“Crop Insurance Key to Unlocking Adequate Investment in Agriculture” – writes expert Lunga Njara

“Crop Insurance Key to Unlocking Adequate Investment in Agriculture” – writes expert Lunga Njara


In spite of many challenges facing the South African agricultural sector, projections show that there will be 9 billion people in the world by 2050, 2.2 billion will come from Africa. On one had, recent reports have highlighted that South Africa’s population has increased from 57.73 million in 2018 to 58.78 million people in 2019. This implies that more food needs to be produced to meet this growing population. The Food and Agriculture Organisation (FAO) estimates that 70% increase on food will be needed to meet the global demand by 2050. This calls for means to figure out ways to produce as much food as possible on the same amount of cropland, if not significantly less. South Africa serves as a major player in global trade. Accordingly, it has a responsibility to make its contribution to the global food supply which implies that it has to do so by employing tactics similar to those of other developing nations to meet the desired output.
Notwithstanding other challenges within primary agriculture such as its declining share to the economy over the years (7.7% in 1969, 5.3% in 1988, 2.5% in 2017) which emanates from diversification resulting in shifts to other sectors. The sector across the value chain is estimated to be contributing between 20% – 25% in the economy. Although there are other factors such as climate change which pose of threat in agricultural development, government continues to pin its hope into the sector. An overarching challenge and expectation in the South Africa context is that government must attend to the whole agricultural value chain. It is pretty much impossible for government to do that alone. All sectors of society need to pull their resources together if we are to see any adequate investment in agricultural development. Adequate in the sense that the sector should improve on productivity and thereby improve on growth and reduce unemployment. One particular area that needs special attention is developing a strong public private partnerships on agricultural insurance to boost investor confidence. In as much as government cannot directly control erratic weather conditions, agricultural insurance is underpinned as a great risk response mechanism because it is proactive in nature.
In quarter two of 2019, the Agricultural Business Chamber and IDC Agribusiness confidence index fell to 44 points quarter on quarter. A level below the neutral 50-point mark shows skepticism around agribusiness conditions in South Africa. A persistent decline in confidence is typically followed by a similar movement in investment.
Without sidestepping the correlation between crop insurance and investment in the sector, it is important that I highlight the following:
• The current farming climate in South Africa comprise of close to 40 000 commercial farmers, producing 95% of the output with the 87% area of land at their disposal. Of that amount, only a margin equivalent to 40% of farmers are covered through crop insurance.
• The emerging sector has roughly 250 000 smallholder farmers and 1.5 million subsistence farmers producing 5% of the national output on 13% of the agricultural land available to them. What is, rather intriguing, is that only 1% of the emerging farmers are insured.
There could be a number of reasons for these dynamics, however, with the R3.9 billion worth of investment by government to develop emerging farmers there should be a solid plan in place to see to it that these farmers are insured so as to sustain the farming business. In addition, this sum of investment should be used with the understanding that in as much as South Africa is found to be food secure at national level, the same cannot be said at household level. This is the level where most from the 1% insured farmers emanate.

The 2017 Global Food Security Index places South Africa among the top six countries with agricultural disaster risk management mechanisms and policies in place. The GFSI’s Disaster risk management sub-indicator considers, among others, whether the country has legislation for disaster risk reduction in the agricultural sector, a specific or tailor made actionable plan for addressing disaster risk reduction in agriculture and the societal vulnerability to disasters with the focus being on a country’s governmental, demographic, economic and infrastructural pillars. Together these elements measure whether or not countries are proactively addressing agricultural sector disaster risks and if they have the social structure in place to respond to such disasters effectively. The irony is that, inasmuch as South Africa falls on the top six category of countries with the best risk reduction mechanisms, the question we should be asking ourselves is whether the mechanisms are proactive or reactive. With Agriculture in South Africa being an important industry, taking into account its GDP contribution through backward and forward linkages and the large sums of funds invested in the sector over the years, it is rather risky, to the truest meaning of the word to apply a reactive mechanism to the risk the emerging farmers are exposed to.

The crop insurance products offered to South African farmers as a proactive risk management mechanism include Multi Peril Crop Insurance (MPCI) and Hail plus covers, with these largely offered by the private sector and Santam having a share of more than 50% to that market. Worth noting is the fact that South Africa does not subsidize crop insurance like most African countries do with MPCI. However, the national department of agriculture does have a directorate responsible for disaster and risk management. Still, the challenge is that this mechanism is reactive in nature and can only be activated once a disaster has struck the farmers. This questions the generalization of placing South Africa amongst the top six counties with the most effective mechanisms on risk management when only 40% of commercial large scale farmers and 1% of smallholder farmers are insured.

Climate change is a reality of our times and are here to stay. There is a greater urgency today for crop insurance schemes which can protect farmers from poor yields. The sector cannot take for granted the benefits of crop insurance due to the fact that crop production has numerous risks. These can be natural, social, economic and sometimes personal. Nevertheless, the principal characteristic which distinguishes crop production from any other activity is its great dependence on nature. Unlike many other activities within the agricultural value chain, crop production has to be carried on in the face of continual uncertainties arising out of diverse natural and social elements. Normally, the utmost impact of all these elements falls on crop production. This makes crop yield one of the basic risks every farming business will be attributed to, and that is the uncertainty the farmer will have to face. This is the general condition across all nations, whether developed or not.

With crop insurance, farmers can benefit in more ways than one.
Crop insurance cushions the shock of catastrophic crop loss by guaranteeing farmers a minimum level of cover. This simple means that crop insurance serves as a financial mechanism in which the uncertainty of loss in crop yields is lessened by pooling large number of uncertainties that impact on crop yields so as to allow the burden of loss to be distributed. That therefore relieves government off irregular financial burden of providing relief to farmers. Another benefit that is hardly mentioned is that it spreads the crop losses over space and time. As agricultural income is an important factor in national income, crop insurance also has an effect on the prosperity of the country. In addition, farmers get to receive great confidence in making greater investments in agriculture while maintaining their dignity. Therefore, greater investment has a positive impact on improving the position of farmers in relation to agricultural credit. This implies that crop insurance can be used as collateral to access credit. From an economic point of view, it further has an effect of normalizing the availability of supplies and stabilize prices. It is worth noting that farmers may choose a variety of instruments to control price and yield variations. Crop insurance serves as one such instrument. Lastly, crop insurance enables the maintenance of systematic records of crop production. This is important for underwriting purposes and to access credit through financial institutions.

If we are to talk about agricultural development in South Africa, then we should not divorce proper investment in the sector. However, we should be realistic about the challenges faced by emerging farmers. Private sector capital investors need stability, predictability, vision and confidence when they decide to invest their money. That means risk needs to be proactively managed and crop insurance becomes an important factor in boosting investor confidence in that regard.
The absence of data such as information on title deeds, frail infrastructural development in certain areas, inadequate regulations and the absence of collateral to access finance are some of the factors swaying investors away. At the end of the day investors would rather support an initiative that guarantees returns. Therefore a viable model on agricultural development is needed for them to invest in the sector. Financial institutions will remain skeptical about investing in South Africa’s agriculture industry as long as we remain inconsistent with agricultural policies and promote poor regulations. We need long-term consistency in public sector planning to lure investment to the agricultural sector. A solid public private partnership on crop insurance should form part of that plan.

Lunga Njara is an independent Agricultural Economist with experience from the public and private sector. He is the Managing Director of Resolute Agri Specialists, a consultancy firm focused on market research and business development across the agricultural value chain.


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