Weather Index-Based Insurances for Farmers in the North China Plain - Article Example

Weather index-Based Insurances for Farmers in the North China Plain” Name Institution Weather Index-Based Insurances for Farmers in the North China Plain Summary The journal article, “Weather index-based insurances for farmers in the North China Plain An analysis of risk reduction potential and basis risk”, provides a well-balanced analysis of how farmers can adopt insurance policy to reduce weather risks. The two scholars, Heimfarth and Musshoff (2011, p.219) carried out a research in a farm estimated to be size of 0.5 ha and worth 6,000RMB of annual income on average. In their research, they discovered that there is no way one can produce without the weather risks; the weather can lead to partial loss but one cannot expect weather-free risks. Since farmers have always incurred loss due weather, the government of China allowed researchers to go ahead test the feasibility of weather index-based insurance and how it can help farmers reduces such loss. Apparently, the test was not something new since it had been conducted in other developing and developed countries such as India, Ethiopia, Malawi and the Netherlands (Heimfarth and Musshoff, 2011, p.219). The research was carried in North China plain which is particularly located in Shandong province. The North Chain has been described as large agricultural area which produces more a quarter of the Chinese grain production. The article has also quoted other authors description about the region including the differences in patterns of weather (Heimfarth and Musshoff (2011, p.220). Farming is a key source of income for numerous rural families in Shandong. Although the families have small portions of approximately 0.5 ha on average which only enable a low living standard. The production here contributes nearly 60% representing e600 (National Statistical Yearbook of China, several volumes) on average and is thus fundamentally produced by means of crop rotation of wheat and corn on similar field annually. The article has also tried to find a correlation between the weather and the agricultural yield. Heimfarth and Musshoff (2011, p.221) claimed that drought which is immediately followed by the extreme rain normally cause loss risk for numerous Chinese provinces. They went ahead to state that low form of rainfall can be a critical factor of production depressions of the corn within North China Plains. Weather is regarded as a vital factor for production but, simultaneously, the most significant source of problem to agriculture (Hardelin & Lankoski, 2015, p.11). At times, there is period of agricultural season with poor weather incidents resulting to production loses in different parts of globe. Furthermore, Nieto et al. (2010, p.243) claimed that the increasing climate change is likely to raise the number of weather-based risk by increasing the temperature, unpredictable rainfall and occurrence of floods or droughts. The situation requires corn to be planted earlier as June so as to be harvested around or in October (Heimfarth and Musshoff, 2011, p.222). On the other hand, wheat is often planted just after corn either in October or November in order to be reaped in the late spring. The findings of the study showed the insurance policy for the farmers had the potential to decrease weather-based risks of the grain revenues shortfalls from medium-sized farm (Heimfarth & Musshoff, 2011, p.234). The use parametric methods and non-parametric demonstrated the same results, even when dissimilar weather index distribution were assumed. Heimfarth and Musshoff (2011, p.235) argued that the degree to which weather-index insurance adds to reduction of risk is dependent much on location of the farm and on insured crop. The article did a research on two crops, corn and wheat, and the results showed that reduction of risk prospective for the corn production surpasses that of the wheat production (Heimfarth & Musshoff, 2011, p.235). The reality that wheat production strong relies on the irrigation in the periods of winter could as well give explanation on the low prospective of rain-oriented insurance. Therefore, the article concluded that introduction of weather index insurance policy at an individual level can be successful at North China Plain. However, the application weather index insurance did not miss constraints. Quoting Turvey & Kong (2010), Heimfarth & Musshoff (2011, p.219) stated that their complication could results to complexities in communication with the farmers particularly nations with poor developing agricultural industry. The main shortcoming of this kind of insurance is considered to be basis risk. The article claimed that basis risk is characterizes by a risk which is non-insurable, and is contributed by two factors. One is the geographical or environmental basis risk which emerges from spatial disparity between the patterns of weather at a particular farm location and specific weather station (Heimfarth & Musshoff, 2011, p.219). Secondly, basis risk of the production often remains owing to the fact that individual production to the farmer is always imperfectly interrelated with underlying one. Therefore, within a year, one specific farm could have production losses but gets no recompense from insurance company. On the contrary, quoting Skees (2008), Heimfarth and Musshoff (2011, p.219) stated the farm could get compensation devoid of having any production losses. The main learning points from reading this article The main learning points include the aim of the article, the major actors and what the literature reviews says about the topic. The aim of this study therefore was to examine the degree to which the weather index-oriented insurance can add to decreasing the risks of the revenues shortfalls of a medium-sized farm which produces wheat or corn in North China Plain within Shandong province (Heimfarth & Musshoff, 2011, p.218). The article has highlighted the relations between weather and crop production. Weather can result to either high production or losses. When the weather becomes favorable and follows its expected pattern, farmers often plant at a particular period and reap good harvests. Some farmers in this case, those from North China Plains depend on farming for their income. However, with climate change in the recent times, high temperatures are usually witnessed which lead to unexpected precipitation, floods and droughts. On the other hand, low rainfall also affects the crop as they wither leading to low production (Heimfarth & Musshoff, 2011, p.223). The article majorly uses rainfall in its reference to effects of weather on agriculture. The connection between availability of water and production is heavily dependent of the sensitivity of particular crop to water deficit at the time of planting and stages of growth. However, the two authors have argued that despite farmers planting within a specific period of time so as to try avoid risks, it is difficult to predict climate change in general and its consequences cause unfavorable weather for farming in major diverse regions. The article held that weather index insurance could be the most useful approach for managing and reducing financial risks related to farming (Heimfarth & Musshoff, 2011, p.234). Nonetheless, traditional insurance is said to have had numerous shortcomings, particular in the developing nation owing to its high costs of transaction, involves considerable state subsidization and other challenges which could deter the risk protection (Heimfarth & Musshoff, 2011, p.219). Weather index insurance pilot study has been carried out in countries with low income like Ethiopia, Malawi and India and is relatively based on degree of rainfall. The article have also mentioned test of weather index insurance feasibility in developed countries, meaning it is becoming a trend hence agricultural sectors in countries are encouraged to embrace change. Garrido and Bielza (2008) stated that in the developed nations, there is case of the weather index insurance policy use in greenhouse horticulture in Netherlands which is actually based on the temperature indices. Furthermore, Germany uses index-based insurance that hedge against extreme rain, heat, frost and drought in agriculture (Heimfarth and Musshoff, 2011, p.220). Another factor strongly highlighted by the article is lack of literature in relation to risks individual farms and individual crops. Similarly, the article has stated that little attention have been paid to basis risk quantification. Such reasons are what have prompted this to take a different approach and try to fill the gap in the research. The article therefore uses China in contemporary example to highlight how weather exposures farmers to risk in their production of crops. Heimfarth and Musshoff (2011, p.219) posited that the risk in production does not impact agricultural production in China in general, but affects majorly small-scale farmers who have limited possibility to deal with risks. The result indicates weather index insurance can successfully reduce production to farmers. However, the concluded that farmers intending to adopt the insurance policy should do so to individual farms since weather affects different crops in different levels. Critical Analysis Insurance is a policy which has existed for decades, and has helped companies, institutions and individuals reduce various risks. Practice of adoption of insurance started in the ancient times with Babylonian and Chinese being the first people to apply this strategy in reducing risks and uncertainties (Zeckhauser, 2008). In the process various types of insurance were adopted including auto insurance, health insurance, life insurance, property, burial insurance, credit and liability insurance among others (Zeckhauser, 2008). Even as insurance policy grows, one sector that had been ignored was agriculture. Farmers have concentrated in adopting property insurance against fire risks, against trespass and animal and human destruction but with no focus on risks of weather. Turvey and Kong (2010, p.7) opined that despite Chinese being the creators of insurance, agricultural sectors still suffered weather related risks. The invention of weather index risk is a breakthrough to farmers in this era of climate change. The new concept in agriculture confirms innovation is very important in growth in any sectors. For good growth change must be accepted in all social levels. Despite Chinese insurance industry being in maturity stage it was still too expensive small scale farmers (Heimfarth and Musshoff, 2011, p.219). The question can therefore be whether the insurance scheme will be affordable to farmers. The results of the research provided