Financing agriculture, recovery
In the aftermath of Typhoon “Nina,” the Department of Agriculture (DA) has preliminarily reported that close to P400-million worth of damage to agriculture covering more than 300,000 hectares of farmlands has been sustained.
The report dated Dec. 27, 2016 states that in the Bicol area alone, 87,800 hectares of rice areas and 6,000 hectares of corn areas have been affected with crop damage in excess of P300 million. In the Calabarzon, more than 200,000 hectares of farm areas have been affected while damage to fisheries have yet to be declared.
Perfunctorily, the DA has prepared its usual aid package of assorted vegetable, rice and corn seeds for distribution to farmers to perform a “quick turn around” program of plantings in the hope the farmers can recover from their crop losses: crop losses on inputs which were secured through debt from informal lenders charging at rates beyond 5/6.
Some farmers do indeed plant, while most others just sell the seeds because they need the money more to restore their homes and prioritize expenses related to their survival. Some farmers hope to recover while most others know, there is no recovery from the cycle of debt and devastation.
In the last five years, figures from the Philippine Crop Insurance Corp. (PCIC) have estimated crop damage at more than P200 billion, yet to date, the virtual absence of a strong and credible nationwide crop insurance program has settled no more than 2.5 percent of these losses.
It is the absence of this insurance coverage, among a few more other key measures, which has choked Philippine agriculture and stifled its growth and development. It is the absence of an innovative transfer mechanism for risks which has kept cash releases to victims at a limited sum from the national budget when that amount can be leveraged ten times over, if there is an effective crop insurance system in place.
Anyone in the rural countryside knows that after a calamity, seeds are not what people need. It will take weeks to clear the debris and devastation before farms are workable again. In between that time is the business of tending to the sick, the wounded, the dead, and to the severe damages to farm equipment, infrastructure, livestock and animals.
Cash needs to be distributed but the nationally appropriated budget for such calamities is never enough. But whatever that amount is, no matter how paltry, can still be leveraged over and over again if an insurance and reinsurance system is in place. After a calamity, cash pay-outs are what moves people to act and recover.
A case in point was our experience after the devastation of Typhoon “Haiyan.” Despite efforts of the government to get the recovery efforts going, nothing was moving until the Buddhist charity organization called the Tzu Chi Foundation started doling out a cash for clean-up program.
In Africa, countries affected severely by weather related incidents have banded together (African Risk Capacity) to pool funds for agriculture insurance and to issue payments not only when a full scale calamity ensues, but at any time in the planting cycle when weather changes affecting crops. That is the beauty of “Index Based Agriculture Insurance.”
Water, the wind, precipitation, dry and wet spells, temperature… are all indexed as they affect a crop’s output. For example, rice needs to be subjected to a certain amount of sunlight, water and temperature to grow at its optimum rate. At any time the weather changes throughout that planting cycle breaching the “indexes” set, pay-outs are triggered to allow the farmer to adjust and save his crop or engage in another farm activity to save his investment.
Needless to say, if a full scale calamity ensues, a pay-out is triggered as well. With this system in place, adjusters will not be needed to settle payouts as agronomic science and weather tracking stations will do so.
The national government and local government units can pool funds to leverage that pooled amount to tens of billions of funds ready for pay-outs immediately after a calamity. But the greater impact of an Index Based insur- ance system is the confidence it will give mainstream financing institutions to fund Philippine agriculture.
In a climate-changed world, in a country as weather vulnerable as the Philippines with an average of 30 tropical cyclones in a year, can we blame banks if they choose not to lend to farmers without any insurance system in place? Do banks have no duty to their depositors and shareholders to stay profitable? Is it no wonder that despite the mandatory provisions of the Agri-Agra Law on lending to the farm sector, banks would rather pay penalties?
An agri insurance system through a strengthened PCIC, that will be mandated to do direct and indirect (re-insurance) index based insurance system will not be enough. An Agriculture Guarantee Fund, must also be institutionalize and expanded.
The case has been proven that such a fund can and will motivate rural banks and mainstream finance to flush more capital to the farm sector. The fund set up by the DA with the Landbank in 2008 which started at less than P4 billion has not only remained intact but has actually grown to more than P6 billion today. Along the way, it has been responsible for convincing rural banks to lend to thousands of farmers.
In time, with the possible reform of the National Food Authority, the day will also be possible for its network of nationwide warehouses to be operated as post-harvest and refrigeration storage facilities for our farm produce.
Creating a system, where farmers can store and have their produce properly valued, is the day we provide farmers a pricing mechanism for their crops resulting in more financing against crops held in these warehouses. A robust warehouse receipts program, operated even by the trust departments of banks can even take charge of this system of trading warehouse receipts. Can commodity trading on the Philippine Stock Exchange be far away?
Finally, in a country of micro, small and medium-scale enterprises, we will need to enact into law a “secured transactions law,” or a modernized “Movable Collateral Law,” that will allow MSMEs to be financed based on what they have (equipment, improvements, vehicles, raw materials, crops, jewelries, receivables, and other movables) rather than what they do not have (land and cash).
Done through an electronic registry which is transparent, as is being done in China and Vietnam today, millions of would-be entrepreneurs will get a shot at financing their agri and other related business ventures.
Today, all the bills regarding Index Based Agriculture Insurance, the Agriculture Guarantee Fund, the creation of a national post harvest and storage network, the creation of a “Secured Transactions” system for movable property, have been filed in the House of Representatives. Together, these measures provide a nucleus to convince the private sector to help finance the agriculture sector. Combined, these are also meant to help government distribute relevant aid soonest when it is needed in the form it is most usable to the victims. They are by no means the only silver bullets to cure Philippine agriculture since telecommunication connectivity and investments in infrastructure must continue to generate growth and development in the farm sector.
But these measures will definitely go a long way in starting an irreversible process to establish a financing ecosystem for our farmers that will include the private sector in a substantive way, beyond government dole-outs and palliatives.
Creating a system, where farmers can store and have their produce properly valued, is the day we provide farmers a pricing mechanism for their crops resulting in more financing