South African commercial and smallholder farmers are exposed to an environment that is not always conducive to crop production
. As climate change affects our production ability and food security becomes top of mind for many it is imperative that all stakeholders become involved in the safeguarding and management of this vital resource.
For more than a decade discussions have been ongoing about the potential for a public private partnership to build a suitable and viable agricultural insurance model for South Africa. The priority populations for a possible intervention that have been identified are commercial farmers in the grain production areas as well as smallholder farmers in the grain, oilseed and livestock value chains.
Our agricultural sector cannot be seen in isolation and one needs to take cognizance of not only our own National Development Plan but also the United Nations Sustainable Development Goals for 2030. In the absence of insurance subsidy support from Government the negative impact of climate change on farmers’ profitability, sustainability, competitiveness and potential uncontrolled food price hikes following the occurrence of droughts as we have seen over the last few years is obvious.
The South African Insurance Association (SAIA) has done a lot of work over the last few years on putting together a cohesive and structured solution for this sector. Work has been done and discussions had with various stakeholders and it is incredibly positive to see the various players’ commitment to the sector and finding a solution. A comprehensive look at similar interventions in the rest of the world and a study of various models from across the world have informed the local solution. We have certain differentiators in the South African environment that differentiate us and need to be borne in mind. Key to the success of the plan will be the commitment of Government to supporting and funding the proposed solution.
At the beginning of June the latest proposal from SAIA was presented to the government and we now await the outcome of this submission. One appreciates that the wheels turn slowly and there will no doubt be a process of evaluation and negotiation. What is heartening is that the initiator of these discussions more than a decade ago is also now the newly appointed minister of Agriculture, The Honourable Didiza. This bodes well as she has long been a proponent of such a solution and we are positive that this will expediate the process as she understands the sector and the imperatives.
The challenge with any such a proposal is that it is not an immediate silver bullet. The ideal timeline objective of the proposal is a 10-year view to the solution. The actual implementation will take time and there are still some realities that need to be considered when planning the subsidy tenure. Examples of these are that the index offering proposed for smallholder farmers is new to South Africa and would require a minimum of five years to gain early stage traction for adoption by the smallholder farmers and time for the insurers to pilot the offering. Climate change is a rising phenomenon challenging the sustainability of the sector and this threat increases year on year. Small scale farming needs to grow exponentially as a hedge against food insecurity.
In essence the proposal is to create an entity that will be the vehicle through which farmers can access this insurance. This vehicle will consist of both public sector and private companies and essentially be the insurance administrator for the scheme. Farmers will have access to the product and the premiums will be subsidized by government.
Currently there is a definite unwillingness by both commercial and smallholder farmers to insure their crops and based on the Accenture Report of 2018 the following have been the dominant reasons:
Not making enough income from production
Insufficient number of Livestock to insure
Lack of money to purchase any insurance
Lack of trust of insurance schemes
Reliance on own capital for protection against risk
Sources of risk are manageable without insurance
A lot of work will need to be done to educate the market on what the products entail and this is also borne out by the International Labour Organisation (ILO) who have developed guidelines on consumer education interventions for farmers to understand index insurance. Educational road shows can create awareness to demystify the misconceptions on the availability and benefits of insurance. Additionally, education could address overreliance on capital to cover risk, and misconceptions that only commercial farmers require insurance.
The proposal differentiates between commercial and smallholder farmers with smallholder farmers getting a slightly bigger subsidy for cover taken and the commercial farmers having access to a slightly more complex product solution which is in line with their farming practices.
As is the case with all insurance products, there is a level of risk that the farmer must carry, called ‘risk for own account’. Misconceptions often arise when more is expected from the compensation without fully appreciating that for instance expectation of lower premiums could result in higher ‘risk for own account’ to the farmer.
Through crop insurance we can integrate the three dimensions of sustainable development – economic growth, social inclusion and environmental protection – and involve participation and partnerships among different actors.
The most common type of direct premium subsidy is a proportional subsidy, whereby the government pays a percentage of the total premium. This is done in most countries. Insurance subsidies are commonly used to:
Improve equity of coverage by extending insurance access to the currently uninsured farmers, especially those who have been previously excluded such as the low-income farmers or farmers in high- risk regions.
Substitute for safety net and disaster assistance spending by providing farmers and other rural people with subsidized insurance against catastrophic losses, such as drought.
Protect banks and agricultural credit programs from bad debt, especially against systemic losses that lead many farmers to default on their loans. It is often hoped that this agricultural insurance intervention for both commercial and smallholder farmers, will also encourage banks to extend credit to riskier farmers, especially if there is high potential for growth.
Support farm incomes more generally, as is done in many countries.
We have to be realistic and understand that the proposal now lies with government for consideration but we are cautiously optimistic that the case is solid and the need very real.
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