Developing rice farm insurance in Indonesia

Rice farm is a source of livelihood and food security for a large proportion of rural families. Despite the government’s policy of achieving self-sufficiency in rice, however, the country has continued to face the risk of rice production deficit.

One of the main reasons for variability of rice production growth has been risks faced by rice farmers due to the global change of climate and natural threats, specifically floods, droughts, and pests and diseases which have thwarted the farmers’ enthusiasm towards adoption of yield-enhancing modern inputs.

The growth of production of rice was not satisfactory since the early 1990s. The production of rice, which was growing at the rate of 4.0 percent per year during the 1980s, did not keep pace with the growth of population since then.

As reported by FAO-RAP [1], the annual growth rate of rice production decelerated to 1.3 percent during the 1990s and 0.6 percent during the period 1996 to 2006. Based on the national social economic survey data published by CBS [2], McCulloch [3] indicates that nearly a quarter (24.8%) of 53.5 million households in Indonesia is rice farmer households.

Among rural households, rice farmer households account for 37.8 percent. Warr [4] reports that almost 82 percent of the poor in Indonesia live in rural areas. This sector is also an important source of formal employment and export earnings.

Being a staple food for Indonesians, maintenance of growth of rice production is quite critical in reducing dependence on imports, saving foreign exchange and improving access of staple food to everyone. Increased availability of rice at reasonable prices also helps in reducing domestic discontent and in improving political and economic stability.

Rice crop supplies 50 percent of the energy needs of an average Indonesian. Recognizing the importance of rice in macro and household food security and as a major source of livelihood of small scale subsistence farmers, the domestic policies of Indonesian governments have aimed at achieving self-sufficiency in rice.

Despite being the third largest rice producing country in the world, Indonesia has continued to remain a net importer of rice.

The imports of rice (milled) and its products had been an average of 1.53 million tons during 1979-81, 0.19 million tons during 1989-91, 2.25 million tons during 1999-2001, 1.83 million tons in 2002 and 1.65 million tons in 2003.

However, since January 2004, a ban on rice imports was imposed, initially up to June 2004, but was later lifted to allow some imports of rice to maintain national rice stocks at safe levels. During 2008 and 2009 so far, following a significant increase of domestic rice production, the imports of rice have been negligible.

Agricultural insurance has been widely applied in many countries in favor of the farmers and the poor people. The lessons emerging from review of status of crop or farm insurance in various countries are that some form of insurance cover is necessary for encouraging the growth of farm production, and the government support in this endeavor is unavoidable.

Despite the existing subsidies, price, and other policies that improve access to inputs and markets and improve farmers’ terms of trade, policies responding to the risks farmers face are clearly lacking in Indonesia.

Therefore, considering the current food security concerns and experience of other countries, rice farm insurance was identified as one of the priority areas to guard the interest of the farmers as part of pro-poor policy in the context of agricultural development.

Farm risks, rice production loss, and importance of rice farm insurance

Risk denotes probability of occurrence of an event or condition, which may have adverse consequences at any stage in the pathway of rice production chain. The risk adversely affects the current as well as future farmers’ decisions and severely impairs production and farm income, when it crosses absorptive limits of self adjustment coping mechanisms.

The production and price risks are the major risks in agriculture, including rice farming. The production or yield risks arise due to biotic and abiotic factors in the short run, and potential climatic changes, and inefficient support infrastructure, in the long run.

Major sources of price risks are imbalance in demand and supply, market imperfections, post-harvest losses, and lack of production or farm-income stabilization support systems.

The multiplicity and diverse sources of risks make farming decisions more complex to tackle, and pushes the rural population into the vicious cycle of low production, low income, poverty, and low investment in improved technology.

Risks in rice farming perpetuate poverty and food insecurity. Risks are associated with processes of rice production as well as handling of rice till it reaches the ultimate consumer. Obviously, risks are faced by the rice producers/farmers as well as by other stakeholders who perform the functions of input production and supply, credit delivery, processing and marketing of rice.

However, the most vulnerable to these risks are rice farmers, especially those who operate small pieces of lands and subsistence farmers. Risk management strategies for small scale rice farmers ought to be distinctly different than that for other farmers or rice stakeholders. Risks faced by rice farmers in Indonesia are both natural as well as man-made.

The risks caused by natural factors are droughts or moisture stress at critical periods of crop cycle, floods or excess water, high or fluctuating temperatures, change in humidity, attack of pests and diseases, and emergence of weeds.

The man-made or humaninduced risks include non-availability of critical inputs like seeds, fertilizers and plant protection chemical in time, poor quality of inputs, non-availability of credit to purchase inputs, and market failures.

Harvest failure due to flood, drought, and pests and diseases infestations are common in several parts of Indonesia. The frequency and intensity of such risks are not the same in different places but the effect accummulates to a large amount when the whole country is considered.

Hadi et al. [5] estimated that during 1989-1998, the size of paddy harvest failure due to the three types of risk mentioned above was, respectively, 0.21 percent, 0.50 percent, and 0.06 percent of the planted area.

Recent data reported by the Directorate General of Food Crops [6] indicate that the actual rice area affected by flood, drought, and pest and disease was, respectively, 333 thousand, 319 thousand, and 428 thousand hectares with respective production loss amounting to 997 thousand, 984 thousand, and 327 thousand tons (2008).

The total production loss due to flood, drought, and pests and diseases was 2.33 million tons, which is 3.87 percent of the total production (cultivated at wetland and dryland) in 2008 (60.326 million tons).

For majority of the rice farmers who operate small size of landholdings (average 0.3 ha in Java/Bali), such a loss is very significant.

This unexpected losses become a problem for the survival of members of farmers’ households. The increasing frequency of harvest failures and yield losses in important rice producing areas urgently need rice policy response.

