Not the last word – MCPI #3

Below is an email I received on June 3 from Jay Horton from Strategis Partners, the company that is promoting Multi Peril Crop Insurance. I have attached a copy of the spreadsheet to the email I sent to you informing you of this article. I hope it works, if not then write me in the comments section at the end of this piece and I will forward it to you.

I circulated the email among consultant friends and I have to say that none have been enthusiastic. One said he could see ways of taking advantage of the proposition. Some of the comments I cannot repeat. Let’s say they were from non-believers. But here is a sample of the comments and questions about the commercial proposal to provide MPCI:

• Fire and hail is only 1% or $5/ha compared to $$21/ha. Do not tell me that isn’t an extra cost.
• It will happen(government assistance) and I wish I could have that sure bet on it.
• Benefits are imaginative. In risky areas where the cover would be most useful the premium will reflect the risk.
• I fail to see why interest is saved. We normally pay insurance (F + H) after harvest. I am sure they will require payment before.
• What about the interest on extra inputs?
• Real cost $32,000 net of saved insurance. You could get the yield by extra inputs anyway, nothing to do with insurance.
• For every winner with forward pricing there is a loser. Is the farmer better at this than the speculator? In the end forward pricing is a COST. Frankly it has to be to pay for the broker of the deals. Otherwise everyone would be in on the act. It is only sensible when prices are towards to top decile as currently with wool. How much can you cover forward anyway, safely? (Remember this was written early June, just this morning wool has continued to go down and wheat up. It needs an expert to comment but I have noticed the Shanghai Stock exchange has taken a hit over recent times. Once again China controls the market this time in wool. Ed)
• Only a % of the output is covered. 70% as I read it. To me that business will have a serious loss if only 70% of the proposed output is achieved.
• Jay relies on security of income to make business decisions that could or might pay off. Returns from extra inputs. Forward pricing. True should they work but they are not assured. Observe Canola prices this year. Early pricing, which looked pretty safe has been eclipsed. Do you hedge currency as well?-you should at extra cost.

End of comments. I welcome comments from farmers and anyone else in agribusiness. If in this article I have missed something, then tell me. Same goes if you think I am wrong.

There are some assumptions in the figures as presented by Strategis:

• $20,000 increase use of inputs is the optimisation of fertilizer rates and anything else where corners may have been cut.
• Benefits on grain prices of $40,000 is an assumption that the grower, once insured, will hedge.
• Increase in yield of $30,000 is the result of optimal inputs ($20k)

What is missing from Jay’s costings is the $5000 cost of an audit on the farm business, looking at history yields and that sort of thing.

The day after I circulated the email to colleagues, one wrote back and pointed out that if they had hedged the previous week on Canola, it had just gone up by $15 tonne.

I would imagine not many a hedging wheat at present prices, at least I hope they are not. Those that have, may now be regretting the move. There seems to a deal of uncertainty around the world at present. Agrimoney.com (5 July)  are reporting hedge funds being caught out by the surge in wheat prices. Then a rush of ‘short coverings’ as it continues to be wet in some areas of America delaying harvest and increasing concerns about sprouting.

The Agriculture White Paper and MPCI.

Minister Joyce mentioned on ABC ‘Insiders’ (can any ABC programme get more left wing than ‘Insiders’? Inside what, one wonders) almost in passing, that the federal Government are to be involved in MPCI. To find the detail I had to go to the ‘media release’ section of the White Paper, where I found this somewhat seminal sentence: better financial preparedness and risk management with $29.9 million for farm insurance advice and assessments. And further down the page this, the qotes are not mine they are the ministers’: “Some of the in-drought support measures I announced as part of the Budget in recognition of the need for support in some parts of Australia. Others are new, such as the $29.9 million to help improve farm risk management. This is timely, with the Australian market for insurance products to help farmers manage risk, such as multi-peril crop insurance, expanding.”

Apparently the $29.9 million is intended to pay half of the $5000.00 ‘inspection fee’ ‘audit’ ($2500) call it what you will but it has to be done before any MCPI is considered by the insurer. By my reckoning that $29.9 million will pay for half of the fee for about 12,000 grain growers.

