UNSPENT drought support funding could be redirected to help establish a multi-peril crop insurance (MPCI) scheme, says Liberal backbencher Dan Tehan.
Mr Tehan spells out a plan for the Abbott government to help farmers improve risk mitigation against natural disasters via an MPCI in an extensive opinion article to be published in The Australian Financial Review this week.
His plan also has strong backing from the MPCI Taskforce convened by Grain Producers Australia (GPA) and headed by NSW Farmers president Fiona Simson. The Taskforce membership also includes bankers and Australian Farm Institute executive director Mick Keogh.
It made a detailed submission to the federal government’s Agricultural Competitiveness White Paper on workable options to help establish a viable MPCI.
With the White Paper’s release imminent, Mr Tehan said the farm policy road map provided a one-in-100-year opportunity to make Australia’s drought policy proactive rather than reactive, underpinned by an MPCI scheme.
A better bottom line
The chair of the Coalition’s agricultural backbench committee said providing a “nudge” to create an MPCI market would mean increased farm sector productivity and a better budget bottom line for farmers and government alike.
He cited the National Rural Advisory Council’s 2012 report into agricultural insurance products which made several recommendations on how to implement a scheme.
“For farmers, the government could look at making sure there is no barrier to exploring the option of insurance,” he said.
“Redirecting the unspent drought funds allocated to our existing ad hoc system, to a one-off payment covering part of the cost of assessments would support this option.
“For insurers, government investment in weather and environment data collection would provide the information needed for major insurers to enter the market.
“Keeping this information public would also have major flow-on effects to other industries that rely on this data."
The report also noted that the adoption of insurance schemes which would save a farm’s income in a bad year could also make rural towns more sustainable.
“With a confidence in financial security year on year, farming families would no longer be constrained by having to ‘self-insure’ by keeping large amounts of capital in reserve, instead spending on upgrading their business.
“The government’s Agriculture White Paper gives our agricultural sector the chance to reform our drought policy to make farming businesses sustainable and ensure that events like droughts are only a natural not a financial disaster.”
Farmers are risk management experts
Mr Tehan said Australian farmers are experts at managing risks like floods, drought, fire and frosts, “because to be a farmer is to accept these disasters as par for the course”.
“It is a case of not if but when these events will challenge a farming business,” he said.
But Mr Tehan said instead of having a prepared response when drought or any other natural disaster hits a farming community, such as the former Exceptional Circumstances scheme provided, “farmers now are left in a state of flux”.
He said the current system was, “expensive, reactionary and isn’t working for our farmers”.
“Given that between 2001 and 2011 drought interest rate subsidies alone cost the taxpayer - including farmers - over $2.6 billion you would think there would be a better way,” he said.
“It is why we need to look at multi-peril insurance as a way forward.
“In Australia, market forces rather than government subsidies are encouraging commercial insurance companies to enter the market and offer multi-peril policies to our farmers.
“Whilst demand for sustainability is evident in farming communities, commercial viability and the access to multi-peril insurance remains a problem.
“Both the variety of the products that farmers can buy and the amount of data needed to support these products is limited.”
Speaking to Fairfax Agricultural Media, Mr Tehan said he was unsure how much of the government’s drought loan assistance scheme was unspent, but he’d requested those figures from Agriculture Minister Barnaby Joyce.
However, he said he believed there was enough money in that bucket to start advancing his MPCI plans, which would be examined more closely leading into the next budget.
The Abbott government has allocated $320 million to a drought support package while the former Labor government also put $420 million towards assisting farmers struggling with short-term viability issues.
Not just for croppers
Mr Tehan said the MPCI would initially be designed for all grain farmers but over time he said there was no reason why it couldn’t work for other primary producers.
“Ultimately it can work as income insurance,” he said.
“Obviously it gives farmers a better ability to plan and also means they have greater confidence to improve the productivity of their property and to continue to invest.”
Mr Tehan said he believed Treasurer Joe Hockey would see merit in redirecting the unspent drought money towards the MPCI, while Nationals MP Mark Coulton also held a roundtable discussion on advancing an MPCI with Liberal and National party rural and regional members when parliament sat in Canberra earlier this month.
Ms Simson said MPCI is one of the “hot topics” at grower meetings which also carried a “huge” amount of interest across commodity groups.
“Whilst we're currently only looking at grains, imagine the difference it would make if this sort of policy had been available to the banana growers in Carnarvon,” she said.
“A cross commodity scheme is certainly the ultimate intention.”
Ms Simson said she was “very pleased” to see its inclusion in the white paper and appetite from government for discussion.
“Government is clearly indicating that they are withdrawing from industry natural disaster relief and that industry should be taking on these risks themselves, but at the moment there is literally no way for farmers to do so,” she said.
“At the moment most of the data we have is anecdotal or international and we do need a proper pilot to start collating data in the Australian market.
“We would welcome further discussions with government about their involvement in a pilot.”
Ms Simson said for market forces to work properly, many more insurance products are needed in the market to provide some downward pressure on premiums.
She said several items are on the table for discussion with government currently including; underwriting of a 200 per cent "stop-loss" for re-insurers in the event of catastrophic loss; self-insurance bonds in the style of farm management deposits; collection (and ownership) of production and weather/climate data; and 150pc depreciation write-off incentives.
Grain Producers Australia chairman Andrew Weidemann said another way to help foster the establishment of an MPCI for grain growers was via a levy collected through a stamp duty on insurance premiums.
“It is pleasing that we have seen government start to move on this topic and we hope there will be more out of the White Paper eventually,” he said.
“It would also be good to see the stamp duty collected from these policies directed towards a fund helping the underwriters feel secure around the stop loss provisions.
“And in my opinion a complete overhaul of the insurance policies currently offered needs to move more in line with managing extra risks.
“We are used to insuring for fire and hail, so let’s see a new policy covering all of these perils developed under a multi-peril policy revamp.
“This will receive a stronger uptake of multi-peril in general in time but allows for a big change in Insurance product development.
“Giving growers the skills to understand the way in which to use the insurance and the methodology behind the various products will also be something industry needs to consider.”
Mr Weidemann said redirecting unspent drought funds towards establishing an MPCI scheme was “an encouraging first step”.
“We want a mechanism that helps to get this service off the ground,” he said.
However, he said industry and government also needed to consider other viable options that would underpin and foster the development of an MPCI.
“There’s enormous scope here to have a discussion about farming insurance in general and this is a conversation that’s long overdue,” he said.
“It’s time we actually had a decent discussion about what we need to help mitigate risk in farming today.
“Over the last few years we’ve seen skyrocketing production costs - and we’ve done all we can with minimum tillage and the like - but there’s no silver bullet option on the horizon that will help boost profitability for farmers significantly, so we need to look at better ways to mitigate risk.
“If we can lessen some of that risk, it will give farm managers more confidence to make decisions and then that goes through the whole supply chain to a large extent and also extends to the businesses that support farming and also rely on farm income.
“It has to happen on a commercial basis, but also the government needs to be more commercial in the way that it looks at this opportunity.”