The impacts of the 2018 drought on farmers is immediately clear with the images of starving animals and parched land across the media. We are all quite aware of some of the catastrophic effects, but perhaps not the knock-on effects the drought can have across industries and geographies.
Droughts, like hail, flood and bushfire, are a reality in our variable Australian climate. But the impact of the most recent drought has some asking if we should be doing things differently.
Fallout from the recent drought
For the livestock industry, one of the main impacts is on breeders. After spending years building up their stock, during a severe drought they need to then make the difficult decision to either sell and start again or roll the dice and hope for rain.
One rain often builds false hope, with ‘green pick’ (early growth) showing up in the paddocks but not providing enough nutrition for livestock. And it’s the waiting too long to make the decision to sell that can result in poor livestock condition (and therefore difficult to sell or very low prices).
No livestock drought insurance safety net
There currently isn’t a readily available insurance solution for drought impacts on the livestock industry, for example there’s no policy to assist with death or assistance with humane destruction. Major insurers typically provide listed events cover relating to fire, storms and malicious damage.
Tresidders was recently asked to contribute to a livestock insurance article for the insurance industry body, NIBA’s Insurance Adviser magazine. Luke Chrzanowski commented “Anything is insurable if you can measure the loss and the chances of loss, but the challenge is that it can be cost prohibitive for the client and the insurer. The insurance industry released multi-peril crop insurance, for example, and with a loss ratio over 1,000% most have left the market as it’s not sustainable.”
“Having said that, the team at Tresidders is always actively looking for insurance solutions for our clients, as new products and insurers are always coming into the market.”
Until then, this leaves the industry with really only one lever to pull – risk mitigation.
That doesn’t mean that insurers don’t want to help. Executive Manager IAG Agri Solutions, Andrew Beer previously told NIBA’s Insurance Adviser magazine, “Farmers are resilient and accept that drought is a part of life in Australia, however, we’ve looked at how we can provide extra support during this incredibly difficult period.
“Last year we announced our Drought Assistance Package through our WFI, NRMA Insurance and CGU brands as a way to give our customers the option to continue their insurance cover through this difficult period. We believe continued insurance cover is critical in reducing additional risks for their businesses at a time when they are already facing significant difficulties.”
Wright says the best and most difficult thing for farmers like himself to do is to take the emotion out of their financial decisions. “No one takes more risk than a farmer or grazier – I’m happy that we have a family farm, but it has to be a financially viable venture.”
When our livestock farmers are in strife, this causes a butterfly effect to numerous other industries and is not limited to the geography impacted by the drought.
In the case of the 2018 drought, reports of feed more than doubling in price has been a significant influence across Australia.
Chrzanowski’s comments to NIBA highlighted why this quickly becomes a big challenge: “Those farmers that rely on feed, it’s the biggest cost input to their industry. The increased prices are causing significant pain – they’ve got contracts to fulfil, paired with the price pressure from the supermarkets which means the margins might be too tight for some of these farms to survive.
“And then you have the feed truck transporters facing declining feed runs due to reduced supply, same with feed storage businesses, and abattoirs are seeing quantity increase but quality declining as farmers make the hard decision to sell up and ease the burden on themselves.”
Insurance brokers calling for innovation on behalf of agriculture clients
Farms are and should be run like a business. To that point, some brokers have called for a compelling business interruption or income protection cover for livestock and crop farmers. Currently there isn’t a compelling solution but that doesn’t mean there couldn’t be a product that could cover drought or supply chain disruption.
Government intervention could also be an option. The issue with some drought-related insurance covers like multi-peril crop insurance is that it doesn’t have enough take up and geographic spread to be sustainable. A government facilitated obligatory scheme could create a solution that would be justifiable for insurers.
“There’s an argument to be made that as the entire population feels the drought, the government should step in on a social level,” noted Chrzanowski in the NIBA article. “The poultry industry does it well with disease cover. A levy is charged to all chicken buyers which goes to that fund, and then if there’s a poultry flu outbreak, the government pays for clean-up and replacement.”
Each time there’s a significant drought, there is a lot of noise about drought proofing, but it can feel like there’s a lack of action.
Some insurance brokers argue that government drought aid money should be used to mitigate drought risk for the future rather than act as a band aid for the current loss.
There are quite a few things that savvy farmers can and do to reduce their risk, from capping high wastage water bores to diversification.
Chrzanowski notes that farm clients that do well are the ones that don’t put all their proverbial ‘eggs in one basket’ and instead look at ways they can diversify and spread their risk.
If you have any questions or would like to talk about your insurance solution, please contact us.
The information in this article is general only, it doesn’t take into account your business or situation. You should speak to your insurance broker about your needs before making any changes or decision