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Agricultural Insurance
Sunday, May 26, 2013 - 12:10
More from less

The demand for food in South Africa has increased substantially in the past decade and this trend is expected to continue. The increase has been driven partly by 9.7% growth in population from approximately 46.2 million in 2002 to approximately 50.7 million in 2012. But demand has also been triggered by increased consumer spending.

Santam Agriculture, a crop and asset insurer with more than 83 years of experience, has found that the growing economy, as well as increased social expenditure by government, has shifted many consumers to higher income groups. Living standards and spending power in South Africa is measured in terms of the living standard measurement (LSM) groups 1 to 10, with the disposable income of group 10 being the greatest. Since 2004, the percentage of the South African population classified into groups 1 to 4 (lower income levels) has decreased from just over 50% to below 30%.
Head of Santam Agriculture, Riaan Louw explains, “This improvement in living standards has led to increased consumption of food, especially protein, with chicken, the cheapest source of animal protein, showing the greatest growth in consumption. Greater spending power has also shifted consumption away from traditional staples like maize into bread, pasta, potatoes and rice.
“An ever growing population will continue to demand increasing quantities of food and as such, opportunities will always remain for innovative producers that are able to keep improving productivity and producing more from less,” says Louw.
According to the Department of Agriculture, the number of commercial farming units in South Africa has decreased from 57 980 in 1993, to 39 966 in 2007, a decrease of 45.07%. In conjunction with the ever increasing demand for food, South African commercial farmers have been placed in the precarious position of having to produce more food with less arable land at their disposal.
“While the main field crops accounted for 6.8 million hectares in 1981, the same crops accounted for only 4.2 million hectares in 2011. Other possible reasons for this decline are rapid urbanisation resulting in more land being used for other activities as well as reduced planting on marginal, lower potential land due to extreme cost pressures on producers,” says Louw.
He added that another concern is the impact of mining, especially in high potential production areas in Mpumalanga. The long term outlook for area planted in South Africa is illustrated in figure 1.


Figure 1: Outlook for the area planted under major field crops in South Africa
Source: Bureau for Food and Agricultural Policy (BFAP)

“While the decline in total area planted is clear, production output of the commodities has increased in South Africa,” says Louw, “thanks in large part to great improvements in technology.”
He emphasised that while the total area planted to maize has decreased from 2.71 million hectares in 2001 to 2.37 million hectares in 2011, total maize production increased from 7.94 million tons to 10.36 million tons during the same period.
Figure 2 represents the production of soya in South Africa, a further indication of increased productivity. Although soya is the only commodity that shows a significant increase in area planted in the long run, increased productivity is clearly illustrated by the fact that production increases at a faster rate than area planted.


Figure 2: Soya area planted vs production
Source: Bureau for Food and Agricultural Policy (BFAP)

“Despite a decline of 7.2% in area planted under the main field crops in the past 10 years – production volumes have increased by 22.2% in the same period. In other words, the constantly increasing demand in the modern era has been met by intensification rather than expansion – a trend that looks set to continue across industries in the future,” adds Louw.
Intensification has also changed the nature of technology and machinery required to produce at the stated levels. Increased productivity has been achieved through the use of improved inputs, like better seed varieties and fertiliser, but at the same time, capital technology has advanced greatly. Increased commodity prices in recent years have allowed farmers to make significant investments in improved capital assets, making use of the huge advancement in mechanical technology. The Department of Agriculture, Forestry and Fisheries indicates that the value of capital assets on commercial farms has increased by a staggering 140% in the past decade, from R101.03 billion in 2001 to R242.52 billion in 2011.
Louw says, “This includes land, fixed improvements, machinery and livestock. The need to increase productivity and intensify production, coupled with labour unrest and ever increasing wages has pushed many farmers to mechanise further, with the value of vehicles and machinery on commercial farms increasing by 170% in the past decade. The recent increase in minimum wages looks set to drive this trend towards mechanisation even further in the future.”
Commercial farmers have faced tough times in the past and continue to be exposed to risks, even more so now. In addition to the challenge of supplying more food with less, farmers still face the ever-present issues such as volatile prices and extreme weather conditions and are becoming increasingly unable to plan for such unpredictable events. It is important that commercial farmers remain aware of these risks, and mitigate them as much of as possible.
Effective risk management through adequate crop and asset insurance, proactively managing their ecological area, and utilising methods to reduce water loss, are vital to prevent financial ruin and possible foreclosure. A lack of knowledge around this issue may cause South Africa’s food prices to increase and the country’s export produce sector could be at risk.
For more information on Santam Agriculture please contact your broker or your nearest Santam office.
 

Copyright © Insurance Times and Investments® Vol:26.5 1st May, 2013
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