Organic farming is not only about healthy food, but also about using practices that make our agriculture sustainable and resistant to climate change for many generations to come. In this article, we take a closer look at the present and the future of organic farming, as well as the importance of crop insurance practices in helping with the transition to greener farming methods.
What is organic farming?
There are many explanations and definitions for organic agriculture, but all agree it is a practice that relies on ecosystem management rather than external agricultural inputs. It is a system that considers potential environmental and social impacts by eliminating the use of synthetic inputs, such as synthetic fertilizers and pesticides, veterinary drugs, genetically modified seeds and breeds, preservatives, additives, and irradiation. These are replaced with site-specific management practices that maintain and increase long-term soil fertility and prevent pests and diseases.
In general, the development of organic farming is driven by:
Organic Farming in the EU
TThe area under organic farming in the EU has increased by almost 66% in the last 10 years – from 8.3 million hectares in 2010 to 13.8 million hectares in 2019. It currently accounts for 8.5% of the EU’s total ‘utilised agricultural area’, but there is still lots of room for improvement.
A sustainable food system is at the heart of the European Green Deal. Under the Green Deal’s Farm to Fork strategy, the European Commission has set a target for at least 25% of the EU’s agricultural land to be organically farmed, and a significant increase in organic aquaculture by 2030. To achieve it the EU Commission has set out a comprehensive organic action plan. It is broken into three interlinked axes that reflect the structure of the food supply chain and the Green Deal’s sustainability objectives (Table 1).
Is organic farming riskier than conventional farming?
Organic farming is often deemed as being more resilient to certain climate risks compared to conventional farming practices. USDA’s Risk Management Agency (RMA) recognises organic farming practices as good farming practices and continues to improve crop insurance coverage for certified organic producers and producers transitioning to certified organic production.
Organic farms tend to promote biodiversity by avoiding synthetic pesticides and encouraging the use of cover crops, crop rotation, and other practices that enhance ecological diversity. This diversity can make farms more resilient to changing weather patterns, as different crops have varying tolerance to climate conditions.
In addition, there is a strong emphasis on soil health practices like composting and reduced tillage. Healthy soils can better retain water, which can be critical during periods of drought or irregular rainfall, helping to mitigate the impacts of climate change. For example, during the very dry 2021 growing season, the farms in Canada with higher levels of soil organic matter produced an average of 8.2 more bushels of canola per acre than farms with lower levels of soil organic matter.
Moreover, organic farming typically produces fewer greenhouse gas emissions compared to conventional farming, primarily due to the avoidance of synthetic fertilizers and pesticides. Therefore, it brings less exposure with regards to ESG transition risks.
Insurance of organic farms
As a rule, insurance companies do offer insurance coverage specifically for organic crops. However, insurers and farmers face several problems related to crop insurance. Organic farming can potentially lead to lower yields, due to the inability to use synthetic pesticides and fertilizers. It creates some controversy within classic crop insurance practices. It is difficult to include more widely diversified organic farming in a crop insurance system that was largely built on insuring conventional types of field crops, and that largely defines success and failure in terms of crop yield and revenue. For organic farmers, by contrast, success also includes other values and goals, such as improving soil quality, increasing biodiversity, and enhancing the environment. In such a case, the level of insured yields is usually lower than for conventional farming. For example, in the USA, if a farmer does not have an individual yield history for organic crops, they can be offered insurance for the area yield level for standard crops but reduced by 35%.
Moreover, underwriters in insurance companies possess limited information regarding organic farming practices and how they are related to crop insurance. Many agents of insurance companies do not know as much as they would like about organic production, and do not feel comfortable or well-prepared enough to work with organic growers. At the loss adjustment stage, the parties of the insurance contract may face the problem of interpreting good farming practices, violation of which is the reason for diminishing the insurance indemnity or even decline in the compensation. Clear cases of failure include things like using insufficient amounts of seed or fertilizer, grossly underwatering an irrigated crop, or allowing weeds to take over the field. What this means is that insurance adjusters and outside experts decide if it is such a failure or not, and not the farmer. However, there are many grey areas. The complexity and integrated nature of an organic production systems means it can be difficult for an adjuster to judge whether a given organic farm is using good farming practices, unless they are intimately familiar with the operation.
One more problem is that insurance companies usually experience higher loss ratios from insuring organic farmers compared to standard clients. It can be explained by the lower participation of organic agriculture in crop insurance, hence, a higher adverse risk selection. Moreover, growing a more diverse selection of crops can bring additional risk of failure depending on the variety, hence, more potential losses to the insurance company. And finally, organic farms have a higher produce yield than conventional farms, and horticulture and viticulture is more vulnerable to climate risks compared to field crops, that makes insurers increasingly reluctant to insure it. In addition, it is difficult to verify sums insured based on market prices from liquid markets of conventional crops. Organic food is more expensive; therefore, an insurance company should consider the higher price of crops. Instead, its verification is often just to follow the contract price between a farmer and their buyer. It means, that the exposure (maximal loss) per one hectare in organic farming can also be higher.
Conclusions: can insurance lead the transformation of farming practices?
The EU has an ambitious target to have 25% of land under organic farming by 2030. This is a big challenge for farmers who, despite economic and social motivation, and growing consumer demand, are struggling with difficulties in the transition phase. Insurance plays one of the most important roles in motivating farmers to switch from conventional methods to more environmentally friendly ones. Insurers are ready to insure organic crops but should continue to develop their expertise to ultimately ensure that organic farmers have the same access to crop insurance, on equal terms to conventional farmers. For this purpose, several methodological, educational and data availability problems need to be solved.
GrECo Group, as one of the leading specialist brokers in the CEE/SEE region, facilitates the development of solutions for organic farming by conducting crucial research in this area and creating tailor-made solutions for the insurance and agricultural industries. We firmly believe insurance can play a major role in the transformation of agriculture from conventional practices to more ecological ones. We just need to provide the farmers with the right incentives and solutions.
Group Practice Leader
Food & Agriculture
T +48 22 39 33 211
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