Brazil Crop Insurance - 3

12/13/2013

By Alastair Stewart
DTN South America Correspondent

SAO PAULO, Brazil (DTN) -- Brazilian grain farmers have enjoyed five years of handsome margins and have plowed a large portion of their profits back into their operations.

But you don't need to remind most farmers about the crisis that followed the last such cycle.

Between 2000 and 2005, Brazilian farmers were similarly bullish. Expansion was the watchword with huge tracts of Cerrado savanna brought into soybean production every year and successive records in farm machinery sales.

Everything turned sour in 2005, though. Crops disappointed, prices fell and the Brazilian real strengthened, leaving many farmers overextended. With credit limited and farmers starved of working capital, the Darwinian nature of farming in the Brazilian Cerrado came to the front. Many farmers in Mato Grosso and surrounding areas were forced to sell out. Others held on but became hamstrung by debt.

The crisis had a transitory effect on overall Brazilian soybean production, but the effects on farm communities and local economies were longer lasting.

In the U.S., revenue insurance has done a great deal to reduce the impact of such cycles and would be an obvious solution to stabilizing the local farm economy here too.

"If Brazil invested more in crop insurance, we'd have a much healthier sector," said Luis Carlos Guedes Pinto, director general of rural insurance at the BB/Mapfre group and former agriculture minister.

Crop insurance has grown in Brazil over the past seven years and approximately 10% of grain-planted area is now covered. But new impetus is needed to extend insurance beyond its southern strongholds and onto the vast Cerrado plains -- the new center of Brazilian grain production. Unfortunately, the government has given no sign that it will give the program another boost. Indeed, inconsistent government support has undermined the scheme currently in place, shaking insurer confidence and limiting growth.

EXPANSION NOT THAT EXPENSIVE

That's a shame, as it really wouldn't cost that much to insure farm yields and prices.

Premium subsidies covering yields on all Brazil's major crops would total R$4.1 billion ($1.7 billion), according to a 2012 report by MBAgro.

The government's budget for premium subsidies is already notionally R$700 million and any additional help would represent a small portion of the annual farm credit budget of R$136 billion ($57 billion).

Meanwhile, the government could save in other areas if revenue insurance were universal.

Brazil will spend R$4 billion ($1.7 billion) on acquiring grains this season as part of its price support policies. Revenue insurance would vastly reduce the need for such schemes.

The other aspect is debt default. The government spends R$3 billion ($1.3 billion) each year on servicing farm debt, of which a large portion has been refinanced because farmers lost crops.

If crop insurance were to become more widespread, there would be less need for refinancing as fewer farmers would go bust.

Insurance would also reduce moral risk.

At present, every time there is a major drought or price crisis, farmers descend on the government and demand refinancing of their debt. The government has little option but to concede as otherwise it puts the sector in default.

"If the government made it clear that insurance was the solution and refinancing wouldn't be an option, the government could rid itself of a hefty cost," said

Luiz Foz, rural insurance specialist and director of the Brazilian General Insurance Federation (FenSeg).

Crop insurance would also ease the impact on the local economy of a bad drought, such as that which hit Rio Grande do Sul in 2011-12.

The direct cost of losses to the Rio Grande do Sul soybean crop was R$434 million ($183 million), but when you add in multiplying factors, such as indirect jobs and machinery sales, the total cost was R$1.8 billion ($760 million), according to calculations by MBAgro, a local farm consultancy.

Crop insurance would greatly limit the impact of such disasters, not only to the economy but also to the public coffers. According to MBAgro, under current conditions a 10% loss to the Brazil farm crop cuts the tax take by R$5.1 billion ($2.2 billion).

In short, there are certainly many ways to justify increased spending on government premium subsidies.

IMPETUS IS VITAL

Universal crop insurance systems are not built overnight -- it took the U.S. 30 years to build to where there is 90% coverage -- and Brazil has come some way in eight years.

It would be a tragedy if impetus is lost because the government is not fully committed to the scheme and is unwilling to increase support to spread it to the Cerrado.

Latent demand is certainly there. Many large corporate farms in the Cerrado spend significant resources on spreading acreage over a wide geographical area in order to diversify risk. These groups would surely be just as happy to take out insurance on revenues instead.

All that is needed is political will.

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

(CZ/AG)