In this context, crop insurance would be a strategic policy response to the current food production scenario.

This is one of the financial instruments to transfer farmers’ production risks, associated with farming, to a third party (private company or government institution) through certain amount of premium payment.

Rice farm insurance is very important to help small farmers from crop loss and to ensure that they have minimum working capital for the next planting season.

Normally, farmers provide financial capital in the beginning of planting season at certain amount sufficient to meet cost of production (according to the size of planted area). This capital is used for planting activities (land preparation, seed and seedling, fertilizers, etc.).

In the incidence of unexpected natural disaster (specifically flood, drought, and pest and disease attack) during the period of planting season, farmers usually face risk leading to planting or harvesting failure.

In times that the paddy fails to harvest due to the three incidences mentioned above, even with certain age of the crop, the farmers are entitled to obtain certain amount of compensation from the insurance company to whom they are tied risk cooperation.

However, all conditions, set in the agreement should be met by those involve, including the farmers. In this point, there is a guarantee that the farmers will obtain certain amount of capital on the ground of risk sharing.

Such payment should be available in times of replanting (when the times permit within the current planting season) or available for the next planting season. Rice farm insurance is also very important to achieve the highest level of production.

The farmers would possibly manage their land without good agricultural practices and in this regard, moral hazard may be apparently occurred.

However, this moral vulnerability is arguable because the farmers are tied and committed to the agreement for which terms and conditions, including good agricultural practices are applied.

When good agricultural practices take place, such moral hazard could be avoided and higher production is expected. On aggregate, the insured rice production would contribute to the national production stock.

On the contrary, in case that the farmers not meet these terms and conditions and fail to harvest, there are penalties. This means that the farmers experience losses because of their attitude. Rice farm insurance, therefore, is relevant with the direction of national agricultural development on food security.

The other advantages are the potential of regional economy development and employment opportunity through new business activities in agricultural insurance system. Moreover, the local government will be helpful during the natural disaster incidence.

The insurance company will involve in dealing with natural disaster relief. This private sector will take certain portion of responsibility in farmer’s burden after a loss of their rice farm production.

This paper is aimed at an in-depth description about Indonesia’s endeavor to formulate appropriate rice farm insurance application. Sharing these experiences could be useful to obtain valuable suggestions to help improve the current rice farm insurance concept and implementation strategies.

Moreover, exchange of information among the participants in this conference would be a significant contribution in developing rice farm insurance in Indonesia.

There are three aspects that would be described in this paper, namely farmers and other stakeholders’ responses on application possibility of rice farm insurance, introduction of rice farm insurance scheme, and rice farm insurance policy.

RICE FARM INSURANCE SCHEME

The genesis of any form of insurance lies invariably in ‘mutual aid’ principle. In Japan, the agricultural insurance essentially started and being operated largely as a mutual aid institution.

In the present context, agricultural insurance is being increasingly evolved as a ‘marriage’ between mutual aid and actuarial technique.

According to Ray [7], the actuarial technique is the application of statistical methods to determine the behavioral pattern of what seems to be prima facie irregular happening like occurrence of drought or flood or insect/disease infestation of crops and the extent of crop losses there from.

The insurance based on actuarial method implies that each insured individual, in the ultimate analysis, becomes his own insurer. Over the years, he/she pays enough premiums to meet his/her losses, which is essentially a self-help mode of insurance.

The individual may suffer losses either at the beginning of the period of his/her participation or in the future.

The actuarial technique implies the determination of future losses, indemnities or benefits that the insured may receive in case of crop failure and share of his/her contribution in the form of premium payment every year.

Agricultural insurance is one method by which farmers can stabilize farm production and incomes and guard against disastrous effect of losses due to natural hazards or low market prices.

Crop insurance not only compensates for the loss in the farm incomes but also helps in initiating the production activities after a crop failure or bad crop year. The insurance cushions the farmers against the shock of crop losses by providing them with a minimum or assured amount of protection.

It spreads the crop losses over space and time and encourages farmers to make more investment in agriculture and adopt new technologies.

However, in the Indonesian context, this need to be adopted as an important component of safety-net policy, as has been done in both developed and developing countries.

Access and availability of rice farm insurance will change the attitude of the farmers and induce them to adopt new high yielding-production technologies and borrow loans for purchase of inputs.

Nevertheless, the enthusiasm of rice farmers to buy the rice insurance product (by paying insurance premium) critically depends on their own mechanism or risk diffusion, and importance of rice in the household income.

Relevant with this, Hazell [8] describes that the global experience about the advantages of farm insurance program reveals that the crop credit insurance reduces the risk of becoming defaulter of institutional credit and farmers do not have to seek loans at higher interest rates from private money lenders.

A farmer could adopt improved but uncertain technology when he was assured of compensation in case of a crop failure.

Obviously, agricultural insurance schemes, both in developed and developing countries are highly dependent on government support in various forms like subsidy on premium, reimbursement of administrative expenses of insurance companies, reinsurance support for risky crops, technical guidance and financial support.

Raju and Chand [9] explain that subsidy on insurance premium in recent years was 60 percent in USA, 70 percent in Canada, 50-60 percent in Philippines, and 58 percent in Spain. Moreover, Roberts [10] reports that in 2003, total insurance premiums were estimated at US$ 7.1 billion, which was 0.6 percent of farm gate value of agricultural production.

The premiums are concentrated in North America (69%), Western Europe (21%), Latin America (5%), Asia (3%), Australia (1%), and Africa (1%). It may be mentioned here that under international trade agreement, the World Trade Organization (WTO) allows subsidization of premium in agricultural insurance as a ‘green box’ measure.

Location: Indonesia