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Biodiversity and economic issues have taken center stage in South African agriculture. Recently, Locust damage and Foot and Mouth Disease temporarily distorted trade. Additionally, , the Ukraine-Russia conflict has increased input costs resulting in farmers switching from maize to soybeans.
The prolonged rains have resulted in farmers planting late and some switching from maize to sunflower in certain geographic areas. These challenges highlight the risks and uncertainties in business, and agriculture is no different. The calamities pose a great risk to the agricultural value chain.
There is a dualism in the South African agriculture sector. With approximately 1.3 million smallholder farmers and 40 000 commercial farmers exposed to the same risks. However, the challenges faced by the former are unique due to factors such as smallholder farmers’ operations, which usually occur on small pieces of land. Other factors, especially from a risk management point of view are; limited data and experience of this category of farmers in traditional crop insurance.
What these challenges present is an opportunity for insurance products that best fit the nature of these farmers. However, these products invite a public sector participation in the form of government subsidies through a public private partnership model. Countries such as Zambia through the Farmer Input Support Programme and Kenya through Kilimo have paved the way for many other African nations to seriously consider national schemes on index insurance.
What is index insurance?
An index is defined as a measured value of a parameter such as rainfall, temperature, soil moisture etc. It pays out when a particular measure, for example rainfall, is above or below a certain level. With index insurance, if the measure drops below, or is above, a predetermined level, the policy will pay out to the farmer or the insured. Therefore, there is no waiting period for an assessor to assess the damage. This is because it takes the actual measured variable such as rainfall throughout the insurance cover period into consideration and compares it to the historical average for the same grid and period to determine the deviation from the historical average. The deviation from the average is then used to calculate the insured loss. Although the weather-based insurance index does not provide cover against actual loss in yield, the index is designed to mirror as close as possible the loss in yield that may result from measured variable’s (index) insufficiency for optimal plant growth.
What Types of indexes are available for farmers?
Commonly available indexes in the agricultural sector are weather based index insurance, area yield index and the Normalised Difference Vegetation Index, commonly known as NDVI.
Weather Based Index Insurance is concerned with a predefined critical weather event such as soil moisture, rainfall, temperature etc. The structuring of this index is based on a weather parameter. The payout triggers when the insured parameter hits the agreed threshold. For example, if the soil moisture content needed for optimal plant growth should be 40% but the available moisture for the plant is below or above that – leaving room for soil moisture deficit of excess soil moisture content, given the agreed threshold between the insured and the insurer, a payout may be triggered.
Area yield index insurance considers the reference yield per crop per region. The yield guarantee level is based on reference yield which can be an average yield in a region - and therefore a payout triggers when the actual yield falls below the guaranteed yield, which is benchmarked against the average area/regional yield, hence the term Area Yield Index. This product requires significant yield history per crop and region.
Normalised Difference Vegetation Index (NDVI) is a product that is used to quantify vegetation greenness and is useful in understanding vegetation density and assessing changes in plant health which affect plant quality. A payout triggers when the measured parameter falls below the agreed threshold. Vegetation index is solely measured by satellite, therefore there is no loss assessment in the field. This is mostly suitable for livestock farmers for grazing purposes.
Which index products are available in South Africa?
In South Africa, index insurance products are not legislated in the Insurance Act. Therefore, our farmers are not able to purchase this insurance product. However, Santam has done a pilot on a Soil Moisture Index product in collaboration with the South African Insurance Association, The Department of Agriculture, Land Reform and Rural Development, the Financial Services Conduct Authority, and the Prudential Authority and a decision is pending whether it will be permitted or not. However, this product is currently available in other African countries such as Kenya, Mali, Uganda and Zambia to name a few. While index insurance exists in these countries, it is dependent on government support and subsidies. In countries such as the USA, India and China multiperil agricultural insurance is subsidised in order to promote food production and sustainability. Therefore, should this product be permitted in South Africa, and purchased by farmers, there would be a great impact on the long-term economic performance of farms. This is because insurance has a stabilising effect on income through indemnity payments on insured losses. A stable income o is a condition to receive financial loans and to be able to invest. Farm investments are necessary for farm growth. In addition, some production activities are too risky without insurance, or where on-farm risk reduction measures are not possible or not efficient.
Insured farmers are able to readjust their production strategies and thus improve the economic performance when measures of risk avoidance or risk reduction are less efficient.
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