Unpredictable weather increasing financial risks for farmers and the industry

Philip du Preez, Head of Agriculture at Mutual & Federal.

The volatility of weather conditions, from drought to flooding and hailstorms in South Africa is taking its toll on farmers financially, and creating some concern for the sustainability of the sector.

The impact on farmers’ finances is forcing them to try cut costs which could leave them exposed to more risk, according to Philip du Preez, Head of Agriculture at Mutual & Federal.

“With regard to insurance, we have noticed that farmers have started to explore more affordable options and are reducing certain insurance covers because they are under pressure financially. This is not advisable because being covered during volatile weather conditions is more important than ever for farmers to protect their business,” says du Preez.

South Africa has experienced its worst drought in 71 years over the past year after an El Niño weather pattern brought drought conditions to much of southern Africa. The drought resulted in eight of nine South African provinces declared disaster areas and in recent weeks, several areas in the Free State, the Western Cape and KZN have experienced flooding.

October to January is typically of one of the key periods in Southern African agriculture – the planting and early crop development stage. However, this year’s early crop season may prove challenging to the farming industry.

“Certain regions had some good rains at the right time which lead to acceptable crops. For the rest, it was a disaster,” says du Preez.

North West province, Limpopo and the central Free State were most affected by the harsh weather conditions. Some parts of the Western Cape, dependent on winter rains, are facing very dry conditions which could lead to disastrous consequences for the province.

“Due to the drought, many farmers were not able to plant in December 2015, which is essential to ensure mature crops for South Africa. The continuation of the drought into 2016 further delayed the planting of these crops, leading to concerns of the security of both food and the farming industry in South Africa,” says du Preez.

Du Preez answers some of the big questions around the impact of the drought on farming businesses, agricultural insurance and the effect of the recent flooding in certain areas on crops.

What is the outlook for farming following the drought?

“The drought will definitely have longer term financial implications for farming businesses,” says du Preez. “This may include reduced crop production, reduction of livestock and increased debt, which will ultimately lead to less income.”

He says the full effects of the drought will probably become more evident over the medium term and that economies of scale will become increasingly important as farmers’ margins are under pressure.

“We foresee fewer, but larger, farming operations in the future, downsizing of farms will not be economically viable in most instances,” says du Preez.

He says, “From an insurance perspective, we have noticed that farmers have started to explore more affordable options and are reducing certain covers.”

What advice do you have for farmers who are looking to reduce cover to cut costs?

“The current weather patterns are putting increased pressure on farmers and causing financial uncertainty for them,” says du Preez.

“This means that investment into agriculture is becoming even riskier and farmers are being more price sensitive or are simply not able to afford the premiums on multi-peril crop insurance (MPCI).”

Despite these tough times, farmers find themselves in, du Preez advises against reducing cover to cut costs.

“Cutting insurance cover would be the wrong kind of solution to this problem. It is especially during high-risk times like these that farmers need to have the right cover in place to help them get back into the financial situation that they were in before the disaster struck. Being under-insured or having no cover in place will likely be more expensive in the long run,” he says.

What are the financial effects of the drought on the insurance industry and farmers?

The extreme weather conditions lead to volatility, which makes it difficult to allocate capital to this line of business. Returns on economic capital are therefore under pressure.

“From an insurance and reinsurers perspective, it is therefore becoming increasingly risky to do business, which reflects in an increase in rates and pressure on capacity,” du Preez says.

MPCI is heavily dependent on reinsurance capacity and, for the last few years, the amount of reinsurers willing to offer this cover has drastically declined.

Du Preez says, “The selection of clients is also becoming more complicated. Insurance companies are heavily dependent on new forms of data and insights form experts. Farmers with proven track records in the production of crops are currently being considered and farmers without this are finding it difficult to be accommodated.”

What can be done to assist smaller and emerging farmers without a proven track record?

“It is critical for the insurance industry and government to establish a Public Private Partnership (PPP), accommodating MPCI on a sustainable basis. Currently, only agriculture in South Africa and Australia are not subsidised and supported with MPCI insurance by government,” says du Preez.

Agricultural companies and the banking industry should consider making MPCI cover compulsory for financing input production.

“This is not only an insurance or agricultural problem. All ‘role-players’ – including government – must get together to address the threat of changing weather patterns. Thought has to be given to product development, ways to increase the insurance pool and how to manage costs better. In so doing, an affordable product, suited to the farmers and insurance companies in South Africa, could help to address this threat,” du Preez says.

How will the rainfall impact crop production?

Bloemfontein was recently hit by massive hailstorms on 20 October. Du Preez says it is still too early to determine the impact this could have on farming in the area.

In the Western Cape, low-lying areas across the Cape Peninsula were affected by flooding, but overall conditions throughout the cereal producing areas of the province, especially the Southern Cape, have been conducive for crops.

“A larger wheat crop is forecasted for the Western Cape, due to an increased area planted and improved weather conditions,” says du Preez.

According to data by the Crop Estimates Committee released on 27 September, the total area on which wheat is planted in the Western Cape increased from 310 000 hectares in 2015 to 323 000 hectares in 2016. Production forecasts for Malting Barley and Canola are also higher.

In KZN, mostly the coastal areas had been affected by the flooding and, according to reports, Amanzimtoti and Stanger have been badly affected.

“Thankfully, these locations fall beyond the summer grain producing areas and harvesting had in any case been completed during these events,” du Preez says.

Due to the lack of planting, does the flooding mean farm soil is being washed away?

The flooding occurred mostly in locations where farm soil wasn’t really at risk of erosion, according to du Preez.

There is, however, an increased risk of elevated soil erosion after an extremely dry season as a result of decreased plant cover on natural veld, leaving bare soil exposed.

What is the way forward for our farmers?

“South Africa is quite used to droughts and, given the history of our country, we have built up the resilience to survive difficult situations,” says du Preez.

“Similarly, the agricultural sector has, for many years, been exposed to harsh and changing weather conditions and patterns, and has been able to pull through.”

He concludes, “I am hopeful that, with support from all relevant parties, our farmers will continue to find ways to survive and thrive.”