WHEN CROPS ARE INSURED

Floods, landslides, drought and fires. This year's natural disasters have caused great damage to agriculture in Azerbaijan. But since most villagers' property was not insured, they can make up only a portion of their losses with assistance from the state budget.

Today, the country's farmers do not give enough attention to insurance. And this is while 50 per cent of an insurance policy against agricultural risks is covered by the state. The average tariff for agricultural insurance is about 1,500 manats per year (five per cent per hectare), while the average profit per hectare of land is estimated at about 25,000 manats per year.

The state can insure risks associated with the cultivation of wheat, barley, maize, potatoes, sugar beets and vegetables (except greens). The Ministry of Finance says that insurance against risks allows farmers to increase agricultural production and ensure the profitability of their products.

The state can increase support for the agricultural-industrial complex

Although the state budget for 2006 - 2009 allocated 1.872 million manats for this purpose, insurance companies received only 57,800 manats, or 3.1 per cent of the funds provided; the reason being the small number of claims from farmers for budgetary support to cover their risks. Insurers do not emphasise this type of insurance because of the high level of risk, and so the State Insurance Service of Azerbaijan is developing proposals to improve the mechanism of agricultural insurance. According to Namiq Xalilov, head of the State Insurance Service at the Ministry of Finance, the relevance of developing a new mechanism has also increased following this year's natural disasters.

The AzerSigorta closed joint-stock company has already submitted proposals to the government to grant additional funds for agricultural insurance. The company's proposals provide for 100-per-cent coverage of agricultural insurance contracts, against the current 50 per cent. The company justifies the need to increase state guarantees by the fact that most farmers claim they do not have the funds to insure their farms.

Amendments to the law on assistance to agricultural development in Azerbaijan, approved in the summer of 2007, increased the share of public funding for agricultural insurance premiums from 25 to 50 per cent.

It should be noted that because of the high risks in agriculture, banks are reluctant to lend to this sector. In the first five months of 2009 the proportion of agricultural loans in banks' total lending portfolio stood at 5.6 per cent, but in the same period of 2010, this figure fell to 4.5 per cent. However, there was a rise in total lending to the agricultural sector of 11.9 per cent.

In addition, the state supports agriculture through the State Agency for Agricultural Lending at the Ministry of Agriculture, which has received state budget funds since 2007 for preferential lending to farmers.

It is expected that in the long-term, the government of Azerbaijan can replace subsidies to farmers with preferential lending. Today, economically developed countries support the agricultural sector with subsidies. In the EU, subsidies to the agricultural-industrial sector amount to 50 billion euros per year.

In the new economic conditions (following the completion of the transitional period in Azerbaijan's economy), the agricultural-industrial sector and the economy as a whole must undergo qualitative changes. In the agricultural sector, this should be accompanied by an increase in productivity and use of modern technology, which also requires financial resources.

State support for the agricultural-industrial complex in Azerbaijan in 2010 is planned to amount to 700 million manats. These costs include both the direct and indirect costs to the state of financing the agricultural sector.

Moreover, the Agrolizing open joint-stock company will be given 35 million manats from the state budget and the State Agency for Agricultural Lending at the Ministry of Agriculture - 10 million manats. Of the 44 million manats allocated to the National Fund to Support Entrepreneurship this year, 48 per cent are earmarked for the production and processing of agricultural produce.

According to studies, the cost of one thousand cubic metres of water used for irrigation is 18.8 manats, but it is currently sold to Azerbaijani farmers for 0.5 manats, i.e. 1/37th of the cost. This means that the state pays out 80 manats per hectare of a sown area in the form of direct subsidies.

In 2010, direct subsidies to the agricultural sector are expected to reach 115 million manats, while tax relief provides indirect subsidies of 149 million manats to the sector.

Insurance and Guarantee Fund

To improve the rural population's access to financial resources (other than via the budget), the Azerbaijan Microfinance Association (AMFA) proposes the creation of a Credit Insurance and Lending Fund for agriculture. According to the authors of the proposal, this fund could deal with security risks in agriculture on the one hand, and act as a guarantor for loans to the sector on the other.

