Increased automation expected in agricultural sector
Risks facing South African farmers such as weather-related incidents, rising input costs and the threat of violent crimes are likely to lead to increased automation in the local agricultural industry.
This is according to Gert Henning, Managing Director of Landmark Underwriting Agency (Pty) Ltd – an agricultural insurance underwriter, writing on behalf of Compass Insurance Company Limited. “Following on from the recent strikes in the Western Cape wine farming community, the early indication is that the increase in the minimum farming wage announced in February 2013 will unfortunately lead to job losses as an unintended consequence.”
He says labour-intensive farming activities are being especially hard hit with the wage increase on top of both fuel and electricity hikes, while information from sugar cane farmers on the KwaZulu-Natal north coast, fruit farmers in Mpumalanga and wine farmers in the Western Cape all indicate that the increase in the minimum wage, on top of other increases, has put a serious threat on their economic viability,” says Henning.
“Grain SA has also advised farmers against making hasty decisions regarding retrenching labourers, advising them to first seek alternative solutions. Further, weather-related farming incidents have of course been with us since humankind first started farming.”
Against this background, Henning agrees that many people are predicting increased automation in the farming industry. He points out that this could affect insurance premiums, at a time when the agri-insurance sector is already expected to increase premiums to accommodate losses suffered over the last number of years, driven by major weather-related events such as snow, floods and veld fires.
“Ultimately, the increase in wages will lead to increased automation. However, this leads to the question of increasing debt levels and whether there will be sufficient appetite from the financial institutions to service this need. Automation may also lead to higher insurance premiums, as the items required are placed on risk, especially where the items are high-tech and specialised.”
Regarding finance, recent statistics from the South African Agricultural Machinery Association (SAAMA) indicate that sales of key pieces of agricultural equipment reached a near 30-year high in 2012. According to Gerald Burton, General Manager: Corporate Division of WesBank, “Recent figures released by SAAMA show that the annual sales of tractors and combine harvesters in both 2011 and 2012 were significantly above average and are actually the most positive since 1983 and 1985, respectively.”
Burton notes that this trend was also reflected by WesBank’s book data, which shows an upward trend, although he says he does not believe the increase in the purchase of tractors and harvesters is related to recent strike action in the agricultural sector, as an increase was seen in 2011 before any strikes had taken place.
It seems that the agricultural industry may be now forced to perform a delicate balancing act, with many farmers having already made an investment in key pieces of agricultural equipment last seen in the early 1980s, but being warned to tread carefully when it comes to possible retrenchments because of the increasing requirements of their wage bills. For now, Henning warns against farmers cutting back on their insurance.
“The most common claims that we see arising from farms include fire and weather related losses on the non-motor side, motor accidents increasing due to the deterioration of the road network and the cost of claims due to the increase in costs of spares. There is always the temptation to cut back on insurance when times get tough. History has shown over and over again that going this route can lead to financial catastrophe for individual farmers.
“Our advice is that in all instances, evaluating alterations to insurance must be made in consultation with a specialised agri-insurance broker to establish the needs of the farmer, including setting up a well-thought out insurance and risk management programme. A specialist agri-insurance broker benefits the farmer by having the expertise to assist the farmer in analysing the risk inherent to the farming operation, and proposing solutions.”
Henning says it is critical for farmers to ensure that their machinery and equipment is properly insured. “Financial loss will result where items are not insured according to correct values, either in paying too much premium up front where values are not correctly established and then experiencing a devaluation over time, or losing at the time of claims where underinsurance is applicable and average applied,” he concludes.
