Risk Management in Rice Farming in Indonesia: a Pilot Project for Agricultural Insurance

Bambang Sayaka and Sahat Pasaribu, Indonesian Center for Agricultural Socio-Economic and Policy Studies (ICASEPS)[1]

The rice farm business in Indonesia is risky due to natural calamities, such as drought in the dry season and flood in the wet season. Pests and diseases are also main threats to rice farming. Those threats could affect the rice yields leading to lower production or, to some extent, total harvest failure (puso). Currently, the farmers have to deal with lower yields or harvest failure by themselves. Since 2011 the Government of Indonesia allocates budget to cover rice farmers’ losses due to puso. The allocated fund to cover rice puso is in accordance with Act No. 12/1992 on Crops Farming and Presidential Instruction No. 5/2011 on Securing National Rice Production in dealing with Extreme Climate.

Fund aid to cover puso rice is allocated through a program of Puso Rice Alleviation Aid (BP3).  Rice farming is considered as puso if the paddy crop has been planted more than 30 days ago and is affected by pests, diseases, drought, or flood that destroys at least 75 percent of the farmers’ rice planted area.  The fund to cover puso rice is Rp 3,700,000 per hectare consisting of labor cost of Rp 2,600,000 and fertilizers cost of Rp 1,100,000. The fund is aimed at encouraging the farmers to keep growing rice. The total fund aid allocated for puso rice in 2011 was Rp 253,258,409,719  or equal to US $ 26,799,832 (the current exchange rate is around Rp 9,200 per US $ 1) covering 68,448.22 hectares of rice planted area in 100 regencies of 20 provinces in the country. There were 5,825 rice farmers’ groups that received fund aid for puso rice. In the future, BP3 will be converted into agricultural insurance. Both BP3 and agricultural insurance are aimed at protecting the rice farmers due to puso. Agricultural insurance will involve the insurance companies compensating rice farmers for their losses. Currently, BP3 does not involve the insurance companies because payments to the farmers experiencing puso are received directly by the farmers groups from the banks.

Studies on Agricultural Insurance

The Indonesian Center for Agricultural Socio-Economic and Policy Studies (ICASEPS) conducted some studies on agricultural insurance, especially on rice farming. In 2008 ICASEPS in collaboration with the Food and Agriculture Organization (FAO) conducted a study on agricultural insurance in the North Sumatra Province (Simalungun Regency) and Bali Province (Tabanan Regency). Both regencies are rice producing centers in their respective provinces with paddy fields dominated by technical irrigation systems.  In 2009 ICASEPS funded by the domestic budget continued the study on agricultural insurance in the North Sumatra Province (Simalungun Regency) and Bali Province (Tabanan Regency). The study was continued in 2010 in the same provinces and with the additional regencies of Deli Serdang (North Sumatera Province) and Jembrana (Bali Province).. Each regency consisted of 30 to 40 farmers’ respondents who experienced harvest failure due to flood, drought, and pests and disease attack, e.g. brown plast hopper, rats, and blast. All farmers’ respondents in both provinces were enthusiastic to participate in the agricultural insurance to be offered by the Ministry of Agriculture, Indonesia. Most of them were willing to pay the premium in full for the insurance, and only a few said they would only pay part of the premium. Most farmers asked for an insurance claim that was equal to the production value rather than production costs. They preferred payment claim through the farmers’ group, not individual farmers. The farmers’ respondents expected the agricultural pilot project to be implemented immediately and no later than 2012.

A Pilot Project on Agricultural Insurance

Based on previous studies on agricultural insurance the Ministry of Agriculture Indonesia will implement a pilot project on rice farming in three provinces, namely South Sumatera, West Java, and East Java. Due to some technical reasons, the pilot project will not be conducted in the locations of the studies as mentioned above. This pilot project will start on October 2012, i.e. the first planting of the wet season of the year. The paddy field planted area covered by this pilot project will be 1,000 hectares in each province in collaboration with four Indonesian State-Owned Enterprises, namely three fertilizer-producing companies and one insurance company, and a private insurance company. The premium is Rp 180,000 per hectare of planted paddy field per season or 3 percent of the payment that will be received by the farmers (Rp 6,000,000) if their paddy fields get puso.  The farmers will have to pay 20 percent of the premium (Rp 36,000) per hectare per planting season and the remaining 80 percent (Rp 144,000) per hectare per planting season will be paid by the fertilizer companies.

This pilot project will just cover the puso paddy field. If this pilot project is successful, it will be expanded to cover larger paddy planted areas. In the future the crops insurance will not only cover puso, indicating that farmers’ self-finance for crop insurance is possible if it is profitable. Agricultural credit is promising to estate crop plantations, such as oil palm, rubber, cocoa, and coffee, and horticultural farms, such as vegetables, ornamental crops, and fruits.

Conclusion

It is also possible that the insurance will also include the agricultural products selling price. Some agricultural fresh products, such as vegetables, have an unstable selling price especially during harvest season. Incorporating crop insurance in the agricultural credit scheme is another idea. For example, the food security and energy credit (KKP-E), one of the subsidized agricultural credits, provides funds for working capital for growing food crops (paddy, corn, soybean, cassava, sweet potato, peanut,),  horticulture (shallot, garlic, chili, ginger, tomato, water melon, papaya), livestock (cattle, broiler, layer, goat, lamb), and also food crop seeds. Working capital for food crops and livestock farming includes input and seed, but not insurance. If an insurance premium is included in the agricultural credit, the banks will be encouraged to deliver it more to the farmers. Currently, the banks are reluctant to lend credits to the farmers because of higher risks as farmers cannot pay their credits when they deal with harvest failure or a lower selling price of their products.