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How Crop Insurance Can Combat Supply Chain Risk for Coffee

How Crop Insurance Can Combat Supply Chain Risk for Coffee

The coffee industry needs a serious revamp. In the face of unpredictable weather events stemming from climate change, traditional insurance models are ill-equipped to deal with the changing plight of farmers on the ground. Leading premium coffee producer Nespresso – a subsidiary of Swiss multinational group Nestlé – is one such company that has pioneered the development of a new kind of custom-calibrated, weather index-dependent insurance.

The insurance solution was launched in 2018 and relies on satellite technology, local weather stations, and long-term data to determine specific payouts to participating farmers. The option “issues payments based on a verifiable index measure that is related to the losses that insured farmers experience,” says Michael R. Carter, BASIS research program director, and professor at the Department of Agricultural and Resource Economics at the University of California-Davis.

The model considers factors like average yields within a given area, historical temperatures, precipitation, and a slew of other meteorological activity to project crop yields. Then, the data is compiled to create an index that predicts standard ranges for the variables within a given region. Payments are then activated automatically in the event of extreme weather–like periods of drought or flooding.

>>>>>READ: The Truth About Extreme Weather

“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,” says Crawford Hawkins, founder of former coffee worker-tipping app Propina, a social impact platform that enables users to contribute directly to coffee growers’ pension plans.

The pilot harvest program serves to buffer farmers against supply-side shocks to their crops, including the probability of increasingly erratic weather events affecting their yields. Whereas traditional insurance models work by insuring the crops themselves against potential losses, Nespresso and Blue Marble’s microinsurance option provides a more nuanced approach that relies on high-tech data and satellite imagery to calculate individual payouts. Unlike traditional plans that can require lengthy in-person inspections to evaluate damages, the new insurance model is quick and efficient. Instead of depending on hard-to-arrange inspections – a process that could potentially send impoverished farmers spiraling into debt – Nespresso’s policy doles out payments to coffee growers automatically. That means a claim is filed as soon as a yield-destabilizing weather event occurs. The result is an insurance option that works in favor of local farmers, not against them.

The climate index solution is also more sustainable. Historically, conventional crop insurance policies are tied directly to the value of a crop, so they reward larger yields. As a result, farmers are incentivized to adopt riskier farming practices that aggregate total output over more sustainable techniques like plant diversification that can benefit the long-term health of their farms.

Producers’ inability to deviate from the norm set by their insurance providers makes them more financially vulnerable. Since their income is dependent on the success of a single commodity, farmers risk losing their wages when an external event devastates their star crop. Weather index insurance breaks new ground precisely because it covers these unpredictable but increasingly probable weather events, and in the process, shifts significant control back to small-scale suppliers.

“A single event of excess rainfall or drought can potentially reverse many years of hard work. Now, when there is a climate alteration the coffee grower can go directly to the bank to claim the payment for losses from the incident,” says Nespresso AAA program agronomist Sandra Rodriguez.

Such climatic shocks are more frequent now due to climate change, threatening farmers’ livelihoods. Drought can hinder bean development inside maturing fruit, resulting in underdeveloped seeds. Excess rain, on the other hand, can harm the delicate coffee flower and prevent fruit from developing at all. The flowering phase is a necessary prerequisite to develop the coffee cherries, which ultimately house the beans that create the coffee. Without their proper development, coffee production ceases to begin at all.

“When there are adverse climatic events, it affects the quality and quantity of the coffee,” says Edilma Garzón Gutierrez, an Andes coffee harvester working in the hilly Caldas province of Colombia. “Sometimes we have to look for another kind of income because the coffee will not suffice.”

Gutierrez is one of nearly 2,250 coffee growers in the Caldas region enrolled in Nespresso’s pilot harvest insurance program. The program currently serves around 3,275 smallholder farmers, a significant expansion since its initial launch in 2018.

“Having an insurance solution that protects our members from the devastating effects of climate change is critical for the cooperatives,” says Cesar Julio Díaz, president of the Aguadas, Norte de Caldas, and Alto Occidente coffee cooperatives–which help Nespresso recruit farmers. “It allows coffee growers access to economic resources in the form of insurance payouts that will help them re-establish their crops, making them productive and able to continue with their agronomic activity.”

Among participating co-ops, the program has a 100 percent renewal rate. The majority of members receive their payments in the first year following a severe weather event.

“The crop insurance project is great,” says Gutierrez. “When we pick less coffee, or the coffee is bad quality because of the weather, we have help to confront difficult times.”

Nathalie Voit is a freelance content creator and a graduate of the University of Florida. She is an alumna of The Heritage Foundation’s Young Leaders Program. 

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