New contracts insure against frost

27 Oct, 2004 10:00 PM

A SMALL WA firm has developed a form of multi-peril crop insurance which could help farmers manage risk for uninsurable climatic events such as frost, which had decimated some WA crops this year.

The Agriculture Department has estimated the frosts, which hit crops from Yuna to Esperance in August and September, have wiped $80 million from this year's crop.

Co-operative Bulk Handling has since downgraded its crop estimate to 9.8m tonnes due to lack of rain and frosts.

Australian Agricultural Contracts (AACL) believed it had developed the only crop production risk management product in Australia through its Grain Co-Production contracts which were developed in conjunction with WA wheat farmers.

The Grain Co-Production contracts are an extension of share farming where a grower contributes the land, equipment, materials and expertise and an investor contributes the capital to grow the wheat crop.

AACL director Andrew McBain said the Grain Co-Production contract is paid in April before seeding, and if the crop fails, the farmer does not repay the money.

He said that if there was a bumper crop the farmer would also receive some of the upside based on pre-determined averages.

Mr McBain said Grain Co-production contracts were not loans but payment for services to produce a crop which had not been grown.

ìThe investor pays the farmer to put the crop in and takes the risk," he said.

"We are paying for something that has not happened."

Mr McBain said that from an investor perspective, AACL would spread its own risk by operating in all shires of the state, with losses in one area evened out by upsides in other regions of the state.

He said Grain Co-Production contracts covered only a portion of a farmer's crop and could be used for frost or drought or any uninsurable climatic event.

"Our vision is co-production for any type of agriculture source and at the moment we are focused on wheat," he said.

"We are aiming for 100,000t of contracts for next year and have had a good response from the majority of shires."

Mr McBain said the Grain Co-production contracts would also provide farmers with more confidence to expand operations if they were able to reduce risk after increasing expenditure.

"This will improve their business by bringing in low risk capital," he said.

Mr McBain said while the company had indicative prices, the final price paid would depend on the individual farmer's profile and records.

He said the concept for the co-production contracts was conceived seven years ago and had been tested with selected clients during the past five years.

Mr McBain said the company wanted to attract some of the $400m being invested in what he called boutique industries, such as forestry and grapes, and put it into a traditional area such as wheat.

"We have managed to put together a product to invest in the wheat industry," he said.

He said that from an investor viewpoint, the two-year Grain Co-production investment contracts were less risky and more attractive than, for example, trees, where investment could be locked up for 10-20 years.

Mr McBain said wheat was a better product to invest in because of the history, existing infrastructure,guaranteed buyer and futures market.

He was not surprised the government had not been able to find underwriters for multi-peril crop insurance because a bad year could almost put them out of business.

Mr McBain said it was better for a number of investors from other industries to share the risk which was the investment base for Grain Co-Production contracts.

"We spread the risk between many different parties," he said.

Mr McBain said it was interesting to note that city investors involved in the Grain Production contract also took more interest in farming issues.

He said his company had made inquiries about gaining government funding assistance to help expand availability of the contract system but found there was no structure in place to help requests from companies such as AACL.

"We can't even attract one dollar into assisting us put together a multi-peril crop insurance plan," he said.

However, he was encouraged by the support from farmers so far for the Grain Co-Production contracts.

Mr McBain said that last month he had been approached by Agriculture Minister Kim Chance who had wanted to find out more about the AACL products.

"We met with the minister at his request and he was positive about the Grain Co-Production contracts," he said.



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