To survive the intensifying impact of climate volatility on farm profits, farmers may need to turn to a new insurance strategy similar to the drought protection cover adopted by grain handling giant, GrainCorp.
Parametric, or index-based, insurance might provide the risk management option producers need to buffer themselves from yield or livestock price slumps caused by drought or other specific weather risks.
It would potentially offer protection against the probability of a predefined event happening each season, rather than paying farmers for the actual value of a specific production loss.
Parametric crop insurance against drought relies on weather data results, so a farmer may receive a payout if rainfall fails to reach an agreed threshold in a season.
GrainCorp's derivative's based deal with international insurance giants, White Rock and Aon, pays the eastern states bulk handler and marketer up to $80 million a year in compensation if the Queensland, NSW and Victorian winter crop harvest shrinks below 11.4 million tonnes.
Conversely, in a bumper year when the crop estimate breaks 19.3m tonnes, GrainCorp pays its insurers $15 for each extra tonne, to a maximum of $70m.
The deal cost the company about $6m to cover the 2019-20 crop when yields were hammered by drought and totalled just 3.7m tonnes, but the payout was about $58m.
Climate hits profits
Australian Bureau of Agricultural Resource Economics and Sciences senior economist, Neal Hughes, said frequently hotter, drier and more variable climatic conditions were clearly having a steadily increasing impact on broadacre farm profits.
Average annual broadacre losses sank towards -$100,000 once in the 1990s, but the next decade fell to -$150,000 twice, with three other years also in the red.
Between 2010 and 2020 seven years averaged in negative profit territory, two of which were below -$100,000.
Commodity prices had also become more volatile over the same period, with more negative trends and fewer above average years since 1990.
Most recently they were followed by three years of extreme market highs.
Not only were seasons and prices fluctuating more, but Dr Hughes noted market deregulation in the 1990s had removed price averaging mechanisms which once shielded producers' from some market extremes.
He described parametric insurance for yield as potential "low hanging fruit".
It could give croppers better risk management options as climate variability made conventional insurance cover more expensive, or even too risky for insurers to worry about.
Multi-peril crop insurance had failed to gain traction with Australian insurers despite the grain industry's hopes and careful participant qualification rules set by proponents keen to prove it could work.
"Climate change is making insurance harder, because traditionally products are based on historic records and trends," Dr Hughes told last week's ABARES Outlook 2024 conference.
Simple formula
Parametric insurance offered a simpler assessment formula for insurers compared to the considerable on-farm leg work required when dealing with claims under conventional crop coverage for hail, frost, flood or fire damage.
"Insurers don't need to spend time and money assessing each application or monitoring farmers' behaviour," he said.
Index-based insurance models may also be possible to protect livestock producers when dry conditions sent markets into a slump, or to cover feed purchase costs if drought shortages exceeded certain thresholds.
It's largely all about having good, or better, data available to monitor weather, farm conditions and price points
- Dr Neal Hughes, ABARES
Some insurance companies already offered index-based products in different markets, however, more needed to be done to solve technical problems associated with designing accurate agricultural indexes to work with.
"It's largely all about having good, or better, data available to monitor weather, farm conditions and price points," he said.
"A drought index needs to be sensitive to the complex effects of weather on farms because the effect of drought depends on many factors, including rainfall amounts, temperatures, timing and other things.
"If those factors aren't taken into account, drought insurance runs into basis risk problems because payments don't align with the basis risks faced by individual farms.
"That's largely why index-based insurance products haven't developed in Australia, to date."
Better technology
However, technology was improving fast and better farm weather monitoring data, including satellite monitoring and internet-enabled paddock devices, could solve these problems, enabling a new generation of weather insurance products.
Drought insurance had been a longstanding goal in Australia, not just among farmers trying to better protect themselves from climate risks, but also for governments concerned by the costs and side effects associated with taxpayer funded drought support.
Dr Hughes said government backing for well designed drought insurance schemes could make them better placed to service a big portion of the industry, absorbing losses in years of severe widespread drought.
However, government intervention in the market could also undermine private insurance demand from the farm sector.
Ultimately, the availability of good technical data would define the levels of drought insurance likely to emerge.
"At the moment government and industry data is still patchy - there is a good case for government to support the development and supply of this data."
Andrew Marshall
Andrew Marshall is the group agribusiness writer for ACM's state agricultural weeklies and websites. He is a former editor at The Land and has worked in various Rural Press group roles in Canberra, North Richmond (NSW) and Toowoomba (Qld).
Andrew Marshall is the group agribusiness writer for ACM's state agricultural weeklies and websites. He is a former editor at The Land and has worked in various Rural Press group roles in Canberra, North Richmond (NSW) and Toowoomba (Qld).
