New year new risk: How crop insurance is key for risk management

One of the barriers brokers may face when it comes to selling crop insurance, is that farm owners think they can manage without it. 

However, crop insurance is the one type of risk mitigation that provides the financial help farmers need when all else fails. Understanding why crop insurance is such an important tool in mitigating risk is the key to persuading farmers that it's essential to their business.

Farmers get a safety net if their preventive measures aren't enough and their expected yield isn't met.

What is the purpose of crop insurance?

Farmers face a number of risks to their crop yield every day; regulatory changes, fluctuating demand, pest infestation, machinery failure and unexpected weather are just a few.

There are ways to mitigate risk preventively, such as pest management or better irrigation systems. However, if any of these measures fail to protect the crop, the farmer faces serious losses and no way of recouping their investment. While an interim solution may be to survive off savings and previous profit, these measures alone may not be enough to see them through in the long term, especially if they suffer more than one poor yield.

Crop insurance is the only way they can claw back the money they've already spent and remain able to invest in future seasons. With good crop insurance that is tailored to the type of risk they face, farmers get a safety net if their preventive measures aren't enough and their expected yield isn't met. Being able to recoup the costs of production means farmers don't lose the money they've already invested, may still make some profit and remain able to invest in their business.

Unpredictable weather above a crop field, providing risk to a farmer.Unpredictable weather makes it hard to mitigate risk. Crop insurance protects farmers from the unknown.

Crop insurance protects against unpredictable risks

Adverse weather is something no one can plan for as well as they would like, and no one can stop. While farmers can take steps to manage risk from the weather – such as protecting their crop from hail, excess rain or exceptional sun – they can only plan based on what they think might happen. But with unpredictable weather, it's impossible for them to know whether or not they've done enough until the time comes.

Crop insurance policies cover a range of weather conditions that are a risk to farmers such as:

  • Hail
  • Drought or excessive heat
  • Fire
  • Rainfall and flood
  • Wind
  • Moisture
  • Freeze

Farmers can also insure themselves against other unpredictable perils such as those from:

  • Pest infestation
  • Wildlife damage
  • Malicious acts such as arson

The right crop insurance policy protects against all of the most relevant risks for any farm, and policies are adapted to suit individual circumstances. 

Farm managers can make business decisions and investments based on what's best for growth.

The added benefits of crop insurance 

The ability to plan

Crop insurance gives farmers more than financial stability. It also provides peace of mind and reduces stress, allowing the farmer to devote more time and energy to tending to their farm and making plans for the future. Knowing that their risk is well-managed, farm managers can make business decisions and investments based on what's best for growth, making changes as required.

Concrete capital 

Farms require investment and must adapt to new technology, regulatory changes, working practices and shifts in supply and demand. Of course, investment requires capital, and a bad season affects a farm's ability to move forward strategically into the next. Crop insurance is one of the only guarantees that they'll have the financial resource to continue.

Without this type of protection, farmers may find themselves in a situation where they need to raise capital to keep farming. They may have to sell assets in the form of machinery, resources or land, or change their farming practices in ways that are not beneficial to the rest of their farming strategy. Farmers may be forced to work longer hours in order to compensate for a loss of staff or machinery.

Reassurance for external providers

As well as providing on-farm benefits, it's important that individuals thinking about moving into the farming industry understand the value that banks place on crop insurance. Many banks won't approve loans or be flexible in providing extra credit if they can't see adequate risk mitigation in the form of crop insurance. 

Young farmer making business decisions with reassurance of crop insurance.With the peace of mind crop insurance provides, farmers can concentrate on making the best business decisions for their farms.

What type of crop insurance is available to farmers in Australia?

Australian farmers face a diverse range of risks, and buying into the right type of crop insurance is important. Australia offers a range of products that cater to a variety of farms and risk. Insurance policies usually cover particular crops or weather conditions, and it's important that you guide your farmers to the policy that best mitigates the problems they are most likely to face. 

The most popular type of crop insurance in Australia is single peril or named peril, according to the Queensland Farmers' Federation.This type of insurance covers very specific risks, such as the type of weather most likely to impact production and yield, like hail or drought. Single peril policies are sometimes also limited to a particular type of crop, and can be excellent value for farmers who know their biggest risks and don't intend to diversify in the near future.

However, an alternative is multi peril crop insurance. This type of policy is a relatively new product for the Australian market that provides greater flexibility and control by covering a number of potential perils on a given farm. With multi peril crop insurance, farmers can often insure against several weather-related problems including pest or disease, and payments are based on loss of yield. The farmer and insurer must agree on predicted yield and value before the policy commences.

Farmers may have to employ professional services to carry out activities that determine production and performance data, and the Australian government provide assistance to farmers seeking advice and assessments. Support is available by way of one-off rebates covering half of the costs incurred by eligible businesses.

For more information about the benefits of crop insurance for your farmers and why they should consider our variety of policies, contact the Primacy team now.