do other countries, in and out of Africa, provide their farmers with subsidised insurance?
South Africa is the only country in BRICS, a group of five major, emerging national economies, that does not provide this form of insurance to its farmers.
The other BRICS countries – Brazil, Russia, India and China – already offer their farmers index insurance. Several other countries, including the US, Spain and Germany, amongst others, also have index insurance in place. In Africa, Kenya, Ghana and Rwanda have been very progressive in this area, and there is a lot South Africa can learn from its neighbouring countries.
What size farms will be eligible for insurance? How will subsidy allocations be calculated?
We want the offering to be flexible, as South Africa has about 400 000 developing farmers, and these subsidies must be accessible to these farmers. Therefore, any producer that farms on two hectares or more will be eligible for index-based insurance.
We envisage that the subsidies will work on a threshold basis, where farmers with a stronger balance sheet would receive less support than an emerging farmer. At the end of the day, we need to ensure that more people produce food, and to do this, more loans will be required.
How will subsidised insurance help farmers?
As more farmers would have access to insurance, production risks would immediately be lowered. It would increase the number of farmers who plant, which would lead to a better supply of commodities, as well as price stability, and make insurance of high-value crops more accessible.
Also, farmers are likely to innovate more if they carry less risk. Government support would also stabilise farmers’ incomes and improve rural economies.
This type of safety net for farmers would create renewed interest in the sector. Self- employment and job creation would increase. It could also unlock more value in the form of new investors. Furthermore, it would eliminate the need for ad hoc payments to farmers in the event of disaster.
When a calamity such as the current drought strikes, government, with good intentions, provides feed and inputs to farmers, but it would be better if we could manage such a disaster under an insurance system.
Should government decline the proposed agriculture insurance programme, what would the effect on industry be?
We must ask ourselves: what is the cost of doing nothing. Often we only talk about the losses suffered at farm level, but we must also calculate the impact of farm losses on the profitability of other agribusinesses.
Seed companies, fertiliser manufacturers, millers and processors all experience a decline in sales if farmers are not doing well. If farmers go out of business, the agricultural economy will shrink.
When can the sector expect a decision?
I think we’ll have to wait another two and a half years. National Treasury is leading the process to determine the feasibility of the proposal, and make a call on financial implications. We’re aware that the government has competing priorities and that the economy is under pressure.
Contact the Land Bank Insurance Company on 012 686 0500.
This article was originally published in the 20 May 2016 issue of Farmer’s Weekly.