Vulnerable Australian Farmers lack the support they need from the Government to hedge against increasing financial losses caused by climate change. Weather Derivatives can bridge this gap.

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• Australian farmers receive the second-lowest levels of support in the developed world, second only to New Zealand.
• Western Australian farmer Dylan Hirsch calls for more government support in financial instruments to hedge against financial losses caused by weather.
• Weather Derivatives to take the place of Multi-Peril Crop insurance.
• 8 recommendations to help agri-businesses in Australia to prepare for, and best utilise the new financial risk management products

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Australian grain farmers are among the most vulnerable businesses in the world to volatile production from seasonal weather. In addition to the pressures of increasing incidents of extreme and costly weather, our farmers are also unique in that they lack government support to help them hedge against financial losses from the weather:

“Australian farmers receive the second-lowest levels of support in the developed world, second only to New Zealand”.

A West Australian researcher and farmer is calling on government and industry to support the growth and uptake of weather derivatives, which are successfully propping up farming industries in multiple overseas markets.

The issue will be discussed by Dylan Hirsch, a West Australian researcher who operates a 6180Ha broadacre grain farm, at the Weather Risk Management Associations (WRMA) annual meeting in Melbourne on 5-6 March. WRMA has been dedicated to promoting the weather risk management industry to providers and end-users since 1999.

In his presentation, Dylan explains that traditionally Australian farmers have managed weather (and hence revenue) volatility by ensuring their businesses have enough cash and unleveraged assets on hand. However, a variety of external factors have put too much pressure on their profit margins to enable them to continue this safeguard.

“Traditional multi-peril crop insurance has been a solution for some agri-businesses. However, it has failed to take off in Australia due to moral hazard, adverse selection, a lack of government support with additional taxes, and no mandate to collect and report farm production data.” (Dylan Hirsch 2020)

Financial instruments to hedge against financial losses caused by weather are much more cost-efficient in most cases. Called weather derivatives, these index insurance programs rely on ‘big data’ such as remote sensing imagery, weather station networks, and government-collected industry production data. Weather derivatives were developed by renewable energy supply, energy distribution, and agricultural supply chain industries internationally, and are currently making their way into the Australian agriculture scene, by firms such as Celsius Pro and Weather Index Solutions.

 “To do the same, our agricultural industry needs support from Government, and participation from farmers and engagement with the insurance and finance industries, to ensure weather derivatives can meet the needs of the industry and its investors. The reality, however, is that our industry lacks the political pressure required to attract Government support.” (Dylan Hirsch 2020)

Dylan shares his 8 recommendations to help agri-businesses in Australia to prepare for, and best utilise, the new financial risk management products:

1. The Grains Research and Development Corporation, and other Australian Government agencies, should better invest in industry performance data, including weather station networks, radars, remote sensing, and regional grain production reporting.
2. The Australian Bureau of Agricultural and Resource Economics should adapt surveys to capture data similar to that which is captured by private farm benchmarking groups and by the United States Department of Agriculture (USDA).
3. Australian farmers need to become more focused on quality data recording of all aspects of their production systems.
4. Australian farmers should work with agribusiness lenders and reinsurers to develop products which provide benefits to all parties. This will likely see risk management products become symbiotic with agribusiness lending.
5. Agronomists and agribusiness consultants should familiarise themselves with index insurance products to fill the void of independent advisors for the design of products for each grower.
6. State governments should remove insurance duty on seasonal risk management products to enable the products to be offered by insurers and regulated as an insurance product rather than be limited to financial service providers as a derivative product.
7. Agricultural lenders, including banks and financial product providers, should consider and incentivise the reduction in seasonal weather exposure by clients utilising risk management products.
8. Australian farmers should use financial risk management products to reduce their risk, make longer-term decisions so that they can leverage and grow their businesses.

The Weather Risk Management Associations will be held in Melbourne at 699 Bourke St Docklands, Melbourne on 5-6 March from. Visit wrma.org for more details

This post was prepared by Julia Nekich from The Ideas Suite in collaboration with Jonathan Barratt