March 5, 2020

Rethinking Insurance to Improve Coffee Farmers’ Resilience 


Coffee farming is an unpredictable business, at times devastatingly so. Weather conditions can take us by surprise while crop diseases can be prevalent and persistent. Affecting both the yield and quality of a harvest, these issues leave insurance vitally important to the economic stability of farming communities.

Weather index insurance is an emerging concept that can help protect coffee farmers from the effects of adverse weather conditions and natural disasters. It can also reduce farmers’ dependence on government aid and help tackle deepening poverty in coffee-growing communities.

So why is it that so few coffee growers have heard of it? How can the coffee industry make it more accessible, and how exactly would it benefit the people at the start of the supply chain?

Lee este artículo en español Redefinir Los Seguros: Mejora la Resistencia de Los Caficultores

Pickers on their way to harvest coffee cherries in Colombia. Credit: Propina

Why Is Insurance so Important?

Smallholder farmers in coffee-growing countries are far more likely to be impoverished than not. They make up two-thirds of those classed as poor in developing countries. 

They also contribute significantly to the local economy. When a coffee farmer has a bad year yet does not receive insurance payouts, their close-knit community will likely experience hardship too. A solid insurance plan ensures greater economic stability by supporting farmers through tough harvests. And its impact extends beyond the one farm, benefitting whole villages and towns.

Now, more than ever, poor insurance puts communities at risk. Climate change is causing more frequent and severe weather conditions and natural disasters. Droughts, harvest rains, fires, and floods can have catastrophic effects. 

Leaving farms even more vulnerable, rising temperatures are allowing pests and diseases to thrive at elevations where it used to be too cold for them to survive. It’s at these mountainous heights that coffee farmers often plant their best and most vulnerable coffee trees: ones associated with more delicate and complex flavours, and with that, higher prices. Unfortunately, with many of these varieties, the pay-off is reduced resistance to bugs, fungi, and illness.

Crawford Hawkins is the Founder and CEO of Harvest, an online marketplace launching soon that sells roasted coffee to consumers and businesses and helps to fund weather index insurance and working capital for coffee farmers. 5% of their sales is used to pay producers’ insurance premiums through Propina, a non-profit which means “tip” in Spanish. Additionally, when people buy coffee from Harvest, they can choose to “tip” producers by donating additional funds to cover their insurance policies.  

“When wet months are wetter and dry months are drier, the effect on smallholder coffee producers is severe,” he says. “The increased climate volatility means that the average temperatures across the coffee belt no longer align with their historical average. Weather is becoming more unpredictable and smallholder farmers lack the access to hedging tools to protect their livelihoods.” 

In this context, accessible and comprehensive insurance policies are increasingly needed.

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Coffee producing family at a farm in Colombia. Credit: Propina

Insurance Policies That Cause More Problems Than Solutions

It has proven difficult for many smallholder farmers to access and claim on traditional crop insurance. The problem is that it’s just not designed with the daily realities of smallholder coffee farmers in mind. 

Kellie McCoy, Founder of consultancy specialists The Candra Group and previously Chief of Staff to Starbucks’ CEO, tells me, “Traditional insurance models take a policy holder’s assets into account and then assess premiums accordingly.” In other words, typical agricultural insurance involves insuring the crops themselves, mainly against any losses that the farmer might incur. 

Since the policy is based on the farmers’ crops and any losses specific to their farm, assessing value and damages is time-consuming and complex. In-person farm inspections might be required, a process that can be slowed down by poor or damaged infrastructure (especially after flooding). In the meantime, coffee farmers are left waiting and potentially spiralling into debt.

On top of this, traditional insurance can encourage producers to adopt risky farming methods. Since policies are based on the value of a crop, they reward higher yields. Producers can end up focusing on this over sustainable growth, nurturing the soil quality, and renovating plants (something which typically results in a short-term drop in harvest size in exchange for better returns two to three years later). 

If the farmer fails to increase their yield, their premium can increase and they will find themselves having to pay more with each contract renewal – meaning they have less money to invest in their farm.

These policies also fail to incentivise farmers to diversify their crops – and with that, their income – or plant shade crops, which help to increase the soil quality. There are often strict guidelines that the farmers must follow or else risk invalidating the policy, which can leave farmers unwilling to try something new.

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Rich vegetation grows at Finca Café Con Amor in Costa Rica. Credit: Marianella Baez Jost

Turning to a New Type of Insurance

Some insurance brokers are turning away from traditional models and towards weather index insurance instead. It’s being hailed as a solution to many of the problems inherent to typical agricultural insurance.

In this model, variables such as rainfall, temperature, and wind speed in certain locations are measured using past data, local weather stations, and satellites. This data is then used to create indexes that determine standard ranges for these variables within that region. Coffee farmers and insurance companies then agree on certain levels of deviation for the most appropriate variables in a contract. 

Michael R. Carter is a professor at the Department of Agricultural and Resource Economics at the University of California in Davis, and also the director of the university’s BASIS Research Program. The program aims to provide economically disadvantaged families with the agricultural tools that they need to sustain themselves.

He describes how weather index-based insurance works when put into practice. “[It] issues payments based on a verifiable index measure that is related to the losses that insured farmers experience. Examples of such indexes include average yields within a locality, deficits or excesses of precipitation, and a suite of satellite-based measures that reflect plant health and growth and can be used to predict crop yields.”

