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Hedging their bets
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  1. #1
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    Hedging their bets

    HEDGING THEIR BETS

    Farm insurance may be the answer to the problem of drought and floods for men on the land, reports Piyaporn Wongruang in Nakhon Ratchasima


    Somboon Khantachote, a farmer at Pak Chong, drove a tractor up and down his hilly field under a scorching sun. Nothing could distract the man from his work as he spread chicken manure on the 300 rai of land to prepare it for his next crop.
    However, Mr Somboon said he had no idea how the crop would turn out as the dry season was approaching. It's a time to prepare things carefully to minimise the risks in farming.
    After working as a farmer for his entire life, he has tried every way he knows to prepare himself to cope with the harsh weather that can beat farmers like him into the ground.
    Apart from his own hard work, the farmer constantly prays for luck from the spirit of Chao Por Khao Yai of the deep Khao Yai forest nearby, hoping for the best for his farm.
    Last year he found a way to do something about his fate. He purchased what is called farm insurance, which can help insulate him from farm loss resulting from a harsh drought.
    "Living a farmer's life is like buying a lottery ticket," said Mr Somboon, now 49. "It is a risky business, and whether you have luck very much depends on the weather, which you can never know beforehand."

    He is among the first 35 farmers in the country - and Southeast Asia - to get the chance to try this new security measure against drought.
    The measure, known as drought index insurance, was introduced in developing countries with technical assistance from the World Bank a few years ago, before being introduced to farmers here for the first time in 2006.

    According to Ornsaran Pomme Manuamorn, the operations analyst of the bank's Agriculture and Rural Development Department, the application of weather index insurance to agriculture in the developing world was inspired by the use of weather indexes as proxies for hedging risks in such sectors as energy, where weather fluctuations can have an influence on energy demands, thus the income of the energy companies.
    Like the energy sector, the weather is also a key variable which affects crop production, and the income of farm households. Therefore, weather indicators can be used as proxies for farm production losses and form the basis of an insurance contract.

    Index insurance is different from conventional forms of agricultural insurance such as multi-peril crop insurance, which pays farmers. The payment is based on the measurement of yield damage conducted by loss adjusters in the field.

    However, a World Bank report has found that this insurance policy could be a disadvantage to both insurers and farmers.

    First, since farmers usually have better knowledge about their risks than the insurer, the traditional insurance system tends to pose overly bad risks for insurers as only high risk farmers tend to buy the insurance. Secondly, it can also encourage what is called a "moral hazard", a circumstance under which farmers might not do the best they can to prevent farm yield damage since they will be compensated for the yield losses regardless of the cause.

    It also poses difficulties for insurers to investigate the losses and pay money out as farm damage tends to occur in a wide area at once. The damages need to be assessed for each insured farm before payment can be made. This process is very costly, especially when there are a large number of small farms involved.

    All these difficulties for insurers in administering a traditional agricultural insurance scheme are usually translated to high premium rates for farmers.
    Accordingly, the World Bank then supported the research and development and pilot implementation of weather index insurance, which is considered to be more objective and practical, especially in developing countries where a large number of small farmers live.

    In 2003 the bank provided technical assistance to an insurance company and a micro-finance institution in India to introduce weather index insurance to some Indian farmers. It then expanded its technical assistance to other areas, including Africa, Latin America and Asia.
    "We think it might be another option for people here to deal with farm damage induced by weather," said Ms Ornsaran.

    Unlike its predecessor, the weather index insurance uses objective weather parameters such as rainfall and temperature which have strong correlation with farm-level yield losses as a proxy for the insurance. In Thailand's case, rainfall was chosen as a proxy for farm-level yield damage resulting from drought. A certain level of rainfall deficit is calculated and set as a baseline for payouts, which is considered as objective and verifiable.

    For instance, insurers will pay farmers only when the amount of the measured rainfall at an agreed weather station during the insurance area is below the determined level specified in the insurance contract.
    In 2005 the bank's expert team had teamed up with local experts to work on the programme. Pak Chong, where Mr Somboon has farmed all his life, was picked as a pilot area for it has long been suffering from unpredictable drought.

    In 2006, the team managed to establish the base lines for the payouts, and last year they pooled some insurance companies to sell insurance policies to interested farmers.
    Under the programme, two different options for insurance policies were on offer. The first one charged the premium of 80 baht per rai, with the maximum payout worth up to 1,200 baht per rai, and the second policy charged the premium of 114 baht per rai, with the payout worth up to 1,700 baht.

    Altogether 35 farmers, including Mr Somboon and his relatives, purchased 36 units of the policies, worth nearly 90,000 baht for their 960 rai of corn fields.

    Sommat Polkaew, 39, Mr Somboon's relative and also a corn grower, said she decided to buy the insurance for her 200 rai of corn fields because she wanted to try it.
    Mrs Sommat said farmers actually did not want to get the payouts. What they actually preferred was rainfall, which would help feed their corn, which they considered much worthier than the payouts.