So, someone has got into the Minister’s ear here (Oh dear!). What is the last sentence all about? What ‘insurance products’ is the Minister referring to?  I’ve heard of one, MCPI. Who told him MCPI expanding and from where did they get their information and more importantly evidence? As far as I know the number of farmers who have taken out/been offered MCPI in the current season, across Australia, about 200— about 20 in Western Australia.

MCPI may be a good idea, but at present it is an untried product. I don’t think it is too much of stretch to use the analogy of a new motor car from a new manufacturer. The makers claim great benefits for those who buy their vehicle but they are not available yet — they are currently conducting limited road tests and at the same time extolling the potential benefits to prospective purchasers. The government is investing $29.9 million in this new and still unproven car, but hey know the people want it with all the benefits the manufacturer claims it will bring so they are backing it in the hope, as always, they will benefit.

What’s more is this the new politikspeak, why do we always have numbers like $29,9 million like a supermarket or car sale? Why not $30.0 million?

I have written for clarification to the minister. There is no mention as to whether this is $29.9 a year or over 1 or 5 years, or even 10 years?  Clarke and Dawe have the answer.

This is the email I received from the proponents. Sorry if you have to cut and paste the links, but I thought I should reproduce ‘as is’, rather than put in the ‘click here’ links.

From: Jay Horton <jay.horton@strategispartners.com.au>
Subject: Re: MPCI
Date: 3 June 2015 9:31:32 am AWST
To: Roger Crook <roger.rankin.crook@bigpond.com>

Roger
Thank you for your note, and comments on the history of introducing innovation to farmers. Highly relevant to MPCI. And my apologies for the delay in getting back to you. I have been working out in western NSW this past week.
In response:
1. Yes, please feel free to promote the link to the symposium in the Global Farmer.
Here is the link to download the Symposium Papers:
http://www.strategispartners.com.au/symposium-papers/

Here is the link to our paper: Crop Insurance in Australia – A Report Card:

Crop Insurance in Australia – A Report Card

2. Yes the big question is: What will it cost and what the farmer gets for his/her dollar from MCPI? We are currently working on a quantitative analysis of the grower’s decision to buy Multi-Peril Crop Insurance. The Table below estimates the cash costs and benefits of MPCI, but does not take into account the benefits of avoiding bankruptcy, or the opportunity to expand through leasing land on the back of MPCI (due to bank funding constraints).

Costs MPCI Cost $42,000 per year
Increased Use of Inputs $20,000 per year
Total Costs $62,000 per year
Benefits Lift in Grain Prices $40,000 per year
Increased Yield $30,000 per year
Interest Cost Savings $10,000 per year
Refund on Hail & Fire insurance $15,000 per year
Total Benefits $95,000 per year
Net Benefits $33,000 per year

Please find attached a spreadsheet with supporting assumptions.

I also note the latest issue of “Agricultural Systems” has a paper, which is relevant to the decision to buy MPCI:
Monjardino, M., et al. “Farmer risk-aversion limits closure of yield and profit gaps: A study of nitrogen management in the southern Australian wheatbelt.” Agricultural Systems 137 (2015): 108-118.
http://www.sciencedirect.com/science/article/pii/S0308521X15000578

The paper points out that Nitrogen (N) is the most limiting nutrient in cereal crop production and is an important requirement in closing the gap between potential and achieved water limited yield. However, N fertiliser management in broadacre cereal cropping can be risky for farmers operating in dryland regions because of variability of rainfall and price. Farmers typically respond to this situation by making risk-averse decisions that are neither yield- nor profit-maximising.

Hence the potential role of MPCI to overcome this risk aversion.

Best regards,
Jay

<Waterfall-Chart-Cost Benefit Analysis of MPCI.xlsx>

STOP PRESS Wed 8 July: Just received this from Nigel Hallett MP. Member of the Upper House for the South West of WA. Nigel is one of the major proponents, even the leading proponent of MPCI. Nigel is also a cereal farmer, one of the few farmers in the WA Parliament, so he has first hand knowledge and experience of the challenges facing agriculture at present:

Hi Roger. Just to let you know There are now approx 3 to 5 offering risk mitigation to grain growers… This can be extended across all areas once West Aust finally gets Doppler Radar. Cheers Nigel.