Dark clouds gather over one of South Africa’s largest employers

Climate change, rising input costs, and deteriorating infrastructure pose significant risks to South African farmers, with experts warning that they should make use of agricultural insurance to mitigate financial losses.

This is according to feedback from Hanjo Fourie, business head of agri underwriting at Santam, who explained that the agriculture sector is integral to the South African economy.

It contributes around R400 billion to GDP every year, supports approximately 870,000 jobs, and brings in $13 billion (R235.5 billion) in export revenue.

“Additionally, it plays a critical role in supporting South Africa’s food security – a growing risk globally,” Fourie said.

“But unfortunately, the sector is more prone to the systemic risk of climate change, and specifically water-related losses, than any other sector.”

“The impact of climate change on farming is already evident, with unpredictable weather patterns such as drought, flooding, and hail causing substantial damage to both crops and infrastructure.”

He added that the majority of these weather-related catastrophe claims on crops were for hail.

“Although climate change risk is top-of-mind among global insurers and reinsurers, farmers have long battled the severe effects of weather patterns such as El Niño and La Niña.”

“El Niño is a weather phenomenon that results in less rainfall and higher temperatures across much of Sub-Saharan Africa, while La Niña contributes to periods of above-average annual rainfall in the region.”

Some of the biggest drought years were 2007, 2012, and 2016.

Although the current season’s rains came very late – outside of the optimal planting windows in most areas – the season luckily turned out well from a production point of view, Fourie noted.

“In addition to shifting climate factors, the current landscape means that farmers are already contending with higher input costs like diesel, fertilizer, and pesticides among others.”

“This increases the cost of production for farmers which makes it even more important to mitigate production risks.”

“To ensure there is a return on capital invested, and thereby the sustainability of the operation secured, the impact of production risks must be managed sufficiently.”

On top of this, production risks can negatively impact a commercial farm’s profitability, liquidity, and even the sustainability of its operations, Fourie explained.

“But farming businesses cannot produce any return without taking on risk. Producers must evaluate the cost of risk transfer versus the impact of risk exposure on capital.”

According to Fourie, there are three key strategies that modern farmers typically evaluate during the decision-making process.

These include reducing the probability of the occurrence of a possible contingency, transferring the risk by utilising insurance, or mitigating the impact of production risks if they do occur.

“Most producers make use of risk transfer, using crop insurance to hedge against production risks.”

“Crop insurance is an ideal instrument for farmers to mitigate production risks – including weather-related losses.”

“Furthermore, local farmers unfortunately face unique on-the-ground risks which exacerbate water-related losses, most notably those linked to deteriorating infrastructure and unreliable electricity and water supply.”

For this reason, Fourie said that agricultural insurance is crucial in helping farmers manage the financial risks associated with a loss event like drought, flood or hail which can have devastating effects on crop yields, livestock, and overall farm productivity.

“With the combined effect of climate shifts and a decline in national and municipal infrastructure, agricultural insurance needs to offer more targeted, flexible product options.”

Crop insurance can protect farmers against losses from events like hail, frost, locusts, in transit and fire damage.

Multi-peril crop insurance (MPCI) policies, on the other hand, protect against loss or damage due to drought, excess rainfall and flood.

The type of product and cost of the insurance will depend on the impact of the risk on the producer’s income and the ability to tolerate risk.

Factors such as the client’s production history, soil analysis and location will also affect the price of the product.

For many farmers, affordability of coverage continues to be an important factor when buying insurance.

However, Fourie warned that the price of crop insurance is driven by, among other factors, historical loss experiences, type of crop and the location of the operation.

“The only way for an insurer to rein in costs would be to reduce cover through higher policy excesses or excluding cover for specific perils. But failing to match premium to risk has dire consequences.”

“Farmers should carefully study their policy wordings to ensure they are getting the most comprehensive cover.”

“Additionally, steps can be taken to reduce the financial and insurable risk exposures of farms by diversifying geographic exposures and income streams.”