DESPITE the food sector playing a bigger role in the economy, our foodimport bill remains woefully high.

At a food technology seminar in October last year, Agriculture MinisterDatuk Dr Effendi Norwawi said Malaysia's goal was to produce RM81 billionworth of food by 2005. The agriculture sector was also targeted tocontribute RM31.1 billion or 10 per cent of domestic gross product in2010.

The engine to achieve this is the Third National Agriculture Policy.Covering the period 1998-2010, NAP3's main thrusts are: * to enhance foodsecurity; * to increase productivity and competitiveness of the sector; *to strengthen linkages with other sectors; * to create new sources ofgrowth for the sector; and, * to conserve and utilise natural resources ona sustainable basis.

Into the picture now comes crop insurance.

The ministry plans to introduce an insurance scheme for farmers, fishermenand livestock breeders to protect them from natural disasters, diseasesand other factors which can affect their livelihood. Crop insurance isbeing used in developed countries and a task force has been set up here tostudy it.

On the surface, the scheme is to be lauded. We know through pastexperience how devastating disease outbreaks can be to the food industry.

A case in point is the Nipah virus outbreak in Negri Sembilan betweenSeptember 1998 and May 1999, which killed 105 people and infected another265.

The epidemic had an immediate impact on the food industry — a drasticreduction in pork production and consumption. There was an estimated lossof RM30 million in revenue due to the suspension of pig exports toSingapore.

As part of control measures, some 1.1 million pigs were killed, some 620families had to be evacuated and more than 100 shops and buildings,including schools, were closed.

Close to 36,000 people lost their jobs due to the closure of farms. TheGovernment paid RM140 million in compensation for the pigs destroyed, andan estimated RM548 million was spent in the disease control programme.

What would the outcome have been if the farmers had been insured? Lessdevastating for them financially, but excess losses for the insuranceindustry because indemnities would have exceeded premiums? There is noanswer simply because we don't have a barometer of measurement at themoment.

Crop insurance is nothing new in developed countries. Hail insurance wasintroduced in Europe, the US and Canada over a century ago. In the 1930s,public sector crop insurance emerged in countries like Japan and the US.By the 1950s, such programmes were practised in many countries.

Crop insurance was seen as an effective instrument to tackle agriculturalrisks and to encourage farmers to adopt new technology and innovation.

However, issues have surfaced pertaining to its relevance. Some analystsview the programmes as too costly and can only survive on governmentsubsidies. Others say crop insurance is financially viable.

Majid Mohamad, chief executive officer of The People's Insurance Co (M)Bhd, says insurance companies operate on the law of large numbers. As inany business, there are elements of risk involved, but for the insuranceindustry, the bigger the population, the better the viability.

"In Malaysia, crop insurance has been in existence but mainly on a smallscale and as an extension of a fire policy. There is no product tailoredfor agriculture per se. While there is protection for tobacco growers, thescope is narrow, with exclusions like disease coverage.

"But now that the Government is keen on reviving agriculture and helpingthe farmers, a crop insurance scheme, specially tailored to meet farmers'requirements, would be helpful." Majid, who is also the convenor ofAgriculture Insurance, Persatuan Insuran Am Malaysia, lauds theGovernment's efforts to promote integrated farming, whereby farmers areallocated land for their mainstay products as well as for something else,for example, commercial crops.

"Recently, it was announced that a big agricultural project will take offin Perak. Obviously, not only do the farmers need insurance but also thebuyers who have to be insured against revenue shortfall. Then there is thefinancing problem farmers face.

"Banks are reluctant to finance farmers who have no collateral. A cropinsurance scheme would boost banks' confidence in giving loans tofarmers." The deciding factor before insurance companies participate insuch a scheme is the premium rate they can charge and how the rate is tobe determined.

Even in developed countries, Majid says, there is some form of governmentsubsidy for crop insurance. Subsidies range from 25 per cent ofindemnities in the US to 50 per cent in Brazil and 80 per cent in Mexico.In Japan, the Government has financed over 90 per cent of the cost of suchschemes.

"Our Government is already giving subsidies to farmers in the form offertilisers, replanting subsidies and the like. If these subsidies arechannelled through crop insurance, then it will be less of a headache forthe Government because it can be done in a more coordinated way," he says.

But is subsidy justifiable? A study in the Philippines shows that duringthe first eight years of the implementation of crop insurance (1981 to1989), insured farmers had higher incomes than uninsured farmers. Incomefluctuations were also lower for insured farmers compared with theuninsured. Another study based on data for the 1991-1992 crop year insouth India shows that crop insurance has positive effects on crop input,output and income.

Crop insurance, Majid says, is a stabilising mechanism which ensures thatincome for farmers is not jeopardised. It gives confidence to big-scalefarmers to implement projects and heightens the comfort level offinanciers.

Professor Dr Mohd Yusof Hussein, dean of the Faculty of Agriculture,Universiti Putra Malaysia, agrees that crop insurance is beneficial,especially as the move towards modern agriculture means farmers have totake bigger risks.

"Unexpected events can be devastating. The philosophy is to leave yourselfwith some hope. Agriculture is a risky business. You're dealing withlivestock and subjected to natural occurrences like drought and diseaseoutbreaks. So basically, crop insurance is about risk management." Heexplains that some disasters occur because there is a chink in the linkagesystem. For example, there was a drought in a coconut growing area inJohor some years back. It affected water supply and the drop in moisture,in turn, affected the fungi which kept the pests in check. Finally, thepests multiplied and destroyed the coconut crop. The bottom line is, onenever knows how events can erupt into a disaster.

Professor Dr M. Nasir Shamsudin, head of department, Department ofAgribusiness and Information System, Universiti Putra Malaysia, is of theopinion that crop insurance may not be vital for our country.

"In general, the concept is good. It is a safety net measure. But inMalaysia where the weather is more predictable, we're less inclined tohave disasters like those experienced in temperate coun-tries." To him,crop insurance is a risk management option that offers protection againstyield and price risk. Bad weather affects yield which in turn affectsprice, but for perennial crops like palm oil, rubber and cocoa, there ishardly any yield drop, unlike for food crops like padi. Generally,therefore, price control is in our hands, he says.

Because farmers use different fertilisers, plant on different soil, andare exposed to different cultivation methods, the price of their crops mayvary. As for the farmers themselves, how do we determine who is eligiblefor insurance? "For example, are they experienced enough in riskmanagement?" asks Nasir, who says there are alternatives to cropinsurance.

One of the strategies would be optimisation of the combination of cropdiversification and integrated farming so that income is maximised andrisks are minimised. The rationale is that when the yield of one crop goesdown, the yield of others can balance it out.

"We can also consider futures market in palm oil as a hedge against risks.With Afta and regional co-operation, there will be sensitive lists of foodsecurity crops like padi. And with WTO, all subsidies will have to go. Howcan our farmers cope?" He suggests pilot studies in certain areas for cropinsurance, with grassroots level participation.

"We don't have comparative advantage of food here, whether it's better toproduce or import. Our policy emphasises industrial crops and we tend toneglect food crops because per hectare returns for industrial crops arebetter. Previously, our emphasis was on land, labour and cost. Now thefourth factor of K-economy has come in. Once we capture the fourth factor,perhaps in areas like biotechnology and productivity enhancement, we canchange our comparative advantage of food," he says.

There is no uniform approach to financing crop insurance programmes indeveloping countries. It depends on available socio-economicinfrastructure, nature of crop production system and the objective of theprogramme. And as the two learned professors say, pilot studies have to beconducted, issues debated and its financial viability closely studied.

02 September 2001Business Times