A RISK reduction mechanism that is used by promoters of major golf tournaments to protect themselves against major losses of revenue due to washouts is now available to WA farmers.
For decades sporting events and the mining, construction and aviation industries have used weather risk protection certificates to reduce exposure to weather events that may lead to a loss of income.
Mostly used in Europe, the weather risk certificates are backed by large underwriting companies that traditionally have always covered large amounts, usually in the millions of dollars.
Traditionally these risk certificates have been a too expensive proposition for farmers to entertain entering into.
GrainBrokers Australia is introducing weather risk protection certificates into the Australian market and its business development manager David Syme said in the past 18 months, cover amounts have reduced significantly, opening a window for cereal growers in Australia.
“These weather certificates can be used by a wide range of industries,” Mr Syme said.
“For example if you were running the Australian Open golf tournament in Perth in July and you know you are going to get 10 wet days, you would take out a weather certificate which might mean you want to cover $2 million worth of gates sales.
“So you might say if we get 20mm of rain the crowds won’t turn up, but if we get 10mm they will.
“So you might set a trigger for 15mm a day over those wet days and you can use historical weather data to see what the window is.
“The nearest Bureau of Meteorology (BoM) is the adjudicator and so if that receives 15mm of rain you get paid out for the amount you cover for.”
Mr Syme said farmers could now apply this risk reduction to frost events, a dry start or a wet harvest.
“To put it into an agricultural context, if you are a hay grower in Calingiri and you have windrows down and are worried about rain impacting hay quality, you can cover an amount that may be the difference between A grade and B grade hay.
“So you may pick a figure of five tonnes a hectare and the difference in price may be $30 a tonne between the grades, so you multiply five by 30 and your cover would be $150 a hectare.
“So if you had 1000ha covered you would be protecting $150,000.
“You would set your rainfall target at say 20mm because you might think the hay can handle 20mm but anything over will cause decay.
“Or you may be a grain grower in Esperance and your wheat is downgraded from AP to feed.
“For a three tonne crop at $50 a tonne difference that is $150, so you can use a certificate on your wheat at a certain rainfall level to cover that downgrade financially.”
Mr Syme stressed that the mechanism was not an insurance.
“You are not actually defining anything to be insured, it is protecting a sum of money,” he said.
“It is more like a put option or a derivative.
“There is no excess or stamp duty and the assessment is the nearest BoM station.”
Mr Syme said there were many applications and it differed from something like multi-peril crop insurance because it was segmental rather than general.
“With multi-peril you need to identify every crop on your farm and put a value on your yield and so on,” he said.
“This is a lot more flexible and the premiums are lower and it is all backed through underwriters in Europe who have been doing this for a long time so there is good depth there.
“Premiums for the weather certificates range from 7.5-10pc of the amount of money you want to protect.
“In some cases it will be a shade higher depending where the property is located.”
Mr Syme said there had been a good response to the weather risk certificates.
“It is early days, this is only the first year we have had it in place but given some of the weather conditions impacting harvest this year there is certainly an appetite to look closely at it for next year,” he said.
“Bigger growers are certainly looking at mediums like this to take some of the risk off the table and I think we will see more traction next year and there is a healthy number of growers already saying they want to build it into their budgets for next year.”
Mr Syme said from a political point of view, there has been interest in mechanisms such as this.
“Through the recent drought summit that was held in Canberra, the Federal government is looking at how to respond to climate change and to get farmers to adapt to changes in climate,” he said.
“They are looking at possible tax offsets for multi-peril and weather certificates in an attempt to get the industry to stand on its own feet as opposed to relying on drought packages to get farmers to return back to business the year after a severe weather event such as drought.
“This is really about keeping sustainability in farm businesses against these events.”
Merredin farmers Jules and Pep Alvaro have had experience with weather risk certificates, taking one out in 2017 and also this year.
“It is fantastic for the stress levels and relatively cheap peace of mind – particularly during the terrible start of 2017,” Jules said.
“That was the first year we decided to implement it – after two wet years we were keen for some insurance.”
The Alvaros had 100 years of data – through grid rainfall data and their own rainfall records at their disposal.
“This showed that our effective rainfall over the past 20 years is 208 millimetres for the growing season,” Jules said.
“The data didn’t show a pattern, there was no decreased rainfall but the timing (of the rain) had changed to more summer rain over the years.
“We had our this data put into fortnightly deciles and came up with the optimised claim time being April to mid-June for a pay out.
“The data showed that July is the money month, we had always thought it was September, and that in a Decile 1 start in seven out of 10 years you end up with an average year.
“So our 2017 insurance policy was set between the dates of April 4 to June 15 with 34mm as the stop.”
The move was a timely one for the Alvaros, who received a pay-out that year due rainfall not hitting the 34mm trigger level in the April to June period.
“We did not receive a payout for the 2018 season as we are having an above average year so it doesn’t really matter,” Jules said.