Australian ag copes well with risk

Australian ag copes well with risk

Agribusiness
Richard Kohne (left), Sea Harvest and the Future Farmers Network, caught up with Australian Association of Agricultural Consultants WAs Tim Johnston at the Rural Bank risk function last week.

Richard Kohne (left), Sea Harvest and the Future Farmers Network, caught up with Australian Association of Agricultural Consultants WAs Tim Johnston at the Rural Bank risk function last week.

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While farming has always been a risky business, a recently released report highlights some new and emerging risks that are becoming a concern for industry.

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WHILE farming has always been a risky business, a recently released report highlights some new and emerging risks that are becoming a concern for industry.

The report 'Australian agriculture: An increasingly risky business' was put together by the Australian Farm Institute (AFI) with the aim of shedding light on what risks impact on the current farming environment and recommending how these might be dealt with in the future.

AFI executive director Richard Heath discussed the report with a small gathering of growers and WA agricultural industry representatives in Perth last week at a function organised by Rural Bank.

Mr Heath said the research was carried out to try to quantify the risk Australian agriculture was exposed to.

"Risk is not new and Australian agriculture has always involved some risk but it has coped with it pretty well," Mr Heath said.

"We have doubled our output over the past couple of decades in the face of risk.

"So why are we worried about it?

"Because risk is ever changing and the risk environment constantly evolves.

"Do we have the tools available to manage that risk, do we need to understand whether they continue to be appropriate tools or do we need more tools to deal with the changing nature of risk?"

Mr Heath said there were a couple of things influencing the change in risk.

"There is the potential impact of climate risk and how much of that is going to influence the farm business's usual way that it has dealt with risk in Australia," he said.

"The usual way of dealing with risk is to have a strong balance sheet.

"By far and away, more than having insurance policies or anything else, running a good farm business is the best way to deal with a whole range of risk.

"Underneath that, however, we have to recognise that not every farm business is going to have a strong balance sheet, so what are the other tools in toolbox.

"This is where we start looking at things like crop insurance, income insurance and all those types of commercial risk mitigation tools that in Australia we don't use as much compared to a lot of other countries."

Brian (left) and Julie Keding, Gairdner, caught up with Ben Stanich, Pingrup and Australian Farm Institute executive director Richard Heath at last week's Rural Bank function.

Brian (left) and Julie Keding, Gairdner, caught up with Ben Stanich, Pingrup and Australian Farm Institute executive director Richard Heath at last week's Rural Bank function.

Mr Heath said there were also some emerging institutional risks that needed to be taken into account.

"Production and market risk is able to be quantified quite well, as we have access to historic data," he said.

"Institutional risk is a bit more qualitative and it is hard to get hard data about it, but it is by far the most significant new risk agriculture is facing.

"Institutional risk includes things such as consolidation of supply chains or community trust - anything that has a disruptive regulatory impact.

"Bans on live trade are having more of an impact and placing businesses under more risk or threat than production and market risk in some sectors."

Mr Heath said institutional risk was hard to insure against.

"But what industry can do is have representative bodies or advocacy groups that are doing a good job monitoring what those risks are and putting in place strategies to try and mitigate those risks as much as they can," he said.

"Some institutional risk you can completely mitigate against with good advocacy response and good policy response - by getting ahead of the issue."

Mr Heath said in terms of commercial risk mitigation products, such as insurance policies, Australia's competitors had a far broader range and higher uptake.

"We have those products in Australia but they are either in complete market failure or haven't been taken up to the extent of other countries," he said.

"There are a whole range of reasons why this is the case and one of the main, significant ones is that every other country where they have been popular they have had significant government support.

"They are subsidising the use and incentivising the market to get it to work.

"The question is how do we get that to happen in Australia?

Malcolm Rennie (left), Rural Bank, with Keysbrook dairy farmer Mark Furfaro, John Reilly, Rural Bank WA and Kojonup grower Keith Ashton.

Malcolm Rennie (left), Rural Bank, with Keysbrook dairy farmer Mark Furfaro, John Reilly, Rural Bank WA and Kojonup grower Keith Ashton.

"One of the things that has been done quite badly in Australia is the way that these products are extended and talked about.

"In talking about risk mitigation products what inevitably comes up is cost and how that is talked about doesn't take into account those behavioural economic type approaches.

"A lot can be done there in terms of better extension and better understanding of what those products are and how applicable they are to farm businesses."

Mr Heath said there were newer index-type products and derivative products in the marketplace now that couldn't be sold through an insurance broker, so they couldn't be compared side-by-side with traditional crop insurance products.

"They are classed as a financial instrument and you need a financial services license to sell them and a lot of insurance brokers don't have that," he said.

"Weather derivatives would be better if they were licensed in the same way as a lot of insurance products as they would then be extended into agriculture more."

Mr Heath said a lack of good data in Australia was also contributing to not making these insurance products affordable.

"We have coarse spatial data for weather and a whole lot of other things that, if better, would allow really accurate calculations for premiums compared to other countries," he said.

"There are recommendations in the report around government responsibility to provide more granular weather data to make sure we are doing everything we can as an industry to have better utilisation of satellite data and so on."

Mr Heath said the project was not centred on multi-peril crop insurance.

"That is one of the tools discussed, but there are a whole range of other tools in there as well," he said.

"Where these tools are established overseas, there has always been a significant amount of government support.

"The question here is if they are going to get up in Australia, what is role of government and should they subsidise or how should they be involved?

"We didn't come out in this report and say specifically yes they should or no they shouldn't be subsidised by government, but what we did say is that it is highly unlikely there is ever going to be a mature market without some sort of government intervention along the way."

Rural Bank chief financial officer Will Rayner said that Rural Bank was keen to partner with AFI in producing the risk report.

"If you think about our role as a rural bank, we want to feed into the prosperity of agriculture, rather than feed from it," Mr Rayner said.

"If our customers are doing well and the sector is doing well then it is a good place to be operating a bank.

"So we think about our business very much in that way.

"Evidence-based, factual information around the risks that are in the sector are important so we can lead a better solution for our farmers and farming communities."

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