The association intends to submit its proposals to the government because, in its view, the state should take an active part in the establishment and operation of such a fund.

The Fund could determine priorities for its activities, establish maximum limits for insurance and guarantees, identify specific cases for insurance payments and establish evaluation criteria for insurance and guarantees.

According to the head of the association's research group, Vaqif Rustamov, risk insurance in the agricultural sector is currently experiencing certain problems. In particular, this is due to the limited range of risk insurance cover in the agricultural-industrial complex, as well as limitations on payments in insurance cases - mainly natural disasters.

According to Rustamov, the fund does not need a separate law, as the law "On state support for small businesses" has been valid since 1999, and it contains the necessary provision.

According to experts from the association, in order to improve the system of agricultural insurance in Azerbaijan, it would be useful to create a large insurance company and a network of regional agrarian companies alongside the Credit Insurance and Guarantee Fund. This would compensate for damage caused by the loss of fixed assets and loss of crops with insurance payments. It would also improve the tariff policy (tariff differentiations, bringing them into line with the dimensions of risk) and create and use insurance reserves.

To develop a more effective insurance mechanism for agricultural loans, specialists suggest the introduction of new instruments (bonds from accidents, an insurance contract based on an index of adverse weather conditions, an insurance contract based on the index of land productivity), technological innovations (weather forecasting by satellite, satellite imagery, early warning systems) and stimulating private insurance companies (incentives for paying insurance premiums and payments, grants for administrative expenses and the reinsurance of subsidies).

When introducing a new mechanism, it is proposed that risk factors should be taken into account - natural (weather), health (diseases and epidemics), market (price differences between local and international markets, changes in quality standards) and political, economic and social (war, financial crisis, weakening of institutional arrangements).

Poor harvest year

Meanwhile, according to the latest calculations, the flooding of the Kura and Araz damaged 60,107 hectares of agricultural land, including 26,255 ha of grains.

As a result, according to Sabir Valiyev, head of the department to control the production and processing of crops at the Azerbaijani Ministry of Agriculture, Azerbaijan is expected to harvest 2 million tons of grain, including 1.3 million tons of wheat, this year.

The country's demand for wheat amounts to 1.5 million tons and, accordingly, the additional amounts will be covered by imports of grain, particularly from Kazakhstan, says Valiyev.

He added that Azerbaijan has sufficient grain reserves - since the beginning of 2010, 520,000 tons of grain have been imported, 15 per cent of this came from Russia and the rest from Kazakhstan. However, there is a risk that grain prices will increase, as the Russian government decided to impose an embargo on exports of grain from 15 August to 31 December this year because of the drought and loss of yield. The yield from grain crops in Russia, according to official figures, could decline by 30 per cent, and Russia is expected to harvest 75 million tonnes of grain this year. World grain exchanges reacted immediately to the Russian government's decision, and grain prices skyrocketed.

Over the past six or seven weeks, the price of wheat in EU countries has increased by almost half, which was due, above all, to the decision by the Russian authorities, although the increase in grain prices at stock exchanges cannot be considered justified, because Russia is not the leading exporter of grain.

The International Grains Council (IGG) announced last week that the USA and Australia intend to increase exports of wheat to compensate for the loss of supplies from Russia. According to the IGG forecast, the world's wheat production will decline this year, from 686 million to 651 million tons, while consumption will be 655 million tons. Thus, the market must rely on carry-over stocks, which, however, remain quite large (192 million tons) due to two consecutive productive years.

Experts estimate that grain stocks on the world market are 50 per cent higher than those in 2007, when prices on the stock exchanges reached record highs.

At the same time, because of the situation in the country, exporters are reducing the volume of exports. To prevent a rise in grain prices on the domestic market, the Azerbaijani Ministry of Agriculture appealed to the government to abolish VAT on grain imports. Azerbaijan introduced VAT on grain imports in early 2010: while one ton of grain costs 480 dollars, VAT is 18 per cent, i.e. 86.4 dollars per ton of imported grain.

Grain is imported into Azerbaijan mainly from Kazakhstan, while contracts have already been signed with Russian suppliers, which will be implemented regardless of restrictions on Russian exports, as they have already been paid for, said a representative of the Ministry of Agriculture.