some hope to small scales farmers. According to Heimfarth and Musshoff, (2011, p.234) weather index insurance showed the positivity in reducing production risks and therefore implies farmers will increase their revenue from farming. To a big extent, small scale farmers at North China Plain who highly on farming are likely to improve their livelihood and that of their families. The show that to some level, the aim of the weather index based form of insurance has been achieved. On the other hand, constraint portrayed by the research shows that the instrument is yet to achieve its objective. Another concern for this paper is that researchers only focused on two crops yet North China Plain farmers also depend on other crops. Okhrin, Odening and Xu (2013, p.353) contended the benefit of the new insurance instrument is that farmers will have more income and reduce poverty. The farmers will no longer be exposure to financial risk and in the long run will increase their loan limits and more investment. When the production risk is reduced, farmers will have more freedom to loans due to the fact that financial institutions are likely to increase limit levels. Furthermore, more insurers are likely to come on board with booming trend of weather risks (Turvey & Kong, 2010, p.7). All these indirect impacts can improve the general economic growth. In a comparison with traditional insurance which has been in place for farmers, the article shows that weather index insurance offers more opportunities for small scale farmers to get into more market segments. Nonetheless, the other prospective target segment could be collective commercial farmers and villagers (Barnett & Mahul, 2007, p1243). Form the article, this paper understands that in both developed and developing nation weather index insurance can now be used for two major reasons. One is that this tool can be used to support agricultural and rural growth and development (Gale, 2013). As stated earlier, farmers, the input suppliers and, financial institutions can use this instrument to manage risks like drought. Gale (2013) claimed that the other purpose is that it offers an alternative mode of financing for the risk discovers programs and could act as one of the requirements for the loan approval practice by the financial bodies. Despite the results that weather index insurance can reduce weather risks on crop production, there are several concerns that Heimfarth and Musshoff (2011) failed to address. In their experimenting, the two authors concentrated on precipitation and failed to provide a reason why they ignore other weather elements such as temperature and wind. The concern here can be the although high temperatures cause precipitation in the long run, heat itself can also cause risk like withering of crops or quality damage. Lesch and Baker (2013, p.85) argued that it means that even if you choose to insure against that risk of heavy rainfall or droughts, the farmer can still suffer loss from other remaining weather elements. A research finds that farmers can still suffer production even if the farmers adopt weather index insurance. Hardelin and Lankoski (2015, p.12) pointed out that agronomic factors like fertilize use, soil condition, soil type and plant density are also impact weather leading to risks of production loss. Concerns can be raised in a about the legibility of compensations in situation where these agronomic factors affects the directly affects plants. Barnett and Mahul (2007, p.1245) argued that the small-scale farmers might find themselves vulnerable to risks where non weather factors affect the crop. The argument is based on the reason the Chinese small-scale farmers normally do not have high income to spend on more than one insurance policy, i.e. weather index insurance and non-weather insurance. This paper also found another challenge in types of crops chosen by Heimfarth and Musshoff (2011) in the research on the viability of weather index insurance in reduction of production risks. Heimfarth and Musshoff used wheat and corn as their major focus because this is the major crops within North China Plain. However, it becomes difficult to use these two crops as representation of other remaining crops. In fact, China is at position one in production of rice, potatoes, tomatoes, peanuts, sorghum, tea, barley, millet, soybeans, cotton and oilseed (Gale, 2013). These crops have different response to weather elements hence one cannot use the same measure to show the level to which they are affected by weather. Practical implications – UAE Context This study produces implications for farmers of regional countries and in this case UAE. Despite of importing most of food crops in the past, UAE has citizens have started farming in small scale. Most of the cultivated land in this country has been dominated by date palms in the past, but now farmers have started planting cabbage, tomatoes, squash, eggplant, mangoes and citrus (Heard, 2013). In the current arrangement, the UAE government heavily supports farming by providing farmers with seeds, pesticides and fertilizers to encourage this activity. Even though, the country has intensified agricultural activities, production of the crops are still affected by intense heat and limited supply of water. Heard (2013) stated that the UAE climate often is hot and dry and during the months of July and August, the