Drought strikes but insurance keeps farmers growing

Falling reservoir levels, water rationing and a coffee harvest 30% below expectations. These are some of the effects of the current record drought in central Brazil. But many farmers in the country can continue their work thanks to farm revenue insurance offered by the Brazilian cooperative Coamo and Swiss Re Corporate Solutions.

Valdeci Honiak still remembers when an unprecedented drought hit the southern Brazil state of Paraná in 2011 and he lost his soybean crop.

Honiak, like other farmers, plants soybeans during the area's hot rainy summers. In winter he makes his living from a second crop, corn. He earns enough to support his family.

This is why Honiak is very careful to balance his finances and not assume any additional costs. While negotiating a loan in 2010, he took out a newly offered type of insurance, farm revenue insurance. The plan is offered by Credicoamo,  the credit arm of COAMO, the largest agricultural cooperative in Latin America.

Protecting a business in times of drought

At first Honiak was doubtful, especially since the new policy was more expensive than the traditional one. But his doubts faded when drought set in. Loss calculation and payout were swift. And he received enough cash to cover his losses.

Honiak is now an advocate for revenue insurance. “The more people who take out insurance, the more the price will go down, and everyone will be protected.”

A revolution in farm insurance

The revenue insurance plan was developed jointly by Credicoamo and Swiss Re Corporate Solutions' Agriculture division. According to Swiss Re's Jose Cullen, head of the Brazil section, revenue insurance had never been sold in the country even though it has a successful track record in other countries such as the US.

The plan considers the average individual output of each member and also takes into account another variable: the commodity price on the Chicago Mercantile Exchange, the main global market for agricultural produce and the outlet for more than half of the 5.63 million tons Coamo sells. “We set a value per sack when the policy is being taken out, according to the price of the commodity on the Exchange. This will be used as a benchmark in the case of a claim,” Cullen explains.

A business behavioral revolution

Coamo's president and founder José Aroldo Gallassini is the main advocate of the policy. “Farmers need to be aware that they can protect their operations through insurance. That is why I insist that everyone takes out insurance,” he says.

More than 3 000 members bought insurance for the 2012-2013 harvest. Dilmar Antonio Peri of Credicoamo believes that the availability of the insurance is raising farmers' awareness about the need to protect their business. “The farm revenue insurance policy has brought about a behavioral revolution,” he says.

Covering small scale to large scale

This type of insurance is not only beneficial for small scale farmers but also for larger commercial operations.

"Insurance today offers solutions for any size of farming" says Swiss Re's Cullen. Since insurance keeps farmers in business when disaster strikes, its importance is set to grow as more people move to cities, which means they'll depend on farmers to supply their food.

"Together with the other partners in the agricultural value chain insurance here is a great enabler of agricultural resilience for a more urbanised world" Cullen adds.

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