Using Price Index Insurance to solve the dilemma of "Pig cycle"

Since the beginning of this year, pork prices have risen rapidly, which has aroused concern from all sides, and the "pig cycle" has appeared again. How to establish a long-term mechanism to slow down the pork market price volatility and protect the interests of pig farmers and consumers, there is an urgent need for in-depth study and formulation of feasible regulation and control measures. Pig price index insurance is an important innovation in the field of agricultural insurance in China in recent years. It is a beneficial exploration of using insurance means to disperse and transfer the risk of market price fluctuation and iron out the "pig cycle". Making good use of the tool of price index insurance is of positive significance to solve the dilemma of "pig cycle".

The main methods of Pig Price Index Insurance in China

Pig price index insurance is essentially a "put option", that is, when the actual price index of live pigs is lower than the agreed price index during the insurance period, it is regarded as an insurance accident, and the insurance company compensates for the difference. At present, 16 provinces (autonomous regions and municipalities directly under the Central Government) have carried out pilot pig price index insurance, which mainly includes the following key elements in terms of the mode of operation.

On the basis of claims, all localities basically choose pig-to-grain ratio as the trigger condition for claims, mainly considering that corn accounts for about 70% of pig feed, and corn price is the main factor affecting pig feeding cost. using the ratio of pig price to corn price (referred to as pig-to-grain ratio) can cover the changes in pig price and feed price at the same time, and better reflect the actual income of pig farmers. At the same time, the pig-to-grain ratio of 6:1 is generally used as the break-even point for pig farming. When the weekly pig-to-grain ratio data released by the National Development and Reform Commission falls below this value, the settlement of claims is relatively objective and fair, and it is easy for farmers to accept. Some insurance companies think that the production level is different in different places, and they do not adopt the 6:1 standard uniformly, while some insurance companies try to use absolute price as the trigger condition for claim settlement.

During the insurance period, insurance companies basically adopted the method of "one insurance a year" and "one compensation a year" during the initial pilot period, but because it was inconsistent with the law of pig farming for 4 months, there was no compensation during the period, and could not make up for the loss of a certain batch of pig farming in time, most insurance companies have adjusted the compensation cycle to 6 months, 4 months or 3 months.

In the compensation procedure, when the average value of the actual pig-to-grain ratio in the compensation cycle is lower than the agreed pig-to-grain ratio, the insurance company will give compensation. the amount of compensation = (agreed pig-to-feed ratio average in the compensation cycle) × agreed wholesale corn price × agreed average weight per pig × number. In practice, in order to be simple and clear, insurance companies will often directly introduce to farmers that pig grain will be reduced by 0.01 points to compensate for 2 yuan. In order to lock in the risk, some insurance companies also set up absolute exemption or capping compensation.

The effect and problems of Pig Price Index Insurance in China

Strictly speaking, market risk is not insurable, and the best way is to use the futures market for risk hedging. Under the condition that the pig futures market has not been established in our country, it is of positive significance to explore the way of pig price index insurance. For individual pig farmers, in the case that the insurance premium is largely borne by finance, pig price index insurance does play a role in stabilizing expectations and making up for market risk losses. However, the underwriting scale of pig price index insurance in China in 2015 is only more than 4 million, which is almost negligible compared with the national pig market with an annual output of more than 700 million, so it has little impact on the supply and price of the whole pig market. From the perspective of local practice, there are mainly the following four problems in the operation of pig price index insurance.

First, insurance companies lack channels for price risk dispersion and transfer. Pig price index insurance underwrites the risk of market price decline, but China has now formed a national pig market, and pig prices in different regions and markets tend to be the same, so it is difficult to disperse the risk in space. in addition, the international reinsurance market is cautious about high-risk price insurance, and it is difficult to find suitable reinsurance arrangements, so the problem of over-compensation risk faced by insurance companies is very prominent. The pig-to-grain ratio has been running low from May 2014 to April 2015. The pig price index insurance underwritten by Anhua Agricultural Insurance in Beijing charges a premium of more than 21 million yuan, an indemnity of 56 million, and a compensation rate of 260%. Therefore, insurance companies often limit the pilot project to a certain range where the risk is predictable and the loss can be controlled, and dare not expand the scale blindly.

Second, farmers generally have the problem of selective insurance. The law of "a year's profit, a year's average, a year's compensation" of pig farming in China is very obvious, and experienced farmers can often roughly predict the price trend for a period of time in the future, so it is very easy to have the problem of adverse selection, that is, farmers will actively take out insurance when they expect the pig price to fall, and choose not to renew it when the expected market price goes up. The market price of live pigs has been rising all the time this year, and many farmers in Beijing have not renewed their insurance policies after their insurance contracts expired in April 2015, with the number of insured farmers falling from 606 in 2014 to 2015 to 73 in 2015.

