Industry seeks better weather risk tools

Industry seeks better weather risk tools

Agribusiness
The new Nuffield WA committee, Latham farmer and 2018 scholar Dylan Hirsch (left), treasurer, South Coast farmer and 2019 scholar Johanna Tomlinson, secretary, South Stirling farmer, 2015 scholar and new chairman Reece Curwen being congratulated by retiring immediate past chairman, 2014 scholar and Bencubbin farmer Nick Gillett, new Nuffield Australia chief executive officer Jodie Redcliffe and West Kendenup farmer and 2018 scholar Andrew Slade, vice chairman.

The new Nuffield WA committee, Latham farmer and 2018 scholar Dylan Hirsch (left), treasurer, South Coast farmer and 2019 scholar Johanna Tomlinson, secretary, South Stirling farmer, 2015 scholar and new chairman Reece Curwen being congratulated by retiring immediate past chairman, 2014 scholar and Bencubbin farmer Nick Gillett, new Nuffield Australia chief executive officer Jodie Redcliffe and West Kendenup farmer and 2018 scholar Andrew Slade, vice chairman.

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Lenders, insurers and their reinsurers should work with farmers to develop weather risk products that perform better for all involved, according to 2018 Nuffield scholar and Latham grain farmer Dylan Hirsch.

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LENDERS, insurers and their reinsurers should work with farmers to develop weather risk products that perform better for all involved, according to 2018 Nuffield scholar and Latham grain farmer Dylan Hirsch.

Multi-peril crop insurance (MPCI), which requires a crop to fail and be assessed before insurers pay out, did not work effectively for many farmers in its current form, said Mr Hirsch, whose study tour looked at financial risk management in variable climates.

Instead, lenders, insurers and reinsurers should develop "derivative" or "index" insurance products that trigger quicker pay outs without assessment when predetermined criteria are reached or threshold levels of yield loss occur, Mr Hirsch told guests at the rcent annual Nuffield WA sponsors' lunch.

He said adoption of derivative or index tools to reduce exposure to variable weather and adverse events impacting return on investment expected from crops should be factored into the cost of agribusiness loans, with the expectation the two would become "symbiotic" to encourage risk aversion uptake.

Further, Mr Hirsch said, governments should remove "unnecessary" taxes from products aimed at reducing farmers' financial exposure to weather variability and agronomists and agribusiness consultants should "upskill" in relation to derivatives or index insurance to "fill the void" of independent financial advisors with specific expertise in agriculture.

He said to assist development of these products, the Grains Research & Development Corporation should invest in industry performance data, including weather station networks, radars, remote sensing and regional grain production reporting.

The Australian Bureau of Agriculture and Resource Economics and Sciences should also adapt surveys to capture data similar to that captured by private farm benchmarking groups and the United States Department of Agriculture, Mr Hirsch said, to provide a co-ordinated industry data base of weather impact on production.

Mr Hirsch runs his family's 6180 hectare wheat, canola, barley and lupin cropping enterprise at Latham and was one of the first farmers in Western Australia to incorporate MCPI into his farm management plan to try to minimise financial exposure to drought.

But after four years the MPCI product he was using was dropped by his insurer with no replacement.

During his study tour he visited farmers, agricultural economists, agricultural lenders and policy advisers across the US, Canada, India and Europe to look at how different insurance products have succeeded or failed in their local agricultural industries and if any would be suitable for Australia.

"Weather dependent production makes us Australian grain farmers one of the most vulnerable businesses to revenue volatility," Mr Hirsch told fellow Nuffield scholar lunch guests and sponsors.

"Traditionally we've managed this by ensuring the business had enough cash and unleveraged assets on hand to cope with successive poor seasons.

"However, as profit margins come under pressure from the increasing investment in agriculture from external sources (private equity and corporate), the opportunity cost of having unleveraged assets may impede the ability of family farm businesses to compete with larger, diversified, corporate ones.

"Previous attempts at managing farm production volatility using MPCI products have become victim of moral hazard (farmers making changes to their operation), adverse selection (unshared information affecting risk) and a lack of government support, with additional taxes and no co-ordination of farm production data.

"Programs which have been successful in other countries have not been able to replicate their success in Australia, with many critics highlighting the large subsidies (for agriculture) as the obvious point of difference.

"However, I found there were other more significant factors at play," he said.

Mr Hirsch said he visited Chester in Montana, a grainbelt town of similar size to Perenjori and, like Perenjori, with local businesses solely reliant on the surrounding farming economy.

Wheat yields around Chester ranged from one to three tonnes per hectare with drought the main risk, he said.

"Farm costs and profit margins are very similar too, however the key difference is that their profit margins are much less volatile due to the US crop insurance program," Mr Hirsh said.

The crop insurance program is subsidised, he said, with the subsidy working out about $25 an acre ($61.75 a hectare) and because it has been around for a long time, the extra profitability has "become built into land prices" - the insurance products benefit farmers but the subsidy benefits the land asset owners.

Mr Hirsch said by his "back-of-the-envelope" calculations the subsidy boosted land prices by about $600/ac ($1482/ha) with farm land around Chester about five times the value of land around Perenjori.

"The land market is much more competitive.

"Small and large, young and old farmers compete for the same leases and purchases.

"Because of insurance, mortgage risk is based on farmers' ability to generate profit, rather than their equity.

"Because of less economic shock from drought (town) businesses like lawyers, hair dressers, surveyors and mechanical workshops haven't had a reason to pack up and move to a major centre.

"Farmers retire into the local town, but they often still own property and lease it out rather than sell it."

In London a meeting with an index insurer revealed a specialised product offered in conjunction with an Irish dairy lender, reduced loan interest sufficiently to cover the premium cost of the index insurance for dairy farmers, Mr Hirsch said.

"This was a fantastic example of a product which combines profitability, risk and capital access to benefit not only the farmer, but their investors and the broader industry and I feel a similar approach would suit farmers in Australia, in particular us in grain," he said.

Mr Hirsch pointed out global industries like renewable energy, energy distribution and agriculture supply chains had developed index insurance products without government subsidy or assistance to manage exposure to weather impacts.

These "off-the-shelf products" were now making their way into agriculture with developing countries, including Ukraine, Uzbekistan, India and Brazil, developing their own weather derivative or index insurance programs rather than using the crop protection models already adopted by the US, Canada and European Union, he said.

Other scholars spoke on their research indicating technology was making farming "easier" but not necessarily more profitable or improving return on investment and that the volume and spread of data provided by technology in farming was not being fully utilised.

NEW COMMITTEE ELECTED

Nuffield WA elected a new committee at the recent annual general meeting before its annual sponsors lunch, with a change in all positions.

Bencubbin farmer and 2014 scholar Neil Gillett stood down as chairman after two years and Esperance farmer and 2013 scholar Matthew Hill stood down after a number of years filling both secretary and treasurer roles.

Former vice president, cropping manager of his family's 9500 hectare South Stirling mixed farming operation and 2015 scholar Reece Curwen stepped up to the chairman's role and cropping and feedlot manager on his family's 5500ha West Kendenup mixed farming enterprise and 2018 scholar Andrew Slade joined the committee as vice chairman.

The secretary and treasurer roles were split between two new people this year with 2019 scholar Johanna Tomlinson who runs a 4000ha mixed farming enterprise with husband Wayne, becoming secretary.

New treasurer is 2018 scholar Dylan Hirsch who runs a 6180ha cropping enterprise at Latham.

New Nuffield Australia chief executive officer Jodie Redcliffe came from Sydney for the meeting and to meet WA scholars at the lunch.

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