Swiss Re brings its expertise to bear in minimising weather-induced volatility in agricultural output

Our agricultural risk transfer solutions are key risk management tools to protect farming incomes, support much needed investment in the sector and ultimately increase production.

The global food crisis should not have caught us unaware. Warnings were already being issued by the United Nations in 2008 that “the silent tsunami of rising food prices is threatening to push more than 100 million worldwide into hunger.”

Back then, UN Secretary General Ban Ki-moon said that world food production would need to rise 50% by 2030 to meet demand. He went on to point out that export restrictions and import tariffs should be eased to alleviate the crisis.

The problem has not gone away. On the contrary, it looks to be getting worse. The current year has seen food prices spike once more, driven by soaring prices of cereals, sugar and edible oils.

Why is this happening? In two recent interviews with broadcaster CNBC, on Squawk Box and Protect Your Wealth, Swiss Re’s Roman Hohl, Head of Agriculture Asia Pacific, said that there were several factors in play, among which was growing demand generated by population increases. Another was the expanding middle class in the emerging world which was consuming more meat and milk that require larger quantities of grain to produce.

The substantial appetite of the biofuel industry was another factor in explaining the upsurge in certain commodity prices. At the same time, the supply situation was tight anyway in the wake of 2010’s weather shocks in several key producing and exporting countries, including Australia, Russia, the US and Argentina.

He added that adverse weather conditions in the form of drought and flood helped drive down global grain production by 1.2% last year, instead of the needed 2.5% increase. This had resulted in a spike in commodity prices and by extension to food prices.

China is also keenly aware of how important its agricultural sector is to the overall economy and how vulnerable it is to extreme weather patterns, such as drought and flood. This is manifest in the ongoing winter drought in nine provinces and an expectation of a low winter wheat production.

In response to this need, the government introduced agricultural insurance in 2007 to help safeguard farmers’ incomes and boost their resilience to financial hardship in the wake of poor harvests. In 2008, as part of this plan, the Beijing Municipal Government forged a partnership with Swiss Re to purchase reinsurance cover. The agreement will provide protection for 400,000 farming households in Beijing province.

This public-private partnership is ground-breaking in China and not only signals a shift away from post-disaster financing towards a pre-emptive risk management strategy, but also encourages the investment needed to modernise the Chinese agricultural sector and boost productivity.

Swiss Re’s expertise in reducing weather-induced volatility in agricultural output has also been brought to bear in Vietnam. Through its insurance arm, Vietnam’s Agribank, the key provider of agriculture loans, is insuring its rice farming clients against being unable to pay back loans due to low yields. The risk will, in turn, be transferred via reinsurance to Swiss Re and the Vietnam National Reinsurance Corporation (Vina Re).

Innovative, index-based solutions like these can be more attractive than conventional insurance since they can be offered to large numbers of small-scale farmers, are transparent in structure, have low administrative costs and enable fast payouts. Says Hohl : “The Vietnam transaction, designed to efficiently manage volatility in rice production, could also benefit other Southeast Asian countries.”

The transaction, too, shows that agriculture risk transfer is a key risk management tool to protect farming incomes, support much needed investment in the sector and ultimately increase production.

Published 9 March 2011

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