China has been experimenting with agricultural price index insurance, a new approach to mitigating the risk of price fluctuations.
A recent description in Economic Reference News highlights a pilot for vegetable producers initiated in Zhangjiagang, a prefecture in northern Jiangsu Province. The price index insurance product is offered by Peoples Insurance Company of China (PICC) with 90 percent of the premiums paid by prefecture and township governments. A basis price is set--apparently the commodity's wholesale price during the same period in the previous year. If the current period's price falls below the basis price, the producers receive a compensation payment from the insurance company based on the price shortfall.
The Zhangjiagang pilot is for leafy cabbage-type vegetables grown in the summer when they are in short supply. The basis price is set using average price data provided by local price bureau surveys every 10 days. Last year the insurance company paid out 80,000 yuan to insured producers.
The insurance covers key "production bases"--groups of producers in a contiguous area such as a village or a township. The insurance contract is signed by prefecture officials with the local branch of the insurance company. Then township officials order village officials to go door-to-door collecting premiums and signing up all the vegetable producers in their village. The number of production bases covered will be expanded this year to all bases of at least 50 mu (8.2 acres) and large-scale individual- or company-operated farms producing leafy vegetables. It will also be expanded to include lettuce and spinach.
A recent description in Economic Reference News highlights a pilot for vegetable producers initiated in Zhangjiagang, a prefecture in northern Jiangsu Province. The price index insurance product is offered by Peoples Insurance Company of China (PICC) with 90 percent of the premiums paid by prefecture and township governments. A basis price is set--apparently the commodity's wholesale price during the same period in the previous year. If the current period's price falls below the basis price, the producers receive a compensation payment from the insurance company based on the price shortfall.
The Zhangjiagang pilot is for leafy cabbage-type vegetables grown in the summer when they are in short supply. The basis price is set using average price data provided by local price bureau surveys every 10 days. Last year the insurance company paid out 80,000 yuan to insured producers.
The insurance covers key "production bases"--groups of producers in a contiguous area such as a village or a township. The insurance contract is signed by prefecture officials with the local branch of the insurance company. Then township officials order village officials to go door-to-door collecting premiums and signing up all the vegetable producers in their village. The number of production bases covered will be expanded this year to all bases of at least 50 mu (8.2 acres) and large-scale individual- or company-operated farms producing leafy vegetables. It will also be expanded to include lettuce and spinach.
In 2011, the Shanghai agricultural commission and Anxin Insurance Co. began offering nationwide vegetable price insurance. The experiments with price insurance were endorsed by this year's "Number 1 Document." Beijing began a pilot price index insurance product for 143 large-scale hog producers in Shunyi District in May 2013. This one was offered by Anhua Insurance Co. Beijing's Daxing district launched cabbage price
insurance and Huairou district has chestnut price insurance.
The price insurance is said to be modeled on similar insurance products offered in developed countries. It's considered an exploration of less market-distorting policies. Vegetables and hogs are commodities that have had especially prominent problems with gyrations in price.
The price insurance scheme is a slightly more sophisticated version of the "temporary reserve" stockpiling policy that has tried to assure farmers that the price will not fall below a threshold set by the government. It also bears resemblance to the "target price" subsidy scheme that is just being tried out for the first time this year. In the insurance scheme, the government finances nearly all the payouts by subsidizing 90% of the premiums, but it engages an insurance company to conduct the program.
Some experts worry that the insurance product fails to spread risk. All producers experience the same fluctuations in price, so there is risk of large payouts. Risk multiplies as the insurance is spread to more commodities and regions since the price fluctuations of various commodities in all regions to tend to occur in sync with one another. The insurer faces the risk that all prices could be low and demand payouts simultaneously. Moreover, price fluctuations for vegetables and hogs tend to be greater than production quantity risks. Thus, the price insurance faces greater risk of large payouts than traditional production insurance.
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