Various Insurance Solutions Available for Australian Farmers
Agriculture in Australia is operated in indefinite climatic as well as market conditions. Weather change is expected to bring a rise in the frequency of severe weather events, such as drought. Therefore, Australian farmers have to continuously manage the risks of volatile domestic conditions along with the fluctuating global market settings.
Here are a few options for insuring farmers in Australia against severe weather events, particularly multi-peril crop insurance, weather derivatives, area yield insurance and yield index.
Risks Experienced by Farmers in Australia
Farmers in Australia experience high level of production risk as against other sectors of economy. Since 1975, agriculture has undergone the highest level of volatility at 3.1 times higher than the average. The volatility of agriculture industry is almost double that of any other Australian industry.
Again, within agriculture, there may be various levels of output volatility throughout products and regions. E.g. oilseeds and grains show the highest level of volatility in the farm production value, at 1.8 times the average.
Role of Farm Insurance
Insurance brokers Adelaide explain that farmers need to increase their profits while simultaneously reducing their risks. Farm insurance can help them to achieve this goal. It’s appropriate for infrequent and extreme events.
Yield Versus Cost Risk
The yield risk as against cost risk should also be considered because choices for farmers to hedge cost risk like forward contracts and futures exist already. On the other hand, limited number of options are available to farmers to cover themselves from yield risk.
Providing alternatives to hedge cost risk is easier for the market than yield risk because:
- Yield risks are less systemic than cost risks. They may be localized and don’t affect every farmer in the same way, which means a greater level of tailoring is needed for yield risks management options
- Farmers can control their own yield levels easily, which means insurance providers have to decide whether a yield loss was resulted from a trigger event or substandard management practices. Such a problem is known as moral hazard. On the other hand, cost levels are apparently beyond the influence of individual farmers
- Usually farmers have a better understanding of their risks as well as expected yields than insurers. When this takes place, insurance providers cannot differentiate between low risk and high risk farmers and price premiums accordingly. Such a problem is called adverse selection.
- Ironically, farmers don’t have better information of cost movements than the market.
Insurance – A Solution for Risk Management
Insurance is unable to offer protection against situations that are nearly definite to happen, like weather change. The reason for this is that insurance is not created to be a subsidy to farmer’s income, but a solution that enables farmers to decrease downside risk. Nevertheless, insurance is able to protect against weather variability, where a farm is in profit over a long period but shows an undesirable degree of volatility on an annual basis.
Farmers in Australia have solutions at their disposal for yield risk management (as a part of revenue risk), including:
- Geographical expanse of farms across weather regions
- Diversifying crops
- Using weather forecast to take production decisions
- Enhancing access to dependable water supplies
- Enhancing irrigation systems and practices to enhance water usage efficiency
However, even after using these kinds of solutions, yield risk may pose a problem. Farmers can even make use of savings and credit to even out their incomes during a bit of tough times. However, credit and savings may not be adequate during rare and extreme weather events. Farmers may find insurance useful for these high impact low probability events.
The yield or crop insurance products have been in use in Australia and also internationally. They are classified into two: traditional insurance products and newer index-based products. They have a key difference that in traditional insurance, payments triggered depend on realized individual farmer yields, whereas payments under index-based products depend on other variables like regional-level yields or climate.
Traditional Insurance Products
Named Peril Insurance
Named peril insurance protects farmers against particular perils, like hail, fire or frost. These perils typically cause localized effects and so, they have a little systemic risk. Also, since the farmer doesn’t have any control over the influence of these events, the problem of moral hazard is not significant.
Multi-Peril Crop Insurance
MPCI or multi-peril crop insurance is also called yield insurance as payouts are just based on loss of yields; there is no need of the cause of the loss to be assessed. This type of farm insurance enables farmers to get cover for their crops against all climate-related events (including diseases and pests); however, some particular events are normally excluded in actual practice. For every crop protected under the policy, the insurance provider agrees with the grower on projected yield as well as projected value ($ per tonne). Therefore an agreed value is covered by the policy on every crop. But this type of scheme doesn’t operate in Australia.
Crop Revenue Insurance
The lack of MPCI is compensated by crop revenue insurance as it is similar to MPCI. However instead of offering protection against yield loss, it offers protection against revenue loss. Such a product protects a farmer against both price and yield risk. A projected yield and price is decided when the insurance contract is signed and farmers get insurance for production for that cost.
These new solutions farm business insurance can be used by farmers to get cover against yield risk. An index is just a set of numbers indicating a single variable, like temperature or rainfall over a certain cropping season; or a more complicated calculation including several variables, like shire-level yield data or various climatic data that are considered to have an effect on farm yields. Kinds of index-based products are yield index insurance, weather derivatives and area yield index insurance.
Weather certificates or weather derivatives are comparatively simple products dependent on an index indicating a single variable like temperature or rainfall. They operate in much the same way like financial derivatives.
Yield Index Insurance
This is more complex than weather derivatives, as it brings many variables together to predict farmer’s yield through computer modeling.
Area Yield Index Insurance
A group risk plan or area yield index fits somewhere between the traditional insurance products and the more modern index products and is based on regional level yields.
Visiting insurance brokers Adelaide can make your task quite easy of understanding which insurance products can offer you maximum protection and then you can be free of any worries about your farm.