Crop insurance is one component in a range of risk mitigation options

Protecting the value of your crop is as much about good farm management as it is about insurance

As we approach the summer rainy season and with climate change becoming such a significant influence on farming, it is natural to consider crop insurance as the most effective way of protecting farm revenue. 

In reality, crop insurance should actually be viewed in the context of a broader farm risk mitigation plan. 

MC Loock, Senior Manager of Agribusiness (Primary) at Standard Bank says if revenue loss from crop damage would prevent you from being able to plant again in the next season, with the possibility of losing the farm, then the only choice you have is to take out crop insurance. 

There are mainly two types of crop insurance: hail insurance and multi-peril or comprehensive crop insurance. 

Hail insurance is usually applicable at the beginning of the summer rainy season, when hail is most likely to occur, and it covers 100% of the estimated value of a crop. It also covers the loss of a crop as a result of fire, an accident in transit - from the farm to a silo, and political unrest.  There is a waiting period of 7 days for the insurance to become effective.

Multi-peril insurance is covering the risk of drought or floods and only become effective once viable germination has been confirmed. It provides a variable guarantee, meaning that farmers can insure anything up to 65% of the value of the crop. The lower the guarantee, the lower the premium and the more a farmer will pay from his own pocket in the event of a loss. 

Mr Loock says that the crop insurance industry has come under strain in recent years, as climate change has triggered progressively more extreme and unpredictable weather, causing an increase in claims. 

“Insurers have had to increase their premiums in order to compensate for what has become a negative premium to claim ratio. However, the hike in premiums is making crop insurance less appealing in the market.  With premiums increasing, fewer farmers are purchasing crop insurance which is not just bad for the insurers, but also for the farmers who might benefit from insurance.” 

“As a result, the industry is examining alternatives to traditional crop insurance.” 

“There are a number of ways to mitigate the potential of crop loss as a consequence of weather damage,” adds Mr Loock. 

Diversification is a proven risk mitigation strategy at all levels of farming. In relation to crops, it amounts to geographic and crop diversification.

“Bigger farming operations are spread geographically which reduces the vulnerability of the operation to the impact of an incidence of hail,” says Mr Loock. “Concentrated areas of high value crops produced in hail prone areas can be protected by netting.”  Through crop rotation, you can reduce the area exposed to the elements at any given time.  

Drought risk can be mitigated though including a portion of production under irrigation or on water table lands.  Other measures include the use of drought resistant cultivars, moisture conservation practices like lay over lands or minimum tillage.  The litigants are not equally effective and might be used in combination.  

“And, of course, self- insurance through building up a nest egg of liquid assets, it could be an investment or livestock whose value would cover the cost of your inputs for the next planting season.”  Very profitable production seasons provide the option of using the revenue from one season’s crops to immediately buy the inputs for next season’s planting. 

“This strategy of forward purchasing inputs is often used to manage the tax payable,” says Mr Loock. “If, in the next season, weather damages your crops, you would simply go back to the normal method of financing the following season’s production via a loan. You would, in effect, be your own insurer for one season without suffering any serious financial consequences if you have to ‘claim’ from yourself. 

“Whatever choice you make, it is important to think in holistic terms about risk mitigation rather than putting all your eggs in one basket,” says Mr Loock.