The exact indices used will vary, but they are typically based on historic averages to make sure that they are relevant and accurate. Hawkins tells me, “The index weather insurance that we structure combines a 30-year average temperature or rainfall amount to create a smart contract at a local level, ensuring a payout when the weather deviates from the historical average.”

Coffee trees grow under shade cover. Credit: Marianella Baez Jost

How Weather Index Insurance Can Support Farmers

Weather index insurance shifts a significant amount of control back to farmers. It means that they aren’t held accountable by external parties to their crop’s yield. Nor are they dependent on farm inspections that are difficult to arrange: satellites can obtain all the data that the insurance company needs to process any claims filed by the farmers. 

As McCoy says, weather indexing “simplifies the insurance model”.

Since claims are automatic and based on data the insurance company already has, the payout can also be extremely quick. Wade Preston, Co-Owner of Prevail Coffee in Alabama, says, “When a crop-yield-affecting weather event occurs, the claim is automatically filed and the coffee grower receives a payout.

“If the coffee-growing world and the world of commercial insurance have anything in common, it’s that they are both notorious for working slowly and inefficiently. GPS-based weather indexing solves that problem on both ends.”

When farmers receive their insurance claim payouts faster, they can then recover from any monetary losses quicker. This is especially beneficial to economically disadvantaged farmers who may otherwise be forced to sell their equipment or even land to survive the wait.

McCoy hopes this new insurance model will help tackle the tendency for smallholder farmers to leave their farms and seek new jobs. “If we consider a single smallholder farmer who relies on the sale of the coffee… then a failed crop due to insufficient rainfall could force this one farmer to leave [their] rural area for a more reliable job in a nearby city,” she says. 

Healthy coffee trees grow in a biodiverse environment on Finca Café Con Amor. Credit: Marianella Baez Jost

Barriers to Obtaining Insurance

Although weather index insurance sounds like the ideal policy for farms today, Prof. Carter tells me that it is still not widely used. “Farmer demand for index insurance in many instances has been very low,” he says. 

A startling lack of awareness is one barrier. Weather index insurance has not been well-publicised in many cases. Nor is it widely understood, not even among farmers. Farmers in Kenya have reported being confused about when they would receive insurance payouts if there were fluctuation in the index, with risk-averse farmers were particularly likely to be wary because of this.

A significant number also did not consider the insurance to be worth the cost of the premiums. This is not a problem unique to weather indexing: after many years of ineffective traditional insurance, many producers simply don’t expect insurance to be useful. 

Marianella Baez Jost owns a coffee farm in Costa Rica. She tells me, “Insurance is not well known in coffee farming… Most people only purchase insurance because it is required for their vehicle or property mortgage.”

This issue is further compounded by financial barriers. Lower-income coffee growers are found to be more hesitant in taking out weather index-based insurance due to a lack of trust and understanding of it. 

Siddhartha Jha is the CEO and Founder of Arbol, a platform bringing together farms and capital providers to create weather index-based insurance contracts. He tells me, “Insurance is a key piece of financial infrastructure to help build resilience… for economically disadvantaged farmers… However, the market is still highly fragmented, opaque, expensive, and plagued with fees stemming from inefficiency.”

Weather index insurance can have a dramatic impact on producing communities. The problem is communicating it.

Marianella Baez Jost inspects coffee plants on her farm, Finca Café Con Amor. Credit: Zach Tarhini

Does Take-Up Begin With Coffee Cooperatives?

When we talk about smallholder farmers, the role of the community cannot be overlooked. Just as a poor harvest affects the entire village, an entire village of producers working together may be more inclined to try a new insurance model. It can make it easier to share accurate information about different policies, how to sign up, and how to make claims. 

In fact, research in Kenya found that offering insurance to a group of smallholder farms, as opposed to individuals, led to a better understanding of the insurance model. As the farmers discussed it together, their confidence in the system increased.

Propina is working on trials of weather index insurance with farming groups in Costa Rica, Colombia and Honduras. The farmers’ premiums are paid for by Harvest, which donates 5% of sales and also facilitates consumers “tipping” the producer at the point of sale. Roasters and other supply chain businesses can also match the donation to scale the social and environmental impact.

It’s early days for weather index insurance, but producers have high hopes for it. Rafael Silva of SICAFE Coffee says that he “really wants” to be able to access it.

“Coffee is a crop that 100% depends on nature…,” he explains. “Having insurance as a businessperson means you are protected, that in case of anything happening outside your control, you, your company, your product is safe or taken care of in times of a disaster. Having insurance provides me with a peace of mind and allows me to focus on the bigger picture.”

Good insurance can be life-changing. It can increase financial stability for producers, their families, and their communities. This opens the door not only to a better quality of life (the value of which should not be understated), but also the ability to plan ahead, manage risk, confidently expand, and feel secure about the future – things that are important in all businesses and in all our lives.

As Preston says, “We should be able to speak about financial instruments, processes, and infrastructure… just as clearly and articulately as we speak about coffee processing, roasting, and extraction – even if that means adding terms like ‘weather indexed crop insurance’ to our lexicon.”

Found this interesting? Read Sustainability in Coffee: What Are The Main Issues?

Written by Tasmin Grant. Feature photo: Coffee plants at Finca Café Con Amor in Cañuelas, Naranjo, Costa Rica. Feature photo credit: Marianella Baez Jost

Please note: This article has been sponsored by Propina.

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