temperatures can go past 40 °C. It implies that crops faces the weather risks like withering hence transferring losses to farmers. Therefore, the reduction of risk prospective of the planned insurance looks encouraging to farmers. From the policy perspective, the strategy applied here can encourage the modification of then insurers towards other more crops (Heimfarth & Musshoff, 2011, p.218). Even though the instrument looks promising it can help UAE farmers reduce financial loss and get more financial loans from Emirates banks, they need to be carefully negotiating such insurance because its faces various constraints. The farmers will need to ask insurers on how to resolve complication which can emerge due to the difference between weather pattern farm location and weather station of reference. However, the farmer and the insurance company can resolve this challenge based on article recommendation. In the article, the researchers set a weather station within 100 km of the farm and the result showed some correction of weather indices of nearby individual farms (Heimfarth & Musshoff, 2011, p.218). When adopting weather index insurance basis risk often remains. The practical implication for the UAE farmer is that they can still incur losses due to the fact that individual crops different response to weather (Heimfarth & Musshoff, 2011, p.219). It means farmers may not receive compensation from the insurance company for some crops. Therefore, basis risk must be considered by the farmer and the insurer when negotiating for the insurance policy. At the moment, agricultural in UAE is still lagging behind due to both weather and agronomic factors. Heard (2013) stated that most parts of UAE are a desert with poor soil type and high temperatures. Weather index temperature therefore gives farmers in this country an opportunity in various ways. As stated earlier, weather index help farmers reduce revenue loses hence will have high income to invest in agricultural technology to improve the soil and assets. Banks will come on board to help farmers improve lands and crop production if there are sure the return is profitable (Gale, 2013). Other Comments The article has shown that farming normally is one of the agricultural practices which create income to a number of Chinese citizens. Farming also contributes to the GDP of the country since it acts the major source of income in some areas like North China Plain. However, Chinese agriculture is heavily reliant on weather and crop production is influenced widely because of variations of weather over time. Over the years, farmers have been susceptible to weather risks in production including revenue losses and restrictions of loans limits with financial institutions. Therefore, this article significantly contributes to agricultural sector in different country by recommending adoption of weather index based form of insurance. The article provides that through this tool, the farmers will reduce revenues losses which they incur every year. However, the new concept has its drawbacks that need to be considered before adoption. Heimfarth and Musshoff established that weather differences between the farm location and weather station could lead to complications during claim for compensation. The article asks the insurers must make the instrument cost-effective if their want both the large-scale and small-scale farmers to equally adopt it. Due to limitation showed by the research, the article recommends further researches. References Barnett, B., & Mahul, O. (2007). Weather index insurance for agricultural and rural areas in lower income countries. American Journal of Agricultural Economics, 89, 1241-1247 Gale, F. (2013). Growth and Evolution in China’s Agricultural Support Policies. Washington D.C: U.S. Department of Agriculture, Economic Research Service. Garrido, A., & Bielza, M. (2008). Income stabilization in a changing agricultural world: policy and tools. European Association of Agricultural Economists (EAAE), 108th Seminar, Warsaw. Hardelin,J., & Lankoski, J. (2015). Climate Change, Water and Agriculture: Challenges and Adaptation Strategies. EuroChoices, 14(2), 10-15 Heard, D. (2013). From Pearls to Oil. Motivate (UAE). Heimfarth, L.E., & Musshoff, O. (2011). Weather index-based insurances for farmers in the North China Plain. Agricultural Finance Review, 71(2), 218 – 239. Lesch, W.C., & Baker, B.R. (2013). Balancing the Insurance Equation: Understanding the Climate for Managing Consumer Insurance Fraud and Abuse. Journal of Insurance Issues, 34(2), 82-120. Nieto, J.D., Cook, S.E., LäDerach, P., Fisher, M.J., & Jones, P.G. (2010). Rainfall index insurance to help smallholder farmers manage drought risk. Climate and Development, 2, 233-498. Okhrin, O., Odening, M., & Xu, W. (2013). Systemic Weather Risk and Crop Insurance: The Case of China. Journal of Risk and Insurance, 80(2), 351-372. Skees, J.R. (2008). Challenges for use of index-based weather insurance in lower income countries. Agricultural Finance Review, 68, 197-217. Turvey, C.G., & Kong, R. (2010). Weather risk and the viability of weather insurance in China’s Gansu, Shaanxi, and Henan provinces. China Agricultural Economic Review, 2, 5-24. Zeckhauser, R. (2008). "Insurance". In David R. Henderson (ed.). Concise Encyclopedia of Economics (2nd ed.). Indianapolis: Library of Economics and Liberty. Read More