FINANCIAL risk management products could be a key option to helping manage exposure to drought, according to Latham grower Dylan Hirsch.
Speaking at The University of Western Australia's Institute of Agriculture Industry Forum 2020 on October 28, Mr Hirsch explained the steps he had taken on-farm to mitigate drought risk and went over the findings from his 2018 Nuffield Scholarship.
He farms in the low rainfall zone (LRZ) in the north eastern Wheatbelt, with drought being the most severe risk to his cropping operation and while his return on capital average is quite high, it can range from -25 per cent to 35pc year-on-year.
Mr Hirsch said they farmed based on a range of yields and tried to produce somewhere between one and three tonnes per hectare.
"While our yields might not appear to be increasing, our water-use efficiency is slowly improving as we adopt better technologies and practises into the business," Mr Hirsch said.
"For a bit of perspective, we're a few weeks into harvest and we've had a very similar year rainfall wise to 2007, this year we should end up with a yield similar to our 10-year average which gives us a lot of confidence about where we're going."
The new practises he has been adapting have been driven by a changing climate, it's all been about increasing efficiency and productivity.
Mainly, the changes they've been implementing are to try and mitigate some of the negatives, which have been drying from April to June and make more of the opportunities, which has been a slight increase in summer rainfall.
"The biggest change we've implemented in the past two decades is getting the crop in early, so we haven't sown into mud for over four years now," Mr Hirsch said.
"Getting the crop in early, dry and in a timely manner is probably been, while not the most exciting, the key driver to getting a good economic return.
"We can no longer afford to wait for the opening rains, if the break is late, we get it in dry as late sown crops are often hammered by September heat stress and are rarely profitable."
Increasing the rooting depth of their soil to get a bigger bucket of water has been really successful for increasing the profitability of their operation.
They're improving the pH of the subsoil and investing in hybrid seeds which can do more with less, however that is a very costly exercise.
Fence lines have also been removed and they're doing more with less labour and less machinery.
"I think we've done pretty well to respond to some of the challenges but the last one, being more erratic and extreme seasons, is something that is still difficult," Mr Hirsch said.
"Our current system of managing this issue is to maintain a high business equity and be frugal with our expenditure, which is the same thing we've been doing for decades.
"However, if we're going to compete globally with markets and capital, I don't know if that will be enough to carry us into the future."
Land prices and profitability are increasing despite the changing climate, but increasing costs of production and higher frequency of crop failure will continue which makes it harder to invest and allocate the capital into the cropping exercises.
On top of that, corporate farmers are getting a better geographical spread and have deeper pockets, so are better equipped to manage the risk.
The challenge is for family farmers to compete for that capital, retain skilled farmers on the land and convince others into the industry.
It was with those challenges in mind that Mr Hirsch went on a Nuffield Scholarship in 2018 to look at how farmers could address this in the future.
He went around the world to try to find areas with similar production risks to WA, but the reality was that it didn't exist.
The closest he found was in north west Montana, in the United States, where he came across Chester, a small town of a few hundred people, where businesses rely solely on agriculture.
Droughts are the major production risk, they produce 1-3t/ha of wheat and they're improving.
Their farm costs and profit margins are pretty similar too, but there are a couple of key differences which affect the farmers and the communities around them.
Mr Hirsch said those differences were underpinned by the subsidised US crop insurance program.
"Because of the US farm safety net program, farmers could go out of business a little bit slower, so with performance numbers that have them and their financiers an early warning," he said.
"Land was more sought-after because it was low risk and capital could be accessed pretty readily by a diverse range of people, so farm lending was very similar to what we might see in our residential market.
"Meanwhile back home, our profitability is much better but our economic development is much further behind."
From his trip there is a lot that Mr Hirsch would have liked to apply, but he's taking it in baby steps.
Over the past three years, for their business, he's purchased weather derivatives, or index insurance, to hedge the risk of drought.
"Compared to multi-peril crop insurance, which many of us have heard of, it insures our predicted water-use efficiency, rather than our historical one, so there is no risk of moral hazard and it's available immediately on every Bureau of Meteorology station around the country," Mr Hirsch said.
"We're pretty lucky because we've got one right next to our farm and thankfully we farm in an area which has one variable - rainfall.
"We received our first payout last year and we will probably get a small one this year as well to cover the cost of taking it out."
The family business uses the product because it provides greater certainty in its financial position at the end of the year and gives them greater confidence to leverage the business and themselves.
It also makes them confident to be more assertive with their grain marketing and leverage more than they perhaps would otherwise.
Weather insurance may be part of the solution, but there are still quite a few barriers that need to be overcome.
Mr Hirsch said the weather cover they use had an upfront cost of about $200,000, so that's at the start of their growing season and means an extra $200,000 of peak debt when they're perhaps already trying to leverage to put a crop in.
"There are a few regulatory hurdles as well - in WA, we can't purchase this as an insurance, we have to purchase it as a financial tool which is not accessible for a lot of farmers as they have to prove that they have the financial know-how to use them," he said.
"Many Australian farmers haven't had to understand financial products, like futures and options, because we've always had pools to rely on to market our grain.
"That is changing and as we become more educated around how to use these, I think we will see that barrier become easier to get over."
