Photo Competition KANAT –רחובות \שגיא פייס : צלם -זריחה מעל שדה חיטה: שם התמונה
Public Support to Revenue Insurance and Income Safety Nets
Muamar Haj Yehia, Yael Kachel
Seminar ENPARD 18-19.5.2016
Ministry of Agriculture and Rural Development
Risk in Agriculture
Ministry of Agriculture and Rural Development
Farmers are exposed year round to a variety of risks:
• market-related: such as price variations • non-market-related: such as unfavorable weather,
pests, and diseases
Such risks make agricultural production unstable, affecting the income and welfare of agricultural producers
reduced long-term productive investments in agriculture
Factors Affecting the Demand for Agricultural Crop Insurance in Israel :
Ministry of Agriculture and Rural Development
• Liberalization of agricultural sector
• The WTO regulations exempting governments from their subsidy reduction commitments, with regard to assistance to agricultural insurance
• Farming becoming steadily more commercialized, with greater levels of financial investment.
• New insurance products: creation of an insurance program that replaced disaster relief by the government
•
KANAT is the main provider of agricultural insurance in Israel
Ministry of Agriculture and Rural Development
• Founded in 1967 as a government company
• KANAT ownership is held equally by the government and 14 marketing boards and farmers organizations
• KANAT insures most of the crops and the livestock produced in Israel.
• KANAT doesn’t pay dividends to the stockholders
• Government subsidies of premiums to farmers and subsidies of reinsurance for KANAT
Part of this presentation is based on a presentation provided by KANAT
/http://www.kanat.co.il
KANAT provides two main insurance schemes :
Ministry of Agriculture and Rural Development
KANAT offer two main lines of insurance: 1. Multiple Peril Crop Insurance (MPCI) – ביטוח נזקי טבע
provides protection against a loss in yield due to unavoidable, naturally occurring events (e.g. hail, frost, flood(
• Basic Insurance (collective) • Full Coverage Insurance (optional)
2. Natural Disaster Insurance (NDI) – ביטוח אסונות טבע
provides protection against a loss in yield due to unavoidable, naturally occurring events which are not covered under MPCI, including pests and diseases:
• Basic Insurance (collective) • Full Coverage Insurance (optional)
80%
35%
% government participation in insurance premiums
Revenue Protection Insurance
Ministry of Agriculture and Rural Development
Revenue insurance for rainfed wheat:
• provides protection against a loss of revenue caused by price decrease, low yields or a combination of both
• coverage guarantees an amount based on the individual producer’s actual production history or area production history
• The price protection is established based on wheat prices on the Chicago stock market
Realized Risk Distribution (2006 - 2015)
Ministry of Agriculture and Rural Development
Premium Income Distribution by Agriculture Branch (2015)
Ministry of Agriculture and Rural Development
Arable Crops, 8%
Vegetables & Flowers,
32%
Livestock, 22%
Orchards, 39%
Government subsidies for agricultural insurance and compensation payments
Ministry of Agriculture and Rural Development
0
50
100
150
200
250
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Mill
ion
NIS
Natural disasters: Compensation
Natural disasters: Support for premium payments
Natural damages: Compensation
Natural damages: Support for premium payments
Revenue Insurance as a Substitute for Crop Insurance and Distortionary Support Policies
Prof. I. Finkelshtain, Dr. Z. Bar-Shira, M. Haj Ihie, M. Rosenberg
Department of Environmental Economics & Management, the Hebrew University of Jerusalem
We appreciate: I. Financial Support from the Chief Scientist Fund of the Agricultural Ministry, II. Kanat (Israeli provider of crop insurance) for data provision and students’
fellowships, III. The Research and Economic division of the Ministry for the analysis of farms’
records data. IV. BARD for funding the extension of the research project (with Prof. Barry
Goodwin).
How Risky are Farmers’ Profits in Israel
• Despite the advanced technology that characterizes the Israeli agriculture, the sector faces considerable technological and market risks.
• The annual cost of natural damages to agriculture is estimated at more than 500 million NIS, about 5% of agricultural GNP.
• The CV of typical daily price series is well above 30%.
.
0
50
100
150
200
250
300
0.05 0.16 0.27 0.38 0.49 0.59 0.70 0.81 0.92 1.03 1.13 1.24 1.35 1.46 1.57 1.67 1.78 1.89 2.00 2.11 2.21 2.32 2.43 2.54 2.64 More
# of Farmers at each Risk Level
The Distribution of farms’ revenue C.V.s Based on a sample of 2,800 farmers 2005-13.
• The annual revenue fluctuation of the median farmer is above 80%
• The cost of the risk,
quantified by the Arrow-Pratt Risk premium is 2 billion $, about 15% of total revenue.
Revenue Risk
The CV of the Median Farmer increased from 0.2 to 0.7.
0.00%
20.00%
40.00%
60.00%
80.00%
100.00%
120.00%
0.0
8 0
.15
0.2
3 0
.31
0.3
8 0
.46
0.5
3 0
.61
0.6
9 0
.76
0.8
4 0
.92
0.9
9 1
.07
1.1
5 1
.22
1.3
0 1
.37
1.4
5 1
.53
1.6
0 1
.68
1.7
6 1
.83
1.9
1
Acc
umul
ated
% in
the
Po
pu
lati
on
CDFs of C.V.s
2009-2013
2005-2008 Median Farmer
Is the Risk Increasing?
Counter-Risk Support Policies
• The extent of counter risk-support policies in Israel is limited.
• Estimated at about 0.66% of agricultural revenue as compared to 1.2% in the OECD, 5% in the U.S. and 4% in Canada.
Comparing Insurance Programs at the Farm Level Methodology:
• We examined plantation and citrus farms.
• Estimated (log normal) distribution of prices based on series of wholesale prices and (Gamma) distribution of yield based on Kanat data.
• Based on Sklar's theorem, a joint distribution (Copula) was constructed with varying correlation levels.
• Assumptions: conservative levels of risk aversion (r=0.3), and negative but small correlation levels.
Efficiency Index:
Results:
1) Revenue insurance yields .
2) Whole-farm revenue insurance is 10% (20%) more efficient than crop-specific revenue (crop) insurance.
Profits C.E.
Insurance Cost
1.4
WTO Revenue Insurance at the Sector Level Based on the above sample, the cost of providing revenue insurance to the sector at the maximal level which is allowed by the WTO (but indemnity< 1 million NIS) is about 1.1. billion NIS.
0.00
0.50
1.00
1.50
2.00
2.50
0
200,000,000
400,000,000
600,000,000
800,000,000
1,000,000,000
1,200,000,000
1,400,000,000
0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 1.0
NIS
Cost-Benefit (WTO) whole Farm Revenue Insurance
עלות הביטוח
תועלת מהתכנית
מדד יעילות
0.7
% of covered damage
Insurance cost
Change of C.E.
Efficiency Index
1.55
Conclusions & Policy Recommendations • Farming in Israel is very risky business.
• The magnitude of counter risk support policies of the Israeli government is low.
• The return for 1 NIS investment in whole farm revenue insurance is about 1.5 NIS ( the rise in farmers’ C.E.)
• The cost of providing whole farm revenue insurance for the entire sector is about 1 billion NIS, seems plausible as part of the general reform in support policies.
• Recommendation: work with KANAT to expand the agricultural insurance programs in general and revenue insurance in particular.
Questions for Discussion - Insurance
1. Importance of support for insurance: what are the costs and benefits?
2. Whole farm revenue insurance:
• Experience from other countries
• Benefits vs. difficulties of implementation
3. Should government support for Multiple Peril Crop Insurance be increased (currently 35%)?
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