Farmers are exposed to a variety of perils which can significantly impact on their
revenues and their livelihoods. In many other countries governments have chosen to support farmers by heavily subsidising Multi Peril Crop Insurance (MPCI) programs, normally covering around 50% of the cost of premiums.
Australian farmers aren’t quite so lucky in terms of government support so the insurance products available are extremely limited in terms of the crops they cater for, and basic in terms of the perils that can be insured.
Over the last few years a number of international reinsurers have become more interested in products that are based on weather statistics rather than historical losses — these are called weather derivatives. The reason for their growing popularity is that they can be priced based on weather data that is readily available over an extended time period. Weather derivatives aren’t considered to be ‘insurance products’, rather they are simple contracts which respond when specific weather triggers are recorded at a specific met station.
Weather derivatives could be structured to financially protect a farm business from:
• insufficient or excessive rainfall at harvest
• insufficient rainfall during the planting window
• temperature extremes such as frost at flowering or excessive heat at critical
• stages of crop growth
• lack of heat units during the vital growth stages of the crop I excessive wind
Weather derivatives are often considered a blunt instrument as losses are based on the weather triggers being recorded at the specific local met station rather than on-farm so
there is basis risk (the risk that the weather trigger is recorded on farm but not at the specific met station). In this instance the derivative does not respond. Furthermore it is often hard for growers to reconcile the impact of the weather triggers back to what happens on farm in terms of the resulting yield or revenue impact.
Index products are, as the name implies based on an available index. Many of you will have seen the YieldShield product introduced by Primacy — this was designed to address the yield impact of insufficient or excessive moisture on winter wheat crops. Index products also create a basis risk as losses are determined according to the index rather than on farm.
At AgriRisk we have recently extended our Financial Services Licence to allow us to deal in Derivative and Index products. And while they might be blunt instruments, they may well be better for farmers than having no financial safeguards at all. For more info on derivatives or yield index products contact AgriRisk on (02) 9965 1121.