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Abstract
Hail insurance is provided by the private sector in South Africa but crop insurance (drought
insurance) programmes, after a promising start, failed to attract customers. A crop insurance
programme (drought) for small-scale commercial farmers, who are not yet paying tax, has been
recommended to government. The purpose in this research is to study the economic viability of
such a programme drawing on the US experience. The US programme is well developed but
heavily subsidised. During 1998 US growers paid $900 million in premiums while during 1995-
98 the US government spent $1.2 billion per year on subsidies. An area insurance plan (farmers
are insured as a group) is shown to be more appropriate for small farmers growing dryland field
crops such as maize because risk is systemic (drought related) while adverse selection, moral
hazard etc are overcome. Individual crop insurance will not be viable due to the cost of farm
visits (verification of claims) and the non-availability of information. As a large part of the cost
to government goes to administration of crop insurance it is recommended that an Income
Equalisation Deposit (IED) scheme for small growers receive serious consideration with the
government making a contribution as for example in Canada.