    However, farmers did not want to see their fate lying only in the hands of the spirits like Chao Por Khao Yai, or the government, whose compensation was inconsistent.

    She still remembers how bureaucratic red tape almost stripped her of state compensation for her damaged corn fields in 2004.
    She managed to get only 10,000 baht for her 40 damaged rai.

    "The insurance at least will help ensure that we will have our invested money and start all over again without waiting for the government's help, which we never know when and how much will arrive," she said.
    Last year the farmers received no payouts, however, since the measured rainfall was not below the determined level.

    The ongoing programme has, meanwhile, kicked off new arguments among farmers and insurers, particularly over the technical problems of rainfall measurements and the proper coverage periods of time and areas.
    The farmers agree that the insurance is a helpful safeguard against uncontrolled weather and are willing to pay the set premiums for the next crop this year, but they wish to see the rainfall measurements be more precise and reliable, and the insurance coverage periods of time and areas more relevant to the real circumstances.

    So far, the insurance coverage periods under the programme are set much earlier than the actual times when the farmers start to plant corn. Rainfall measurements are also needed to be made more localised to better cover local cropping areas.

    Thiraphong Tangthirasunan, president of the Bank for Agriculture and Agricultural Cooperatives, an agency which serves as a programme coordinator, said the programme is still relatively small, compared with other farm sectors, but it has the potential to be developed and embraced by government policy.
    He conceded the state farm assistance for farmers affected by natural disasters is not consistent.
    "It is still much about welfare-like treatment, which is not compatible with farm risk, which needs appropriate management," said Mr Thiraphong.
    He said he would consult the new finance minister to see if it's possible to develop the scheme.

    It could be managed under a new fund under which premiums and payouts were professionally managed by stakeholders.
    "It is necessary for us to think about a more sustainable measure against unpredictable farm conditions since we are now facing climate change. It is necessary now and it is necessary in the long run," said Mr Thiraphong.
    Mr Somboon, who paid a 20,000-baht premium for last year's policy, said he might switch to the less water dependent pumpkins to ensure he will at least earn some extra money before the next challenging season. "I often wondered whether it was really worth paying over 20,000 baht for the insurance," said Mr Somboon. "But considering the drought I experienced, I think the insurance was not totally wasted."

    Bangkok Post

    A file photo shows a herder watching cattle grazing on semi-dry pastures in the central plains where drought struck last year.

    Mr Somboon shows a farm insurance. — PIYAPORN WONGRUANG

    Somboon Khantachote, a farmer at Pak Chong, on his tractor while preparing the soil for his next crop.
    Attached Images Attached Images    

  2. #2
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    Re: Hedging their bets

    Altogether 35 farmers, including Mr Somboon and his relatives, purchased 36 units of the policies, worth nearly 90,000 baht for their 960 rai of corn fields.
    In 2006, the team managed to establish the base lines for the payouts, and last year they pooled some insurance companies to sell insurance policies to interested farmers.
    Under the programme, two different options for insurance policies were on offer. The first one charged the premium of 80 baht per rai, with the maximum payout worth up to 1,200 baht per rai, and the second policy charged the premium of 114 baht per rai, with the payout worth up to 1,700 baht.

    I am assuming the word "unit" actually means insurance "policies". That means the Farmers collectively purchased insurance at a yearly premium of 90000 THB on 960 rai (about 460 acres) of farmland.

    First Policy w/ 36 unit coverage would have been 80 X 960 = 76800 THB yearly premium for a maximum payoff of 1,152,000 THB. (37,160 USD for 460 acres is 80 USD maximum per year per acre).

    Second Policy w/ 36 unit coverage would have been 114 X 960 = 109440 THB yearly premium for a max. payoff of 1,632,000 THB.

    The mix is fairly clear assuming the farmers leaned towards the cheaper premium in most cases. The average max payoff would be about 1,400,000 THB.

    With a 90000 THB premium it would take fifteen years to recover a max. loss. The insurance company invests the premiums to earn extra principle, which would cut the recovery time to about 10 years. That is along the lines of what happens in America.

    The problem that I see in Thailand is there is not a good insurance regulation system in place and corruption is so bad. Getting the insurance companies to pay could be a greater problem than in other places (if that is possible). The policies may help a farmer who already owns their land but I think it would cut too deep into the margin of a new farmer or one that has accumulate debt on the land (i.e. sending the kids to college).

    My wife and I will continue to invest in irrigation equipment and leave the crop insurance alone for now. I know that irrigation equipment is not really an option for most Thai farmers in Isaan. The Thaksin administration had several projects in the works to provide government subsidized irrigation systems to support farmers during drought (one would have affected our village). Since the ’06 Coup these projects were cancelled and the money quickly disappeared. We are very hopeful the PM Samak will give the projects another look.

    Any other opinions?
    The Heart determines what is Possible by the Mind

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