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| | The necessary development of a crop insurance |
The recent price evolution and the international environment during the last months show that agricultural markets are more than ever subject to important risks. The issue of the means available to the farmers and governments to protect themselves against this, and particularly insurance mechanisms, becomes particularly acute when facing the risk of a government withdrawal at national and supranational level. However, what insurance are we talking about? And beyond this, what risks are we really trying to protect ourselves against? These are the questions which Senator Daniel Soulage’s report is trying to answer, on behalf of the Economic Affairs Commission based on the law proposal aiming to generalize a compulsory crop insurance, which we hereby publish an extract of.
The Momagri editorial team
The relevance of a global hazard approach
Confronted with government withdrawal – at national as well as European level - and to a trend of growing risks, insurance mechanisms resulting from the farmers’ personal initiatives and responsibility are likely to become more and more important and to become privileged instruments of risk management.
Hence, the approach which has already considerably evolved since the early insurance contracts which exclusively targeted the « hail » risk must continue to gain substance and become as global as possible to allow the appearance of complete products well adapted to the needs. The substitution of a “crop insurance” denomination to today’s commonly used “hazard insurance” would also make sense.
One could thus question the relevance of a sanitary risk insurance, which occurrence increased considerably these last years due to trade globalisation. Although the creation of a specialized section at the FNGCA is planned as well as that of a fund at European level, one must not discard the idea of protecting oneself against this type of risk by signing an insurance contract, at least as a complement to the risks already covered.
Then, the introduction of a sales turnover insurance can, as of now, be discussed. Such a product goes beyond a crop insurance since it aims at guaranteeing farming businesses a net yearly income per hectare and per crop type. It offers a definite interest since pricing aids and help when prices fall below a certain level are no longer permitted since the agricultural agreement at the Uruguay round and the pressures aiming to promote the « separation » of direct help.
Several products of the sort have been sold successfully in Canada and in the United States. Some insurance companies in France said they were currently working at it. While the priority remains the development of a crop insurance system, a system aimed at guaranteeing farmer revenue must not be discarded, which could constitute – as is the case in the United States- a « third protection level » against risks, which would follow a first « safety cushion » level and a second level corresponding to a traditional crop insurance.
In this respect, 2013 could be an interesting milestone to make a first assessment of the crop insurance and to think about the opportunity of extending it through a more globalized insurance mechanism. It is true that it will then be necessary to overcome the hesitations of the European Commissioner for Agriculture who spoke against such a system at the CAP “health check-up” preparatory discussions.
A necessary development of the crop insurance
If the latest agricultural orientation law « reinforced the crop insurance through its progressive generalization to all agricultural produce », only 10% of the farmers approximately are covered today, and this is almost exclusively for the main cereals. Nurserymen and wine growers benefit from low protection whereas their produce is more fragile. An extension of the crop insurance would allow “to enlarge the base of subscribers” and mechanically, to reduce the premium levels and make insurance more accessible to a greater number of farmers.
Thus article 1 says that the crop insurance is « extended to all agricultural produce according to the terms fixed by decree. »
The Economic Affairs Commission fully supports the crop insurance extension objective provided by the law proposal. This objective, as mentioned earlier, has already been included in the positive legislation when the last agricultural orientation law was voted. Concerning this aspect alone, the authors of the law proposal have already been partly satisfied. Nevertheless, whereas the principle of a progressive extension of the crop insurance is today secured, and is even enforced by law, the examination of the insurance guarantees of the farming world show that it is far from being accepted in practice. As mentioned, only one tenth of the farmers today benefit from the system.
It is therefore imperative that the mechanism be really extended now and this for several reasons:
> the progressive « exit » from the FNGCA of a growing number of productions will, over time, leave the farmers no other choice than to subscribe to insurances if they wish to protect themselves against hazards which national solidarity doesn’t want to cover anymore ;
> provided it respects certain conditions, crop insurance is compatible with international trade rules and may , in this respect be put into the « green boxes » of the WTO ;
> it benefits from a level of awareness and real support by the Community institutions which are about to open up the old article 69 mechanism, specifically in order to promote it through European public support;
> as the authors of the law proposal indicated it, the massive call on this mechanism will lead to the extension of the subscription base and therefore will tend to decrease the premiums and make them more accessible and more protective of the agricultural world ;
> the growing intensity and the frequency of risks of all sorts – natural as well as sanitary and economic- due to the progressive climate modification and the development of world trade makes an instrument to manage them and which complies with corporate logic, indispensable.
A report by Daniel Soulage, Senator of the Lot et Garonne department
The development of private insurance mechanisms, in particular of crop insurance, is an interesting track to explore, as an alternative tool to control specific agricultural risks. However, we shouldn’t trust that such mechanisms will tomorrow, allow farmers to face all the risks they are exposed to. Because, one of the specificities of the agricultural sector compared to other sectors of the economy is precisely its exposure to not only exogenous (climactic and epizootic hazards) but also endogenous or market risks due to anticipative farmer and speculators’ –irreversible- mistakes made on forward markets. And, the latter, contrary to exogenous risks, are not insurable on the marketplace. Hence, three essential questions arise:
> If the market isn’t capable of insuring market risks, who should be in charge then? Government, as the insurer of last resort?
> If Government is the only actor capable of supporting market risks insurance, what should the application rules be?
> If the volatility of agricultural prices is partly due to private speculators who act on forward markets, shouldn’t rules defined through international consensus, aiming to control agricultural prices be introduced?
Getting closer to the moment where the CAP will be reformed, it is essential to provide answers to these questions resulting from the international financial crisis. Otherwise, the risk is to live in a world where “tidal waves” can be as destabilizing as those observed on financial markets, but where there will be no more adequate regulating mechanisms to deal with them.
The Momagri editorial team | |
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