South Africa depends on agriculture. It is not merely a highly diversified industry, but also a cornerstone of the economy.
It is a sector that will only increase in importance, as growth in the agricultural sector exceeded economic growth in 2020. South Africa’s agricultural industry includes the production of all the major grains (excluding rice), oilseeds, fruits, sugar, and citrus, to only name a few. The country has a market-oriented agricultural economy with land resources, legacies, and varying capabilities, consisting of commercial farms with established value chains and small-scale subsistence-based production. Agriculture is one of the foundations of developing economies. In the agricultural industry, South Africa showed growth of 5.9% during the fourth quarter of 2020, bringing the overall agricultural GDP growth to 13.1% year-on-year, compared to a 7% economic contraction for the country (Stats SA 2021).
To safeguard and accelerate future growth and to pursue food security, various risks must be effectively and sustainably addressed or mitigated within the industry. This must happen on a continuous basis.
Numerous factors pose risk to agriculture. South Africa suffers from widespread unemployment, socio-political and economic instability that impacts on agriculture in general. Considering this uncertainty or uncertain future events form a substantial part of any agricultural risk model, the agricultural sector relies on insurance to assist it in limiting financial exposure to protect revenue and, by extension, employment, fiscal benefits, and food security.
Status quo
To elaborate, insurance is incorporated within any farming enterprise to address this uncertainty and limit the exposure caused by an undetermined future event. Approximately 1.3% of total farming income is allocated to insurance costs (Stats SA, 2019). The escalation in financial pressures amongst South African farmers has led to farmers considering the costs versus the benefits of insurance, bearing in mind the price, specifically amongst crop producers. There has been a decrease in the demand for insurance products in the agricultural sector, influenced by increasing fuel, fertiliser, and electricity prices. The ongoing Covid 19 pandemic has caused input constraints, for example the glyphosate shortage, an essential herbicide within the industry. The shortage directly impacts maize production, leading to a glyphosate price increase from $ 3 270/t in June 2020 to $ 8 004/t in June 2021.
The cost of agricultural insurance products available for the benefit of farmers has served as a severe structural limitation to its access. It limits the farmer’s ability to repay loans, jeopardizing their access to credit in their business as a going concern. In turn, limitations to acquire capital or credit directly affect yields (production capacity), income, employment, and food security. In developed countries, farmers benefit from crop insurance, price supports, and guarantees. However, mitigation measures are costly (developed and developing countries alike), leading to the exclusion of most farmers in South Africa.
Ripe for disruption?
To promote access to insurance for smallholder farmers and farming enterprises, fertilizer companies such as Syngenta have developed the Foundation for Sustainable Agriculture (SFSA). The objective of the foundation is to provide affordable insurance to smallholders in East Africa. Typically covering various crops against weather risks like drought, storms, flooding, and erratic rains. In addition to the SFSA, Syngenta founded an independent organization, Climate Risk Enterprise providing micro-insurance solutions to smallholder farmers. The inclusion of smallholder offers creates an opportunity to incorporate high-quality inputs, improve their ability to access credit, and increase productivity.
Even considering that SFSA's Agricultural Insurance Solutions (AIS) is not identified as an insurance company but an intermediary, it still promotes access to insurance products for smaller market entrants previously and currently excluded. They provide a form of access to risk mitigation measures to small holder producers. Syngenta as an entrant, considering its size and capacity, has impacted the insurance industry. Syngenta has found an opportunity to address a gap causing inequality within the agricultural insurance industry. It is important to note that the products are limited (specifically in terms of the type of insurance and to smaller-scale farmers); however, it may be the start of a development path to initiate diversified and cost-effective products to assist farmers in general. Like insurance companies reducing premiums on cars if you work from home, there might be ways to limit premiums and offerings based on specific clients' needs. Raising the question, will commercial agricultural insurance providers' current monopoly or position be jeopardized by innovative input suppliers with appropriate capital backing, as they might be unable to adapt to the changing environment?
