New drought product performance

1. You launched the exciting new Vegetation Revenue Cover product last year this time in the Free State and North West. In general, how did the product perform?

Following one of the worst droughts in 100 years, everyone experienced an extremely difficult season. The tough circumstances were the ultimate stress test for the product in many respects. On the positive side, the season enabled us to identify critical areas for product improvement.     

2. Vegetation Revenue Cover is a complex index product that incorporates the relationship between yield and maize price. What impact did the season have on these two aspects? 

Due to the late onset of rains in most maize production regions, the satellite imagery (NDVI) which was used to calculate the yield ratio, did not perform as expected. Consequently we calculated the actual yield ratios using reported yields and yield estimates. In addition, the maize price reached unprecedented high levels. Consulting with the market we have created transparency re to claims settlement and have reached consensus on fair solutions. 

3. The negative correlation between yield and price was well debated when you launched the product, with some schools of thought believing that the product would never trigger to pay any claims. Were any claims paid?

Yes. Our claims ratio was more than 200%. The claims were mainly driven by the extreme low yield ratios in most index areas. As expected, and true to the product design, the high maize price did compensate for higher farm revenue. As a result of the late harvesting season, some farmers were not able to sell at the high July maize price as stipulated in the contract. In an attempt to compensate the farmers for this uncontrollable risk, we lowered the maize price at which the claims were calculated by approximately R1000/ton. This substantially increased the claims in favour of the farmers.  

4. Elaborate more on improvements made to the product?

  • We designed new index areas, also known as polygons. The design is based on soil type and climate that defines improved homogenous index areas, a key aspect for a successful index product. 
  • The actual yield ratio per index area will be determined by a physical hand assessment process, and not NDVI. 
  • We currently offer more benchmark price options which provide additional flexibility to the farmer.   

5. What is the market reaction following the past season and the product improvements?

It has always been our goal to create an innovative and sustainable product serving the interests of the farmer. I believe we clearly demonstrated our commitment to this objective listening to clients and making substantial improvements to the product. We strongly believe in the future of the product. Overall, we have experienced a positive reaction from our clients, partners and other actors in the market. 

6. What are the key challenges to maintain future growth for this product?

Index based products are a new concept to the South African agricultural market, hence we need to allow the market sufficient time to adapt to the concept.  Acknowledging the importance of the finance sector, we are also putting emphasis on financing. It will be crucial for financiers to understand the concept in order to accept this type of risk transfer as risk mitigation instruments.
For further information on the Vegetation Revenue Product, please contact your nearest CertiSure Branch.