Agriculture a risky business! Anikó Juhász V. Forum Asnacodi Roma, 2nd to 3d November 2017
Research Insitute of Agricultural Economics (AKI) Background institute of Hungarian Ministry of Agriculture Staff number: 131, 43 PhD or studies More than 60 years of policy analysis Research Sustainable bio-economy and policy evaluation Natural resource management in agriculture Resource-efficient agri-food value chains Rural development and programme evaluation Development opportunities in freshwater aquaculture Information systems Farm Accountancy Data Network (FADN) Market Price Information System (MPIS) Agricultural Statistical Information System (ASIR)
Main characteristics of risk and the reasons of risk management Decision Risk Probability Risk management is about money! Risk bearing capacity of the farm Risk management Size of loss
Main risks of agriculture Marketing risk Production risk Financial risk Legal risk Human risk USDA, 2013
Main risks to be transferred Type of risk Micro (Idiosyncratic) Meso (Covariant) Macro (Systemic) Market/Price Production Financial Changes in income from other sources (non-farm) Changes in price of land, new requirements from food industry Institutional/Legal Liability risk Changes in local policy or regulations Changes in Input/outpur prices due to shocks, trade policy, new markets, The world of stock endogenous variability markets solution by Hail, frost, non-contagious diseases, personal hazards (illness, death), assets Rainfall, landslides, pollution hedging The risks world of insurances solution by risk community- The world of state toolkit solution by compulsory fonds or subsidies Floods, droughts, pests, contagious diseases, technology Changes in interest rates/value of financial assets/access to credit Changes in regional or national policy and regulations, environmental lax, agricultural payments Human Illness, Accident, Death Changes in labour supply Changes in agricultural education
Evolution of risk management schemes in Hungary I. step 1997-2003 30 % flat rate subsidy to insurance fees Problems: continuous mishmatch between risks covered by insurances and damages caused by risks, only 30-40% penetration Average proportion of damages caused by adverse climatic events Water (flood, inland water and heavy rain) 18% Other 3% Hail and storm 21% Average proportion of risks covered by insurances Storm Frost 5% 5% Other 3% Frost (at winter and spring) 16% Drought 42% Hail 87%
Evolution of risk management schemes in Hungary II. step 2007-2011 National Damage Mitigation Fund against all risks Problems: low penetration, very high compensation claims vs. low rate of damage mitigation, high administration burden, reduced number of insured farmers Claims and payments in the NMF 160,0 140,0 120,0 100,0 80,0 60,0 40,0 20,0 0,0 2007 2008 2009 2010 2011 Mitigation payments Compensation claims Rate of mitigation (right axis) 120% 100% 80% 60% 40% 20% 0%
Hungarian Agricultural Risk Management System (HARMS) Since 2012 HARMS MKR (in Hungarian) Two pillars: I. pillar Compulsory National Damage Mitigation Fund Mitigation over 30% loss of crop level by all climatic risks II. pillar Voluntary insurance subsidised by the state Compensation over 30%/50% loss of crop level by 8 risk types Common risk definitions, common reference crop yields Interdependencies only 50% of mitigation payments without insurance and the compensation payment is deductable from mitigation payments
Structure of HARMS how does it work? II. Pillar - voluntary A, B, C insurance types regulated by the state (min. 55% : 40% : 30% rate of subsidy) EAFRD + national source fee subsidy (65% : 35%) Private insurance companies Insurance fee Compensation payments Farmers Mitigation payments Compensation claims I. Pillar - mandatory National Damage Mitigation Fund farmers + state aid (50% : 50%) Public damage requierements justification Crop losses caused by adverse c. events Information about the insurance contract and the compensation payments
Structure of HARMS who is involved? Login to Compensation System (EK) Payment of mitigation contribution Determining the amount of compensation contribution ARDA Farmers Payments of compensation Operation of Damage Mitigation Fund, management of compensation contributions, determination, payment and accounting of compensation or/and insurance subsidies Improved compensation and subsidy management Improved systemclaim management system Control of damage determination Insurance contracts Insurance claim reporting Insurance compensation Client registration Common Master Data Management System Customer register Register of activitiy area FADN data collection Regional government offices Damage claim notification Damage notification Functional supervision Professional and coordination of supervision and damage determination coordination of damage determination Damage determination workflow supporting software Electronic notice of loss and subsidy claim declaration for farmers