Public Support to Revenue Insurance and Income Safety Nets

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1 Public Support to Revenue Insurance and Income Safety Nets Muamar Haj Yehia, Yael Kachel Seminar ENPARD שם התמונה : זריחה מעל שדה חיטה- צלם: שגיא פייס \ רחובות KANAT Photo Competition Ministry of Agriculture and Rural Development

2 Risk in Agriculture Farmers are exposed year round to a variety of risks: market-related: such as price variations non-market-related: such as unfavorable weather, pests, and diseases Such risks make agricultural production unstable, affecting the income and welfare of agricultural producers reduced long-term productive investments in agriculture Ministry of Agriculture and Rural Development

3 Factors Affecting the Demand for Agricultural Crop Insurance in Israel : Liberalization of agricultural sector The WTO regulations exempting governments from their subsidy reduction commitments, with regard to assistance to agricultural insurance Farming becoming steadily more commercialized, with greater levels of financial investment. New insurance products: creation of an insurance program that replaced disaster relief by the government Ministry of Agriculture and Rural Development

4 KANAT is the main provider of agricultural insurance in Israel Founded in 1967 as a government company KANAT ownership is held equally by the government and 14 marketing boards and farmers organizations KANAT insures most of the crops and the livestock produced in Israel. KANAT doesn t pay dividends to the stockholders Government subsidies of premiums to farmers and subsidies of reinsurance for KANAT Part of this presentation is based on a presentation provided by KANAT Ministry of Agriculture and Rural Development

5 KANAT provides two main insurance schemes : 1. Multiple Peril Crop Insurance KANAT (MPCI) offer two טבע main נזקי lines ביטוח of insurance: provides protection against a loss in yield due to unavoidable, naturally occurring events (e.g. hail, frost, flood( Basic Insurance (collective) Full Coverage Insurance (optional) 35% ביטוח אסונות טבע (NDI) 2. Natural Disaster Insurance provides protection against a loss in yield due to unavoidable, naturally occurring events which are not covered under MPCI, including pests and diseases: Basic Insurance (collective) Full Coverage Insurance (optional) % government participation in insurance premiums Ministry of Agriculture and Rural Development 80%

6 Revenue Protection Insurance Revenue insurance for rainfed wheat: provides protection against a loss of revenue caused by price decrease, low yields or a combination of both coverage guarantees an amount based on the individual producer s actual production history or area production history The price protection is established based on wheat prices on the Chicago stock market Ministry of Agriculture and Rural Development

7 Realized Risk Distribution ( ) Ministry of Agriculture and Rural Development

8 Premium Income Distribution by Agriculture Branch (2015) Arable Crops, 8% Orchards, 39% Vegetables & Flowers, 32% Livestock, 22% Ministry of Agriculture and Rural Development

9 Million NIS Government subsidies for agricultural insurance and compensation payments Natural disasters: Compensation Natural disasters: Support for premium payments Natural damages: Compensation Natural damages: Support for premium payments Ministry of Agriculture and Rural Development

10 Revenue Insurance as a Substitute for Crop Insurance and Distortionary Support Policies Prof. I. Finkelshtain, Dr. Z. Bar-Shira, M. Haj Ihie, M. Rosenberg Department of Environmental Economics & Management, the Hebrew University of Jerusalem We appreciate: I. Financial Support from the Chief Scientist Fund of the Agricultural Ministry, II. Kanat (Israeli provider of crop insurance) for data provision and students fellowships, III. The Research and Economic division of the Ministry for the analysis of farms records data. IV. BARD for funding the extension of the research project (with Prof. Barry Goodwin).

11 How Risky are Farmers Profits in Israel Despite the advanced technology that characterizes the Israeli agriculture, the sector faces considerable technological and market risks. The annual cost of natural damages to agriculture is estimated at more than 500 million NIS, about 5% of agricultural GNP. The CV of typical daily price series is well above 30%.

12 # of Farmers at each Risk Level Revenue Risk The Distribution of farms revenue C.V.s Based on a sample of 2,800 farmers The annual revenue fluctuation of the median farmer is above 80% The cost of the risk, quantified by the Arrow-Pratt Risk premium is 2 billion $, about 15% of total revenue More

13 Accumulated % in the Population Is the Risk Increasing? % CDFs of C.V.s % 80.00% % 40.00% Median Farmer % The CV of the Median Farmer increased from 0.2 to %

14 Counter-Risk Support Policies The extent of counter risk-support policies in Israel is limited. Estimated at about 0.66% of agricultural revenue as compared to 1.2% in the OECD, 5% in the U.S. and 4% in Canada.

15 Comparing Insurance Programs at the Farm Level Methodology: We examined plantation and citrus farms. Estimated (log normal) distribution of prices based on series of wholesale prices and (Gamma) distribution of yield based on Kanat data. Based on Sklar's theorem, a joint distribution (Copula) was constructed with varying correlation levels. Assumptions: conservative levels of risk aversion (r=0.3), and negative but small correlation levels. Efficiency Index: Results: Profits Insurance C.E. Cost 1.4 1) Revenue insurance yields. 2) Whole-farm revenue insurance is 10% (20%) more efficient than cropspecific revenue (crop) insurance.

16 NIS WTO Revenue Insurance at the Sector Level Based on the above sample, the cost of providing revenue insurance to the sector at the maximal level which is allowed by the WTO (but indemnity< 1 million NIS) is about 1.1. billion NIS Cost-Benefit (WTO) whole Farm Revenue Insurance 1,400,000,000 1,200,000,000 1,000,000, ,000, ,000, Insurance cost עלות הביטוח C.E. of תועלת Change מהתכנית Index מדד Efficiency יעילות 400,000, ,000, % of covered damage 0.00

17 Conclusions & Policy Recommendations Farming in Israel is very risky business. The magnitude of counter risk support policies of the Israeli government is low. The return for 1 NIS investment in whole farm revenue insurance is about 1.5 NIS ( the rise in farmers C.E.) The cost of providing whole farm revenue insurance for the entire sector is about 1 billion NIS, seems plausible as part of the general reform in support policies. Recommendation: work with KANAT to expand the agricultural insurance programs in general and revenue insurance in particular.

18 Questions for Discussion - Insurance 1. Importance of support for insurance: what are the costs and benefits? 2. Whole farm revenue insurance: Experience from other countries Benefits vs. difficulties of implementation 3. Should government support for Multiple Peril Crop Insurance be increased (currently 35%)?

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