In recent years, when negotiating their production loans for the upcoming season, farmers in Brazil have been offered a new way to protect themselves against financial loss: Farm revenue insurance offered by Credicoamo, the credit arm of Latin America’s largest agricultural cooperative, Coamo. Unlike traditional agricultural insurance, under which farmers often found only a portion of their losses covered in the event of weather-related crop destruction, this new product covers farmers’ revenue based on their actual outputs instead of an unrelated average.
With higher premiums than traditional insurance, the co-op aggressively marketed the new product as a better hedge against weather disasters, and those who purchased it found that it came in handy two years ago when a prolonged drought triggered the failure of the soy harvest in the Paraná region of Brazil. Valdeci Honiak, who farms land in Peabiru in northeastern Paraná, had taken out a drought insurance policy and believes that he would still be in debt without it. “I was worried because it had not rained for 30 days. But I was also more relaxed that I took out the insurance,’” he says today. He recalls how quickly his losses were calculated and the payment was made. The biggest surprise was the amount he received was enough to cover his losses. In previous years he had observed neighboring farmers having to sell their farms because their traditional insurance had not paid enough to cover their losses.
The product, developed jointly by Credicoamo and Swiss Re Corporate Solutions’ Agriculture division, marked the first time revenue insurance had ever been sold in Brazil. Besides considering the average individual output of each member of the cooperative, the insured amount is benchmarked against the price of products on the Chicago Mercantile Exchange, the main global market for agricultural produce and the outlet for more than half of the 5.63 million tons Coamo sells. More than 3,000 members of the co-op bought insurance for the 2012–2013 harvest, bringing the insured value to R$ 420 million and the annual premium to R$ 27 million, and the coverage is improving the liquidity of its members. If a harvest is lost to drought, they still have the money to pay back their loans.