Market insurance Insurance contract data Interface Insurance compensatio n data Interface Agricultural risk management data base Statistical and reporting system Interface Interface Interface Interface Interface Interface HCA Determination of damage Damage determination control supporting ICT infrastructure and software Interface NFCSO Interface MRD RIAE IGCRS HMS GDWM Operation of the Hungarian FADN System Analysis of profit, cost and income data Agricultural Risk Management Systems Improved FADN (plot-level yield data collection) Operation of Remote Sensing Damage Assessment Ssystem Remote sensing damage assessment method Satellite images Remote sensing damage assessment software and data processing Basic meteorological data services for the determination of damage Extended Meteorological Data Collection System Meteorological data processing method Meteorological data storage ICT infrastructure General management of Agricultural Risk Management System (supervision, analysis and planning) Basic data services of inland water for the determination of damage Extended Defence Information System Members of the system: 70-100 thousand farmers 11 insurance companies and mutual funds 19 regional government offices 8 central offices and institutes Electronic notice of loss and claim declaration for farmers on a web application using mapping system Claim adjustment support and substitution with meteorological, remote sensing and water management indices Site inspection verification by electronic and GIS technologies Electronic notice of official decisions about the damage mitigation and the insurance premium subsidy
Structure of HARMS what does it cover? Type of risk Micro (Idiosyncratic) Meso (Covariant) Macro (Systemic) Market/Price Production Financial Institutional/Legal Liability risk Good penetrated Changes in price system of land, new with requirements from food industry multiperil coverage Rainfall, landslides, BUT pollution Only against production risks Only for crop products Without coverage Changes in local for policy or regulations Market risks Animal risks Hail, frost, non-contagious diseases, personal hazards (illness, death), assets risks Changes in income from other sources (non-farm) Changes in Input/outpur prices due to shocks, trade policy, new markets, endogenous variability Floods, droughts, pests, contagious diseases, technology Changes in interest rates/value of financial assets/access to credit Changes in regional or national policy and regulations, environmental lax, agricultural payments Human Illness, Accident, Death Changes in labour supply Changes in agricultural education HARMS - MKR Insurance Stock market
Structure of HARMS how much does it compensate? Risks Hail, Storm, Fire Winter/s pring Drought frost Heavy rain, flood Inland water I. pillar II. pillar Private add. i. >15% farm level, >30% crop level >30% >50% >50% >40% - crop level >5% to - - - - <30% crop level
yield Structure of HARMS how nuch does it compensate? average yield (100%) 5% deductable 30% deductable 50% deductable damaged yield: 45% I. pillar II. pillar A insurance +private additional i. hail fire storm winter frost drought inland water heavy rain spring frost flood damage mitigation A i. payments Private add. i. payments
HARMS I. Pillar what should the farmer do? For farmers its simple! Payment application submitted once a year electronically - end of the production Application automatically visualizes applicant s land related data in the system The form is filled in with the following data: size of production area by plants verified damages occurred during the year yield and price data for the reference period Applicant shall fill in only the harvest data for the actual year
HARMS II. Pillar what should the farmer do? For farmers its simple! Two steps: 1. Make an insurance contract. The contract is the same as crop insurances 2. Make the tender. Take an: (in the SAPS tender) Give: 1. Personal data 2. Field data (by LIPS) 3. Crop data (by SAPS) 4. Choose risks and type Receive premiums
HARMS I. and II. Pillars how much it costs? I. pillar fixed contribution Arable crops : 1000 HUF 3,2 EUR/ha Vegetables: 3000 HUF 9,6 EUR/ha Plantations: 3000 HUF 9,6 EUR/ha II. pillar approximated averages of fees Arable crops : A ~ 7000 HUF 22 EUR/ha B ~ 2500 HUF/ha 8 EUR/ha Vegetables: B ~ 20 000 HUF 65 EUR/ha Plantations: A, B ~ 150 000 HUF 500 EUR/ha
Percent Percent Percent HARMS Pillar II. how much it costs? 7 12 18 6 5 10 8 16 14 12 4 3 2 1 0 6 4 2 0 10 8 6 4 2 0 "A" (9 risks) "B" (hail) "B" (hail) "A" (9 risks) "B" (hail)
How to decide on the farm level? Example risk type is drought Irrigation Insurance Deep tillage Cost: 3000 Eur/ha/25 years Benefit: ~ +30% yield Cost: 25 Eur /ha/year Benefit: 50% guaranteed yield Cost: 100 Eur/ha/6 years Benefit: ~ +20% yield Solution information! Probability Loss size Value at risk Cost-benefit analysis The more precise information, the better decision about risk management!
