Climate variability and Australian agricultural benefits, why weather risk transfer is essential

At a time when Australia was suffocating in record heat as bushfires burned uncontrollably, then suffered from severe storms, a recent study seeks to quantify the effect of climate variability on the country’s agricultural profits.

The impacts of short-term climate risks such as drought and longer-term changes in weather conditions have hurt Australian farmers, with average farm profits falling by around 22% since 2000, costing the industry around $ 1.1 billion per year.

New research from the Australian Bureau of Agricultural Economics and Sciences and Resources (ABARES) shows that climate and variability have a significant impact on the country’s farmers and recommends the use of risk transfer tools, including including index or parametric insurance, as a means to help reduce the volatility they experience.

An observed change to warmer and drier conditions during the period 2000 to 2019, compared to 1950 to 1999, had a negative impact on the profits of Australian farms and ranching.

“Average temperatures have risen by about one degree since 1950, while the past few decades have also seen a trend of decreasing precipitation in winter, particularly in southwest and southeast Australia,” explained Dr Neal Hughes, senior economist at ABARES.

“Controlling all other factors, we estimate that these changes reduced average farm profits by about 22%. These effects were most pronounced in the crop sector, reducing average profits by 35 percent, or $ 70,900 per year for a typical farm operation.

“Nationally, this equates to an average loss of field crop production of 8%, or about $ 1.1 billion per year.

“Although cattle farms have been less affected overall, some cattle breeding areas have been more affected than others, particularly southwest Queensland.”

This effect is clearly visible in the graph below, which shows the effect of climate variability on average farm business earnings from 1949-1950 to 2018-19, assuming current farms and commodity prices.

The study finds that Australian farmers are adjusting to varying weather conditions and the period of hotter dry weather seen in recent years, but also notes that they could do more and may need to do so if it continues.

ABARES Executive Director Dr Steve Hatfield-Dodds commented on the study: “An analysis like this is complex because you have to take into account the many factors that affect farm profits including seasonal conditions, prices inputs and outputs, technology and management practices, and farm size.

“ABARES is only able to do this thanks to our long-term investments in high-quality agricultural survey data and our multi-year efforts to build the farmpredict model. “

“The results of this study have important implications for the agricultural sector, particularly for how farmers and governments respond to the risk of drought.

“Governments are faced with a dilemma, because helping farmers in times of drought risks slowing the adjustment and innovation of the industry in the long run.

“Adjustment, change and innovation are fundamental to improving agricultural productivity; maintain Australia’s competitiveness in world markets; and provide attractive and financially viable opportunities for farming households.

“Supporting struggling farm households is important, but for the long-term health of the sector, it must be done in a way that promotes resilience and productivity, and enables adjustment and change.

“The main options in this regard include research and development to improve the long-term resilience of farms to drought, including the further development of weather insurance markets.

“Insurance is an important area for further research, as it could offer farmers new options for managing climate risks. “

Climate variability and drought seen in recent years have directly affected profits, but also increased volatility for farmers and related industries in Australia.

This requires a response, both at the political and political level and at the level of farmers who are working to improve their resilience to climate variability and drought, while better managing risk through risk transfer and risk management. assurance.

The weather risk transfer, insurance and reinsurance markets can help and are relatively mature in Australia.

Earlier this year, Australian agribusiness giant GrainCorp entered into a 10-year drought risk transfer contract as a profit protection deal with a large global reinsurance company.

As we explained recently, the contract is expected to bring in up to A $ 57.3 million by the end of the current year, as grain production levels in the covered areas of the east coast of the Australia for which this derivative risk transfer agreement is at risk for have fallen to such an extent that GrainCorp will likely receive a large payout in the first year of the transaction.

This risk transfer agreement was put in place to cover the earnings volatility that GrainCorp suffers from due to climate variability and drought, specifically the type of insurance or reinsurance protection that agribusinesses and Australian farmers may increasingly need it, new data from ABARES suggests. .

“Viable weather insurance markets” are a promising development, says the ABARES study, but the weather risk market in particular is still somewhat limited, she said.

“Index or parametric insurance offers an alternative approach, where payments are based on weather data rather than actual damage on the farm,” says ABARES.

Overall, insurance and risk transfer against climate variability is an important area of ​​research, believes ABARES, with work to be done to develop better datasets and tools to support drought insurance.

Of course, this is where the reinsurance and insurance-related securities (ILS) market has both the appetite and the expertise to help provide the protection needed to smooth earnings volatility and sustain. adaptation to the potential new normal in terms of the climate risks they face. by Australia and other parts of the world.