Insurance and price-protection are big issues for the country’s rice farmers, writes Asia Risk Centre head Roman Hohl*

Making up 12% of GDP and employing nearly 40% of the working population, agriculture is a key sector in Thailand. Thailand’s agriculture GDP reached $44bn in 2012 and agriculture represented more than 25% of total export turnover. Rice is Thailand’s most important agricultural product, followed by rubber and poultry.

Progressive modernisation and access to credit for most of the 4.4 million rice-farming households has lead to production increases and a reduction of rural poverty. The government has successfully established a favourable investment climate for agribusinesses, supporting research and introducing modern technology. With 30% of arable land benefiting from irrigation, rice production hit 32 million tons in 2010.

Flood is the key hazard to rice production, destroying on average 8% of the main rice season area each year (1993-2011). Severe floods in 2010 and 2011 resulted in lost rice area of 10.9% and 12.8%, respectively. While the 2011 flood was devastating for the Thai economy (economic loss of $30bn and insured loss of $12bn, mainly from property and casualty), for rice farmers it was a comparable event to 2010 in terms of area lost due to flood.

Drought is a key risk in the north and north-east of the country, with an average of 3.8% of rice area lost each year. In 2004, 15% of Thailand’s rice-growing land was made useless because of drought. There were immense financial consequences for small farmers and the export industry, as well as for the government that had to fund abnormally high post-disaster payments to farmers in need.

Price of rice

Thai rice prices are the benchmark for Asia. Following a drop of rice prices after the peak of 2008, the severe 2010 flood in Thailand and a decrease in global rice demand, the government decided to replace its rice-mortgage scheme with a rice-protection scheme. Under the new scheme, government warehouses buy rice from farmers at $469 per ton compared with $262 under the previous scheme, which critics argue is way above global rice prices.

Most rice farmers have been selling to government warehouses instead of rice exporters since 2010. This has lead to a drop of 37% in rice exports in 2012 and left the government with a large stockpile of rice.

While farmers who managed to harvest rice in the 2011 flood year benefited from the scheme, those affected by flood had to rely on government disaster payments that were increased from the usual $200 per hectare to $730 per hectare. The commercial value of a hectare of rice is around $1,400.

Crop insurance

Insurers have tried to mitigate the impacts of natural disasters that destroy on average 10% of Thailand’s rice production area each year. While crop insurance has been experimented with in Thailand, the industry is still in its infancy compared with other major Asian countries.

Under an insurance scheme available since 2011, rice farmers are eligible for a maximum payout of $365/hectare for a premium rate ranging from 11% to 43%. The rates are probably the highest in the world for rice insurance; most of the costs are picked up by the government in form of premium subsidies under a private/public partnership.

In 2012, the government-managed Natural Catastrophe Insurance Fund stepped in as the main risk-taker since insurers and reinsurers were reluctant to support the scheme. With increases of premium rates, it seems part of the risk is now placed back in the international reinsurance market. The insurance scheme is still in its infancy, insuring 4% of the main rice area and experiencing anti-selection.

Pilot programmes

As in other Asian countries with many small farmers, index-based crop insurance programmes have been piloted in Thailand. A weather index compensates farmers in case actual rainfall is below expected values; it has little anti-selection and lean costs for claims management. However, index insurance comes with a certain amount of basis risk through the imperfect correlation between the actual loss at farm level and the loss derived from the index. Furthermore, due to the relatively low density of weather stations in Thailand, and the fact that flood risk is difficult to parameterise with a weather index, index insurance schemes face difficulties expanding.

A more integrated risk-management approach could combine the rice-insurance scheme with the price-protection programme, making the cover part of the loan process. For this to occur, the current form of rice insurance would need to be re-evaluated; a yield index could be a viable solution to minimise anti-selection and make coverage affordable for both the farmers and the government.

Under a yield index, losses are determined from actual yield measured by government institutions at village or sub-district level against expected yields. This product is used in India and Vietnam to insure small-scale rice farmers against a wide range of disasters, and has proven successful with lean administrative costs and high efficiency to cover larger areas with small farms.

Read more on Thailand in our latest country-focused risk report, available at our Asia Risk Report hub.

* With the assistance of Hung Long Mai of the University of St Gallen.