Brought to you by:
CGU
CGU

El Nino looms as a farm-fresh crisis

Facebook Twitter LinkedIn Google

Relief for the drought-stricken farming community is unlikely to come any time soon, now an El Nino alert has been issued.

It also spells trouble for the rural insurance market, which, inevitably, has been caught in the fallout from the worst dry spell to hit the country.

There is a 70% chance of an El Nino system forming this spring, or roughly three times the normal risk, the Bureau of Meteorology says in a revised forecast released last week.

The bureau’s previous climate model assessment placed the likelihood at 50%.

“We have been on El Nino watch for a few months now,” Long-range Forecasting Manager Andrew Watkins said.

“We have now gone to an El Nino alert. Drier and warmer is the headline message and, in terms of the El Nino… it will tend to mean the current dry and warm conditions we have will, unfortunately, be likely to extend through the summer.”

El Nino usually brings reduced rainfall, warmer temperatures and increased fire risk in the country’s southeast if it occurs during spring.

The signs are ominous for farmers in drought-ravaged Queensland, NSW and parts of SA and Victoria.

Early weather patterns in the tropical Pacific Ocean and overlying atmosphere suggest the early stages of El Nino – which was named “little boy” or “Christ child” in Spanish by Peruvian fishermen who noted how changed ocean temperatures around Christmas affected the size of their catch – could already be here.

The rain that many Australian crop growers and graziers have been desperately hoping for this spring is likely to be on hold until the end of autumn, when the event is most likely to fade.

Industry figures tell insuranceNEWS.com.au that rural clients have been doing it tough for the past few years, as parched conditions have steadily worsened. Many clients have sought advice on ways to adjust their cover to achieve premium savings.

“Certainly, we have been seeing that and they are very focused on costs because they have significantly reduced revenues,” John van der Vegt, MD at specialist agribusiness broker AgriRisk Services, told insuranceNEWS.com.au.

“Growers are saying, ‘Look, we simply don’t have the revenues, we need to cut back on the coverage provided by our farm pack policies. How can we reduce our cost in those areas?’ ”

Mr van der Vegt says about 85% of the 20,000 winter broadacre growers insure their crops via traditional fire and hail policies, and this season saw 250-300 growers buy a multi-peril crop insurance (MPCI) policy. MPCI insurers will be affected by losses from this season.

“In the eastern states, crops have suffered due to lack of rainfall, while in the west due to widespread frost,” Mr van der Vegt said.

“These losses will place further pressure on the existing insurers (six insurers) and we wouldn’t be surprised if some withdraw, given their poor results in terms of both premium volumes and underwriting profitability over the past 2-3 years.

“Clearly, something needs to change to ensure these products are viable in the long term.”

Take-up of MPCI products has been poor compared with Europe and the US, where strong government support – mainly through premium subsidies – has been credited with making the product line viable.

“The fundamental problem is there is a vast difference between what growers think the premium should be and what insurers think the premium should be,” Mr van der Vegt said.

“In the past, obviously, there’s been talk about government subsidies or government assistance. That hasn’t been forthcoming to date, but I think that’s probably what’s required to make a real difference.

“It might be accelerated tax deductions for premiums or things like that. It doesn’t necessarily have to be a direct premium subsidy. It could be other methods.”

While the going has been tough for farmers, Latevo CEO Andrew Trotter believes it has reminded them of the importance of adequate cover.

“[This year] has really become proof of concept for farmers and the industry about the importance of farm income protection,” Mr Trotter told insuranceNEWS.com.au.

“The silver lining for the drought is people now appreciate how important it is to have farm income protection in their business, and [that will] encourage greater participation for [next year] and beyond.”