INSIGHT-South African farmers dream of drought cover on climate frontline

* A fraction of South African farmers have drought insurance

* Climate change leads to longer and harder periods of drought

* Insurers say they are unable to cover their risks

* The new state subsidy plan aims to fix the failing system

By Emma Rumney

JOHANNESBURG, July 14 (Reuters) – Happy Letsitsa has failed to repay the money he borrowed to survive the 2019 drought that ravaged his corn and sunflower farm in South Africa‘s Free State province.

He has no drought insurance. If the rains fail again, they could spell the end of his business, which supports his wife, child, father and extended family.

“It’s like going to the casino and playing a high bet,” he said of running his small farm with no cover. “It’s not easy, especially if you only have one income: farming.”

This precarious lifestyle is common among the hundreds of thousands of smallholder farmers in South Africa. Most cannot access any drought cover in a country that is feeding the wider region with staple foods like maize, but increasingly beset by extreme weather on the front lines of climate change.

It’s not just the little guys. The problem is also acute among large farmers. Most cannot afford the primary commercial drought cover known as Multi-Hazard Crop Insurance (MPCI), or is not offered by insurers.

Jan Pretorius, in the North West Province, is one of the lucky few who can pay for MPCI, but even he struggles. His premiums represent about 11% of the roughly 7,000 rand ($ 492) he spends to plant each of his more than 600 hectares of maize.

“Where we grow, nobody has comprehensive crop insurance,” he said.

Farmers and insurers say the insurance system is broken, as droughts are getting longer and harder. Parts of the country are in their ninth dry year, while a drought across much of the southern African region that began in 2018 has left tens of millions of people hungry.

Now a plan has been formulated by insurers and the government for a 10-year, R3.2 billion ($ 223 million) government subsidy program to address market problems, according to a South African document. Insurance Association (SAIA) consulted by Reuters who previously unreported proposals.

The program, which has been confirmed by the government, would allow commercial grain and oilseed farmers to see 25% of their MPCI premiums subsidized. Smallholders of grains, oilseeds or livestock would be offered a type of coverage called weather index insurance, and the state would pay 75% of their premiums.

Weather index coverage is used by millions of farmers in several countries, such as Kenya and India, but has never been tried in South Africa. It automatically pays when a measurement, such as precipitation, is above or below a certain level, eliminating the need for costly site visits to assess claims.

Nkhangweleni Ramashia, chief director of the agriculture ministry for development finance, told Reuters the subsidy program was essential to protect farmers from climate change.

“I have high hopes,” he added. “If you look at climate change, I don’t see how agriculture can survive without a product like this.”

This was picked up by Richard Boys, senior executive at Hannover Reinsurance South Africa.

“Without such initiatives, the inevitability of MPCI becoming increasingly unaffordable for farmers and unsustainable for insurance companies is a real concern,” he said.

HUMIDITY MEASURED FROM THE ORBIT

South Africa’s agricultural industry employs over 800,000 people. Yet the high costs, combined with low availability, mean that only 20% of the country’s commercial grain producers have drought insurance, according to the SAIA document.

There are more than 7,000 commercial grain producers, according to the industry association Grain SA. Smallholder estimates vary, and the vast majority also have no drought cover.

Ramashia, who said his ministry was trying to take money out of its budget for the subsidy program, said the priority was to help small farmers.

An industry pilot project that started this month, led by the country’s largest non-life insurer, Santam, aims to cover around 50 smallholders with a product related to soil moisture, measured by satellite, according to Santam’s agricultural manager, Gerhard Diedericks.

The premiums would be added to loans that farmers already get through agricultural cooperatives or other organizations that provide supplies like seeds

A similar pilot project led by the state-owned Land Bank is still awaiting Treasury approval, the company told Reuters.

Paswel Marenya, senior economist for the Consultative Group on International Agricultural Research, said climate index insurance was key to increasing the resilience of smallholders and that payments would be faster and cheaper for the government.

However, this poses problems, he said: Farmers can be worse off if losses exceed payments and, in some countries, implementation has lagged behind expectations, with even subsidized premiums too high for many poor farmers.

Grant programs should also be combined with other initiatives, such as education or new technologies, he added.

INSURERS CANNOT COVER THE RISK

The type of MPCI subsidies offered to commercial farmers under the plan have protected farmers from rising premiums elsewhere, such as in China and the United States, Swapnil Soni, senior underwriter at reinsurer Scor, told Reuters.

Currently, the high costs mean that farmers in wetter regions are choosing to take their chances rather than paying, leaving insurers unable to cover the risks on their books.

“It goes against the whole concept of insurance,” Soni said, adding that the South African crop insurance books of reinsurers, including Scor’s, had suffered frequent annual losses. As a result, he had reduced the volume of business he writes in his crop insurance book by around 70% by 2020, he said.

Many insurers and reinsurers have completely stopped offering MPCI, according to the SAIA document. The number of hectares insured rose from a peak of 859,000 in 2009/10 to 201,000 in 2017/18, according to the press release. Premium volumes fell by around two-thirds to R113 million between 2012/13 and 2017/18.

There is little respite as the weather can only get more extreme.

A 2019 report by the Intergovernmental Panel on Climate Change described the southern African region as a projected climate change hotspot.

He cited studies showing that temperatures have risen in its subtropics at twice the global rate on average over the past five decades and warned of longer and more frequent heat waves or that the region is likely to become drier even if global temperature increases are limited to 2 degrees Celsius.

North West Province farmer Pretorius said even with drought insurance he had no control over the weather conditions that could make or break his business. So every day he looks up and pleads for the heavens to open.

“I am a Christian. I pray for the rain.”

($ 1 = 14.2284 rand) (Reporting by Emma Rumney; Editing by Pravin Char)

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