Brazil Crop Insurance - 2

12/12/2013

By Alastair Stewart
DTN South America Correspondent

SAO PAULO, Brazil (DTN) -- Antonio Galvan has never insured his soybean crop.

Much like most of his fellow Brazilian farmers in Mato Grosso, he doesn't think it's worth it.

"We are lucky that we don't have droughts up here. Insuring yields at the premiums offered is just throwing money away," he said from his 6,000-acre farm in Sinop, northern Mato Grosso.

"People only get insurance when the banks make it a condition of credit," he said.

However, if you offered to insure his revenues at a decent premium he would rip the policy right out of your hand.

For, while Galvan and his neighbors are in the enviable position of being able to count on regular rains, it is expensive to hedge, particularly against local prices that can plummet dramatically come harvest time due to poor logistics in the region.

As outlined in the first story of the series (see Brazil Crop Insurance - 1 in Recent Features), Brazil has established crop insurance in parts of the south, where weather risks are great. But for the system to become universal like in the U.S., the insurance has to be attractive to Galvan and his colleagues in the vast Cerrado regions that are the new center of Brazilian grain farming.

Expansion into the center-west and northeast would grow the industry, but also would allow insurers to diversify risk.

"Insurance doesn't work if you only have a small number of high-risk clients," said Luis Carlos Guedes Pinto, director general of rural insurance at the BB/Mapfre group.

More clients in Mato Grosso and surrounding areas would allow insurers to reduce premiums, which in turn would attract more farmers.

But for this virtuous cycle to commence, the government needs to make insurance more attractive, whether it be through stimulating revenue insurance or by increasing subsidies to bring premiums closer to U.S. levels.

However, insurers and farm leaders question the government's commitment to making the next leap forward.

For while it is Brazil's stated aim to grow insurance coverage from its current level of 10% and the subsidy budget has been growing, there is no long-term plan.

"There's no strategy for growth. Just more of the same," said Luiz Foz, rural insurance specialist and director of the Brazilian General Insurance Federation (FenSeg).

Without a clear pathway, insurers are reticent about taking big risks on Brazilian crop insurance, especially since the government hasn't always kept its promises on support.

GOVERNMENT FUNDING SPOTTY

The Agriculture Ministry has increased the crop insurance subsidy budget every year since 2006.

But those funds haven't always been released to insurers.

In 2010, the government's three-year plan budgeted R$451 million (US$192 million) for insurance premium subsidies. That figure was reduced to R$328 million in the annual budget but only R$198 million was actually released to insurers. Similarly, in 2011, the three-year budget plan set aside R$570 million for crop insurance, the annual budget was R$406 million but only R$164 million was released.

"The practice of withholding subsidies makes it difficult for insurers to plan, so they get conservative," said Pedro Loyola, director of the Parana State Agricultural Federation (FAEP) and crop insurance specialist. The number of farmers with insurance in 2010 and 2011 was 30% below that in 2009.

If that wasn't bad enough, funds are often released very late, in some cases only after crops have been harvested.

"It is quite common to have paid out on insurance before actually receiving the government subsidy," said Guedes Pinto.

The situation has improved over the last two seasons but the concern that funds will dry up again hangs over the sector.

Unfortunately, there is no easy fix to the budget issue, which strikes to the heart of the problems with Brazilian farm policy and the governability of Brazil in general.

The issue is that Brazil's federal budget is inflexible. Brazil is constitutionally obliged to spend fixed amounts on health, pensions and education. So, when there is a budgetary shortfall, as there often is, other areas suffer. Also, since government doesn't know if there is a shortfall until later in the year, it holds off on spending.

The Agriculture Ministry is one of the worst hit by this, and is forced to respond by reducing funds for insurance premium subsidies and delaying payment.

"The ministry is in a difficult situation. It is being starved of resources for everything from animal health to insurance," said Alexandre Mendonca de Barros, director of MBAgro, a local farm consultancy.

The paucity of resources also means the Agriculture Ministry's crop insurance department is radically understaffed and underfunded, according to Loyola.

Of course, these issues are easily fixed, if there is political will. The release of farm credit was equally patchy until 2005, but became much smoother once the government started prioritizing it.

"The farm sector needs to lobby the government to improve the situation. Unfortunately, the farm sector isn't very effective," said Foz.

Unless somebody puts a fire under the government, what is likely to be seen is continued growth, but not the big step forward needed to make insurance universal.


Next in series: How increased crop insurance would bring great benefits and wouldn't cost the government that much money.

Alastair Stewart can be reached at alastair.stewart@dtn.com

(ES/SK/CZ)