Third, the scientific basis of insurance claims needs to be improved. The ratio of pig to grain is calculated according to the price of corn, ignoring the impact of price fluctuations of protein raw materials such as soybean meal and wheat bran (about 30%) in pig feed, and for pig farmers, especially large-scale farms, land rent costs, labor costs, disease prevention and control will have an impact on pig feeding. In addition, the break-even point of pig-to-grain ratio of 6 ∶ 1 is calculated based on the historical data of pig production cost, and the fixed reference value can not really reflect the expected cost. The pig-to-feed ratio has been running above 9:1 since January 2016, and broke through 11:1 at the end of April, resulting in a serious deviation.

Fourth, it is under great pressure to rely solely on local finance to give subsidies. Pig price index insurance has not yet been included in the scope of central financial subsidies, the pilot areas rely on local finance to give a certain proportion of premium subsidies, different sources of funding, support is also different. At present, the pilot underwriting scale of pig price index insurance is limited, and the local financial pressure is not very prominent. if it is promoted on a large scale, the source of huge subsidy funds is an important problem to be solved.

Pay attention to the positive role of pig price index insurance

The price of live pig is mainly determined by market supply and demand, and the change of price with the relationship between supply and demand will lead to the reallocation of market resources. The change of pig price and its derived market risk is the inevitable result of the law of market economy, which can not be completely eliminated. Under the background of comprehensively deepening the reform and promoting the reform of the price formation mechanism of agricultural products, the stability of pig market price should be based on market regulation. Pig price index insurance, as a risk management tool, can not completely stabilize the price fluctuation. However, with the continuous expansion of the underwriting scale, the impact on the price fluctuation of the pig market will gradually appear, and it is expected that after reaching a certain scale. Be able to reduce price fluctuations to a level acceptable to the government and society. In the next step, we should focus on the following tasks:

(1) to improve the pig price index insurance products and operation mode. The choice of the insured should be different from the traditional insurance of breeding sows and fattening pigs, and the large farmers, cooperatives or enterprises with a certain scale should be limited. This can not only effectively reduce the cost of insurance companies, but also guide the policy effect of promoting large-scale farming. It is necessary to establish a multi-year continuous insurance mechanism, such as implementing "three-year insurance" with reference to the pig cycle, dispersing business risks in time and avoiding the speculative behavior of breeding subjects. It is necessary to fully consider the regional differences of pig farmers and the differences in the degree of protection, encourage insurance companies to develop pig price index insurance products with different protection levels, and further improve the insurance products and operation mode through the accumulation and analysis of pilot data. to lay the foundation for large-scale promotion.

(2) to promote the introduction of policies and measures to develop pig price insurance. First, pig price index insurance, as a supplement to traditional fattening pig breeding insurance, should be included in the scope of central financial premium subsidies, so as to achieve a policy breakthrough of central financial premium subsidies from natural risk to market risk protection, or in agricultural subsidies such as the transfer of large county awards for live pigs, it is clear that it can be used for pig price index insurance subsidy expenditure. The second is to speed up the listing and trading of pig futures, and determine the guarantee price of pig price index insurance according to the futures market price. at the same time, we can also use the way of "insurance + futures" to disperse the risk of huge compensation. The third is to explore the establishment of a policy linkage mechanism to co-ordinate the coordination of pig price index insurance and subsidies for large-scale farms, subsidies for improved breeds of livestock and poultry, pig slaughtering, loan concessions and other preferential policies for farmers, so as to achieve the policy goal of stable and healthy development of the pig industry through "combinatorial punches".

(3) improve the price monitoring system of live pig market. Speed up the establishment and improvement of the monitoring system and information release system of the pig breeding industry, strengthen the data monitoring of pig purchase, wholesale and retail prices, pig breeding scale and various feed prices, and improve the comprehensive information collection platform. strengthen the comprehensive and dynamic analysis of pig grain price ratio, break-even point and other indicators to provide a reliable basis for product innovation and business work of pig price index insurance.

(4) study and promote the innovation and upgrading of price index insurance products. The focus is to carry out in-depth research on the functional positioning, development strategy, underwriting scale, supporting policies and product model innovation of pig price index insurance, so as to promote the gradual expansion of pig price index insurance to income insurance and income insurance. This not only helps to popularize pig price insurance on a larger scale, but also plays a positive role in deepening the reform of the price formation mechanism of other important agricultural products and promoting the healthy and sustainable development of the agricultural industry.