How to help the decision making? Digitalisation of agriculture: Corporate governance systems Precision farming Data collection with sensors Remote sensing Soil surveys Market watch Decision support tools Advisors and assistance
Future plans developing HARMS Improvement is needed, because: Producers are not encouraged to reduce risks. Plantations are the winners of the system. Micro- and small enterprises take the advantage of the HARMs Insurance companies do not like to insure plantations Establishment of III. pillar Income Stabilisation Tool NO POLITICAL DECISION! Target groups: dairy, pig and poultry farmers they could nt be members of pillar I. and II. Reforming of pillar IV. subsidised credits for damaged farmers Connection of occurence of damages and crediting of farmers Bonus malus Establishment of pillar 0. the hail protection system covering all the country Installation of ground generators
Summary Agriculture is a risky business. The production risk is only one risk affecting the agriculture. The risk is transferable and insuring is only a small part of risk management. The farmers take the ultimate responsibility for their farms good tool to rethink the management of the farm. Information is key to good risk management developing information and decision making tools and advisory services is as important as support mechanisms!
Thank you for your attention! Our key experts on risk management: kemeny.gabor@aki.gov.hu lamfalusi.ibolya@aki.gov.hu
HARMS I. Pillar mitigation by size class who? 2012 2016 2,1% 11,0% 5,4% Size class Micro: less than 5 ha 48,2% 27,8% 20,2% Small: 5 to 20 ha Medium: 20 to 200 ha Others: over 200 ha 38,8% 46,6% Micro Small Medium Others Micro Small Medium Others
HARMS I. Pillar mitigation by crops what? 2012 2016 9,5% 5,2% 9,2% Arable crops 85,3% 39,7% 51,1% Plantations Vegetables
HARMS I. Pillar mitigation by risks why? Spring frost; 26,5% Winter frost; 6,7% Storm; 2,3% Drought; 47,0% 2012-2016 Drought is the most common risk in Hungary in the first pillar Spring frost is the second one Flood; 0,4% Combinated losses; 0,2% Hail; 12,2% Heavy rain; 0,8% Inland water; 3,8%
HARMS I. Pillar mitigation benefits by location where? 2012-2016 Eastern Hungary and the central part of Great Plain are the most risky areas
HARMS II. Pillar insurance by size class who? 2012 2016 1% 6% 1% 8% 31% Size class Micro: less than 5 ha Small: 5 to 20 ha Medium: 20 to 200 ha Others: over 200 ha 62% 54% 37% Micro Small Medium Others Micro Small Medium Others
per cent HARMS II. Pillar insurance by crops what? 40 35 30 25 20 15 10 5 28,7 22,3 20,4 14,1 3,9 5,1 5,9 6,5 5,9 6,8 36,7 23,4 20,0 12,3 3,3 2012-2016 Increasing coverage of each categories Plantations have the lower coverage 0 Arable crops Plantations Vegetables 2012 2013 2014 2015 2016
HARMS II. Pillar insurance compensation by risks why? Drought; 6,7% Storm; 7,7% Heavy rain; 0,8% Flood; 0,8% Spring frost; 4,1% 2012-2016 Most of the losses were caused by hail Storm is the second one Fire; 0,5% Hail; 79,4%
HARMS II. Pillar insurance comp. by location where? 2012 2016 Szabolcs-Szatmár- Bereg county Southern part of Great Plain, and Southern part of Transdanubian region are the most compensated areas