#SA drought – a tough reality

South Africa’s farmers have faced a tough few months battling severe drought in certain parts of the country. However, as the winter months approach, Gauteng and other regions have experienced some rainfall, but is it too little, too late?

Dubbed as one of the driest seasons on record in South Africa, the drought severely affected the country’s harvest, discouraging the planting of crops. Due to missing deadlines to plant crops in time for the winter season and being unable to plant and harvest crops because of severely dry fields as a result of no rain, farmers face tough times ahead.

Tough times ahead

The 2015 drought has been widely reported on in terms of the possible impact on food security, job losses and the loss of commercial farms, due to discontinuation of farming operations. The reported Government assistance of R300 million is also far from the R10 billion which experts regard as necessary to safeguard continued food security.

The impact on the insurance industry will firstly be felt and have to be dealt with by the crop insurers, where the effect of the weather plays a significant role. The drought has obviously led to Farmers not planting and the estimate is that the production of maize will fall from 14 million tons two years ago to between 6 and 7 million tons in 2016. The reduction in crop size will have a ripple effect through the Crop Insurance industry as the level of premium income will fall and the need to cut on infrastructure and overheads put pressure on the bottom line earnings.

The assets side will see the effect in the possible reduction in numbers of commercial farmers, the slowing down (and possible negative) policy growth as farmers reduce their insurance cover and the reduction in purchasing of agri related assets and implements.

A fundamental understanding

Given the risk associated with farming today; crop insurance is vital. However, the first fundamental to deal with, according to Reinhard Kuschke, Managing Director of AgriSeker, is understanding this highly specialised line of business.

“The detail regarding the technical requirements of a program means there needs to be a very good understanding of what the nuances are that the farmer has to deal with in his agricultural environment, and specifically his crops.”

Kuschke mentioned that one of the pertinent questions farmers have to ask are for example, “To which risks are the crops exposed to in terms of an open roof and how can this be converted into an insurance policy or an insurance contract?” Insuring farmers, farms and all things agri comes with a huge amount of challenges of which drought and floods are only part of it.

Rising to the challenges

South African farmers do not operate in isolation, but are susceptible to the international and national economic and political fluctuations and trends.

The current low point in the SA economy has a direct effect on farming activities, add to this the worst drought since 1984, continued pressure on profit margins due to the increase in input costs due to the rise of fuel, electricity and imported agricultural farming essentials, the political rhetoric around re-allocation of farm land, the lack of and withdrawal of international investments due to SA’s downgraded rating, the rising labour costs and you can understand the pessimism that is currently rife in the farming industry.

However, South African farmers have always been a hardy breed, rising to the challenges that come their way. It is a given fact that we will see a reduction in the number of active commercial farmers with the saying that the “weak will be culled and the strong survive” being very apt in this regard.

The current day commercial farmer is knowledgeable in the matter of finance and risk management, thus understanding the importance of mitigation of risk through the insurance process.

Finding opportunity

The challenge that the agri insurance industry faces, also poses the biggest opportunity and that is to re-asses the old and current policies, operations and procedures and to realign them with the current needs and market trends.

The farming insurance industry is far behind the curve insofar as the development and use of innovative technological development is concerned. There is huge potential in the setting up and use of modern day applications in the industry, with very little being done to directly address the needs of the farmers, especially on the assets field. In this regard the crop insurers are more advanced in their use of technology where there is a direct impact on the insured.

In defining the use of technology in the farming insurance space, one needs to have an understanding of the nature of the market, insofar as the geographic and (changing) demographic challenges are concerned.

This market has never been one where a one-fit-for-all approach has been successful and the use of technology in the insurance field depends on meeting the specific needs of the individual farmer and very importantly, that of the broker.

A positive outlook

The fact that the farmers are responsible for food security must never be overlooked and as such they play a very important part of the total economic and welfare situation of the country.

Bear in mind that the economic outlook for South Africa over the next few years is not positive at all due to the previous mentioned facts. The agri insurers that will be successful are those that will be flexible in their approach, render above par service and have well set relationships with the specialist agri insurance brokers.

Growth will be slow and the focus will be on profitability, which in the current soft market conditions will be under immense pressure.

The commercial farmer, with the support of his agri broker, understands the role of risk management in his farming operation and is as such in the know as to the role that insurance plays in mitigation of risk.

The fact is that no matter what happens with the economy at large, the farmer knows that insurance of his fixed and moveable assets against specific agri related perils will keep his farm operational.

Santam donates R2 million to assist farmers

In a bid to boost the embattled agricultural sector, short-term insurer Santam donated R2 million to help alleviate the financial hardship faced by both commercial and emerging farmers.

Santam Head of Agriculture, Gerhard Diedericks said, “The persistent drought continues to have a knock-on effect on the local economy and threatens the long-term food security of our country. Farmers and communities dependent on the agricultural sector for their livelihoods are bearing the brunt of this crisis. For Santam, lending support to both individual farmers and farming groups is simply the right thing to do.”

“Santam will continue to work with industry partners, brokers and organisations within the agricultural sector to meet the challenges that lie ahead. Collectively we need to do much more to assist our struggling farming communities, and we urge our counterparts to show their support and contribute to this critical cause,” Diedericks concluded.

Immense strain in the agricultural sector

The drought is causing immense strain in the agricultural sector, with many farmers unable to plant and harvest crops and feed livestock. The resultant cost of farming is severely threatening the long-term operation of the farming community, clearly impacting food security.

This, in turn, will impact consumers, with some price increases already reflecting on the shelves at grocery stores and further food price increases expected in the short to medium-term future.

Raimund Snyders
CEO : Mutual & Federal

ABSA contributes R1 million towards drought relief

Absa donated R1 million towards AgriSA’s efforts to assist drought-stricken farmers and the communities that depend on farming around the country.

Sazini Mojapelo, Head of Citizenship at Barclays Africa said, “Absa is concerned about the impact of the current drought as well as the threat it poses to food security.”

“This is why the bank has decided to extend financial support to AgriSA-led relief efforts, aimed at assisting distressed farmers and the communities that depend on farming. We believe that Absa’s contribution, together with those made by other concerned citizens and organisations, will assist in alleviating the severe effects of the drought.”