Despite the importance of the agricultural activities to the Indonesian economy ([13%] of GDP), livelihoods ([34%] of labor force), food security, and poverty reduction, the multiple risks associated with agricultural production – coupled with the general lack of knowledge and outreach to farmers/agriculture sector by financial institutions – have limited the needed levels of investment flows into the sector.

Agri-lending in Indonesia accounts for a small portion of total lending, at [5.8%]. The risks aversion towards lending to farmers are well documented, including price fluctuations and adverse weather risk – as well as logistical difficulties and high transaction costs associated in reaching farmers/rural agriculture areas. The project focuses mainly on addressing the adverse weather risk impacting farmers to encourage greater investment.

Agriculture insurance penetration is less than 1% in Indonesia. Most insurance companies face additional obstacles, such as: the technical difficulty of designing weather insurance products; the high level of investment needed to enter the market; and the levels of reserves and/or reinsurance required to adequately cover weather/disaster risks.

The project aims to contribute to increase investments in agriculture and rural communities by introducing insurance solutions to reduce the risk faced by farmers and agri-lenders/businesses due to adverse weather events i.e., drought, flood, and hurricane etc. – the effects of which are being aggravated by climate change. Initially, the project focused on conducting market assessments and reaching out to value chain players as potential distribution channels. Thereafter, it focused on the collection of historical crop yield data and information from the channels that showed concrete interest. IFC provides advisory services to PT Mars Symbioscience Indonesia (MARS) to strengthen the technical capacity to design/price and administer the agriculture/weather (index) insurance product(s). The project seeks to contribute to a reduction in financial vulnerability for farmers, agribusinesses and banks to climate change/adverse weather events, and an eventual increase in investments/lending to farmers via an improvement in their risk profiles.

Fay Fay Choo is the Asia Director for Cocoa Sustainable Sourcing at Mars Food. Ms. Choo has 24 years of supply chain and strategic sourcing experience in the food industry and in the past decade she has been directly responsible for sustainable cocoa development in Asia, where Mars has an extensive program covering plant science research, technology transfer and certification with tens of thousands of farmers in Indonesia, Philippines, and Vietnam. In a conversation with GIIF, Fay Fay Choo provided an overview of the activities to date and their plans for their future involvement in this business line.

1. Could you please update us on the current status of the project and the major achievements and challenges you faced to date?

- Current status: Soil moisture index (SMI) crop insurance product design completed between IFC and Mars, trained to Asosiasi Asuransi Umum Indonesia (AAUI) and AAUI submitted to Otoritas Jasa Keuangan (OJK) (regulators).
- Major achievement: The product is now approved by OJK and we are in phase of preparing for launch by early 2022. AAUI has since setup the website that publishes transparently the satellite data and smart contracts so product can be offered and claims automatically paid out when and if excess/deficits are triggered. Excellent ways of working between AAUI, IFC and Mars as the collaborators in this project.
- Challenges: 1) Long approval process at OJK probably as the SMI concept is relatively new.

2. In your view, what were the main implementation challenges during the pandemic and what steps did your company have to take on the ground, and internally with your operations?

One of the main challenges during the pandemic was to ensure the sustainability of the project. There was very limited movement specially to perform farmer field school and coaching sessions for which Mars had to adjust to smaller groups. Strategic sourcing had to be put in place to ensure the continuation of the operations; strict protocols had to be created and performed to ensure we kept the supply chain running. These measures were highly appreciated by the community and farmers, allowing their incomes to still flowing.

3. Regarding your next steps, how do you see your involvement in the country and/or in the region. And do you have plans to expand your strategic partnerships in this business line?

As a next step, we would like the product offering to be expanded to cocoa in other growing areas of Indonesia like Sumatera, and the rest of the region. E.g., Philippines, and Papua New Guinea. This product has a huge application in West Africa and Latam, where most of the cocoa is currently grown. We would also be interested in helping to promote this through national agriculture platforms (E.g., PISAgro) for similar products to be developed for other commodities – short term and long-term crops like coffee, rubber, palm, among others.

4. From Mars perspective what were the major issues/challenges they found with production of Cocoa that they felt was impacting their farmers (and their income)?

Low productivity due to aging trees was one of the major issues and challenges we recognize, as well as the aging of the agricultural labor force. Soil depletion, and pest and disease attack are also leading to lower incomes. At the same time, and probably as a result of negative perceptions many developing and transition countries share about farming, the youth does not seem very interested in this field of work and consider it -in many cases- not a profitable business. Due to this, we must find technology and solutions to attract them to be the farmers of the future. Education and capacity building is much needed to accomplish this challenging endeavor.

5. What is Mars view on the proposed Soil Moisture Index (SMI) and why they think this is better product?

Overall, the crop insurance industry is relatively under-developed in Indonesia except in cases like rice, reason why this is a much-needed product to enable risk sharing and farmer financing. The SMI is a better product due to: (1) Soil Moisture, water that is available to the crop vs. rainfall which is not a good indicator; and (2) Index, which lowers the costs and allows to have a transparent open data source like Copernicus Satellite (making the product transparent and easy to administer to many smallholders in each of the regions).

6. What does Mars see as a major challenge in product adoption by the farmers?

The understanding of a weather and soil moisture insurance is currently non-existent with cocoa farmers; hence a lot of education and training will be required which could take a few years. We may consider the possibility of having a lower threshold of a pay-out in the initial years (applying lessons learned from Kenya), allowing farmers more time to better grasp the concept and drive improved adoption.

7. What would be considered as a success of the proposed Soil Moisture Index (SMI) product offering I.e., what indicators?  

Activity levels: Farmers buying voluntarily and increasing year by year (might need subsidies in initial years, and over time move to farmers fully funding it); and Banks being able to provide loans to farmers, increasing confidence in banking and enabling more farmer lending.

The outcome: Farmers are able to access loans to drive productivity and income increases.

We thank Fay Fay Choo for these valuable insights on the project, and her valuable contribution to this COP26 Special Edition Newsletter Issue.

Current Status & Plans
Otoritas Jasa Keuangan (OJK), the Financial Services Authority of Indonesia, approved Soil Moisture Index (‘SMI’) Policy dated 29 September 2021. Asosiasi Asuransi Umum Indonesia, General Insurance Association of Indonesia, already informed and explained all the terms and conditions of the SMI policy to the member insurance companies, and Asuransi Bintang, a local insurance company, received the product license in November 2021 to issue and underwrite the policy of SMI as approved as standard policy. The pilot discussion is going well, now discussing more on implementation activities i.e., workshop, launch events. According to the latest discussion, the intention of Mars is to target +10,000 farmers as pilot, providing subsidy to raise awareness of the new SMI product. Mars is happy to include more farmers upon the pilot success, they are jointly running coconut plantation with Cargill, Olam, and others across Indonesia.

Soft launching ceremony is being planned for December 2021 as an initiative of Crops Insurance to Soil Moisture and is expected to be attended and launched by the Minister of Agriculture in Indonesia.