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Page 1: Public Support to Revenue Insurance and Income Safety Nets · Public Support to Revenue Insurance and Income Safety Nets Muamar Haj Yehia, Yael Kachel ... M. Haj Ihie, M. Rosenberg

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

Page 2: Public Support to Revenue Insurance and Income Safety Nets · Public Support to Revenue Insurance and Income Safety Nets Muamar Haj Yehia, Yael Kachel ... M. Haj Ihie, M. Rosenberg

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

Page 3: Public Support to Revenue Insurance and Income Safety Nets · Public Support to Revenue Insurance and Income Safety Nets Muamar Haj Yehia, Yael Kachel ... M. Haj Ihie, M. Rosenberg

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

Page 4: Public Support to Revenue Insurance and Income Safety Nets · Public Support to Revenue Insurance and Income Safety Nets Muamar Haj Yehia, Yael Kachel ... M. Haj Ihie, M. Rosenberg

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

Page 5: Public Support to Revenue Insurance and Income Safety Nets · Public Support to Revenue Insurance and Income Safety Nets Muamar Haj Yehia, Yael Kachel ... M. Haj Ihie, M. Rosenberg

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

Page 6: Public Support to Revenue Insurance and Income Safety Nets · Public Support to Revenue Insurance and Income Safety Nets Muamar Haj Yehia, Yael Kachel ... M. Haj Ihie, M. Rosenberg

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

Page 7: Public Support to Revenue Insurance and Income Safety Nets · Public Support to Revenue Insurance and Income Safety Nets Muamar Haj Yehia, Yael Kachel ... M. Haj Ihie, M. Rosenberg

Realized Risk Distribution (2006 - 2015)

Ministry of Agriculture and Rural Development

Page 8: Public Support to Revenue Insurance and Income Safety Nets · Public Support to Revenue Insurance and Income Safety Nets Muamar Haj Yehia, Yael Kachel ... M. Haj Ihie, M. Rosenberg

Premium Income Distribution by Agriculture Branch (2015)

Ministry of Agriculture and Rural Development

Arable Crops, 8%

Vegetables & Flowers,

32%

Livestock, 22%

Orchards, 39%

Page 9: Public Support to Revenue Insurance and Income Safety Nets · Public Support to Revenue Insurance and Income Safety Nets Muamar Haj Yehia, Yael Kachel ... M. Haj Ihie, M. Rosenberg

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

Page 10: Public Support to Revenue Insurance and Income Safety Nets · Public Support to Revenue Insurance and Income Safety Nets Muamar Haj Yehia, Yael Kachel ... M. Haj Ihie, M. Rosenberg

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).

Page 11: Public Support to Revenue Insurance and Income Safety Nets · Public Support to Revenue Insurance and Income Safety Nets Muamar Haj Yehia, Yael Kachel ... M. Haj Ihie, M. Rosenberg

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%.

.

Page 12: Public Support to Revenue Insurance and Income Safety Nets · Public Support to Revenue Insurance and Income Safety Nets Muamar Haj Yehia, Yael Kachel ... M. Haj Ihie, M. Rosenberg

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

Page 13: Public Support to Revenue Insurance and Income Safety Nets · Public Support to Revenue Insurance and Income Safety Nets Muamar Haj Yehia, Yael Kachel ... M. Haj Ihie, M. Rosenberg

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?

Page 14: Public Support to Revenue Insurance and Income Safety Nets · Public Support to Revenue Insurance and Income Safety Nets Muamar Haj Yehia, Yael Kachel ... M. Haj Ihie, M. Rosenberg

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.

Page 15: Public Support to Revenue Insurance and Income Safety Nets · Public Support to Revenue Insurance and Income Safety Nets Muamar Haj Yehia, Yael Kachel ... M. Haj Ihie, M. Rosenberg

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

Page 16: Public Support to Revenue Insurance and Income Safety Nets · Public Support to Revenue Insurance and Income Safety Nets Muamar Haj Yehia, Yael Kachel ... M. Haj Ihie, M. Rosenberg

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

Page 17: Public Support to Revenue Insurance and Income Safety Nets · Public Support to Revenue Insurance and Income Safety Nets Muamar Haj Yehia, Yael Kachel ... M. Haj Ihie, M. Rosenberg

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.

Page 18: Public Support to Revenue Insurance and Income Safety Nets · Public Support to Revenue Insurance and Income Safety Nets Muamar Haj Yehia, Yael Kachel ... M. Haj Ihie, M. Rosenberg

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%)?