A group of WA farmers has proposed an alternative to multi-peril crop insurance (MPCI) – a flexible risk-management crop insurance program, which they hope will be endorsed by agriculture minister Barnaby Joyce.
The proposed risk management scheme would employ weather hedges – index-based instruments that use observed weather data to create an index on which a payout can be based – to allow farmers to insure a single crop against drought or frost for one month at a time.
And unlike multi-peril or other indemnity-based cover, the use of weather hedges, also referred to as derivatives, do not require farmers to demonstrate that a loss has been suffered.
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According to
The West Australian, the scheme would mean farmers will pay a premium of about 6% to insure their cost of production, worked out using actuals over five years. This scheme would not yield farmers a profit, but will buffer them from huge financial losses they may face during weather events. It is understood that
Swiss Re is interested in managing the scheme, but wants the state government to underwrite it during the first few years.
Noel Bairstow, a Lake Grace farmer who is part of the group, said hedging against weather could remove the risk from any farm commodity.
“Any farm that is even a little bit marginal or has an issue, as we do in Lake Grace with frost, would benefit,” he told the publication. “The strategy would be to recover your costs with a small amount on top of that to live without having to use savings.”
Bairstow also said that MPCI is often not suitable for WA farming conditions.
“It is limited because it is a large insurance policy that usually covers loss on the entire crop for up to a year,” he said. “Exceptional circumstances, which are the basis of triggering an MPCI policy, can be difficult to achieve because periods of drought typically experienced in WA will not trigger a payment on an MPCI policy. The other thing is you can’t insure at all against frost. In Queensland, for example, an MPCI policy is more likely to trigger because they have longer periods of drought in many areas.”
The Lake Grace farmer added that he expected weather hedging in agriculture to become commonplace in the future.
“Previously there was not enough data for the insurance companies and underwriters,” he told the
West Australian. “It has been important for us to analyse the weather and frost events on the farm. The area has been trending drier but the data shows our farm is only trending lower rainfall in June. Our overall rainfall is the same as it has ever been, except most of the wet weather has been in April.”
Bairstow also said farmers didn’t want handouts.
“Weather hedging is taken out with the insurer for one month and to lose your money is a good thing because it means that you’ve had a successful crop,” he told
The West Australian.
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