AUSTRALIAN AGRIBUSINESS OUTLOOK CONFERENCE 2016 new pathways for agricultural risk management Jay Horton Founder & Managing Director Strategis Partners
author slide today • Australian Agriculture is risky … but our use of risk management solutions is incomplete • Digital technologies & insurance innovation can help fix the problem • For all Agribusinesses, risk management itself is a growing business opportunity
Imagine it’s been a bad season WHAT IF FARMLAND WHAT IF AGRIBUSINESS WHAT IF INPUT WHAT IF BANKERS WHAT IF FOOD OWNERS WERE TO BOARDS WERE TO SAY SUPPLIERS WERE TO WERE TO SAY TO PROCESSORS WERE SAY TO THEIR TO THEIR SAY TO THEIR FARMER - THEIR FARMER - TO SAY TO THEIR FARMER - TENANTS? SHAREHOLDERS? CUSTOMERS? CLIENTS? FARMER - SUPPLIERS? “No need to pay the full “We can pay the full “No need to pay in full “No need to pay the full “You weren’t able to supply farm lease this year.” dividend this year and for the seed, fertiliser / interest owing on your the target volume, but we will continue to invest.” ag-chem we supplied loan this year.” pay you an income to cover you.” this year’s costs anyway.”
Australian Agriculture is a risky enterprise in the global context … Source: Adam Tomlinson “The Realities of Risk in Australian Agriculture”, The Australian Farm Institute Conference, June 2014.
… and across the continent SLA WHEAT YIELDS 1996-2012 Yield Volatility Mean Yields (T/ha) (Coefficient of Variation of Yields) Aust. wheat: sd/mean = 0.4 U.S. Corn: sd/mean = 0.25 Source: CSIRO data; Strategis Partners analysis.
That is why we need all tools in the risk management portfolio The portfolio approach Self-insurance 1 Self-protection 2 Market-based instruments 3
Index-based insurance versus Claim-based insurance Applications Accumulated rainfall Crop & livestock insurance No. of rain days (> 1mm) Crop & livestock insurance Weather Daily min / max temperatures Crop insurance Crop insurance Hot days index Index-based Payouts based on values obtained Crop & livestock insurance NDVI & biomass index from an index that Crop insurance serves as a proxy Soil moisture Remote for losses Sensing Crop insurance Surface temperature Crop & livestock insurance Regional rainfall Production Insurance Earthquake insurance Richter values Other Dam levels Irrigation insurance Physical Measures El Niño Southern Flood insurance Oscillation index Multi-peril Revenue and yield insurance for single crop, Claim-based multiple crops, crop quality, and whole farm Pays an indemnity Single-peril Frost, hail, fire etc. on the farm following a claim of loss by the insured farmer
Insurance can be customised to manage the downside risks Payout from Insurance ($) Probability distribution of farm revenue, crop yield or the index Self insurance Maximum payout Cost of Revenue, margin, yield or Insurance weather / vegetation index Tapout Trigger Insurance cover
But our use of risk solutions is incomplete • Few growers use Multi-Peril Crop Insurance • Less than 1% of grain growers took out MPCI contracts in 2015 • There is a missing middle-tier in the agri- insurance market
There is a missing mid-tier in the agri-insurance market Macro Regions facing catastrophic loss Governments Meso Ag-Chain partners facing upstream / downstream risks Corporates Micro Farmers managing production risks Family Farms
The mid-tier market for insurance is agri-chain firms Potential buyers of index insurance are subject to input / output volume risk AgChem Cos. Large Growers Grain Handlers Trucking Cos. Grain Millers Food & Beverage Manufacturers Farm Equipment Cos. Agri Investment Funds Brokers & Traders Rail Cos. Feed Suppliers Meat Processors Banks Industry Corps. Shipping Cos. Feedlots Biofuels Cos
Innovation & technology can help fix the problem Agri-chain companies should: • Consider index insurance: • Transparent, customised cover • Prompt loss settlement • Based on official data and objective criteria • No claims to work out • Exploit the growing power of remote sensing and big data analytics: • “every agribusiness will become a software company”
Case Study: Canadian grain handler buys index insurance Based in Winnipeg, United Grain Growers (UGG) was a public company, trading grain grown by western Canada’s farmers. • UGG’s earnings volatility is largely attributable to volatility in the volume of grain that it ships, due to variation in weather • To deal with this risk, UGG entered into an insurance contract with Swiss Re that provided payment to UGG if its grain volume was unexpectedly low in a given year
Why agri-chain firms can benefit from index insurance An agribusiness risk management program has an overarching goal: ensure there is cash available to make value-enhancing investments High Create new wealth Company's Ability to Crop & Company's Input or Output fund Weather Livestock Cash Flow investments Yields Volumes internally Need to raise costly external capital • Low Possibility of financial distress • Problems for employees, suppliers, • debt-holders & customers
Insurance reduces the likelihood that the company will have to raise costly external capital at the wrong times High Create new wealth Company's Ability to Crop & Company's Input or Output fund Weather Livestock Cash Flow investments Yields Volumes internally Need to raise costly external capital • Low Insurance Possibility of financial distress • payouts Problems for employees, suppliers, • debt-holders & customers
NDVI profile of crop growth* Source: i-EKbase is a Farm Health Monitoring System that provides automated * Normalized Difference Vegetation Index ( NDVI ) is a analysis and predictions to support farm management by (i) integrating public numerical indicator that uses the visible and near-infrared and commercial data sources, (ii) applying big data analytics, predictive bands of the electromagnetic spectrum. modelling, and (iii) a visual overlay of analysis upon Google Maps. It is used to analyse remote sensing measurements and iEKBase | Dr Ritaban Dutta | Ritaban.dutta@csiro.au assess whether the target being observed contains live green vegetation or not.
Correlating Crop Yield with NDVI at a regional level Wheat Yield versus NDVI NDVI across the Statistical Local Area of Merredin in WA 2003-2011 (330,000 hectares) 2 Pixel Wheat Yield (T per Ha) clustering 1.5 1 0.5 The day of maximum mean 4 clusters of pixels 0 0 0.095 0.19 0.285 0.38 NDVI across the SLA (blue = crop) Crop NDVI Value Source: CSIRO & Data61 data; iEKBase and Strategis Partners analysis
In conclusion Risk management is a growing agribusiness opportunity Are you ready for the era of 'big data’? • Companies that use data and analytics to guide decision making are more productive and experience higher returns on equity • The price of sensors, communications devices, and analytic software continues to fall
Use advanced analytics to manage business risks Using data visualisations Using correlation analyses improve sales forecasts • optimise resource use • across geographies get better information, • more timely information Advanced analytics helps increase your speed • decode complex of response agricultural processes design and market • risk-contingent products Using significance testing Using machine learning methods
Example of spatial data analytics 50 pairs of SLAs with the most counter-cyclical yield correlations, 1996-2012 • manage business resources on the basis of regional differences in supply and demand Source: CSIRO data; Strategis Partners analysis.
what’s Manage your Company’s risks through the use of Big Data and Index Insurance your plan? 1. DISCOVERY Business understanding Gain a shared understanding of the company’s needs and priorities, opportunities and challenges in applying Index Insurance and Big Data. 2. DATA & ANALYSIS Examine Index Insurance options and data- analytics within the company Gain an understanding of Index Insurance options available. Collect and explore data sets, and verify data quality. Use prototype data to demonstrate Big Data methods and tools. 3. ACTION PLAN Decisions Priorities and recommendations Prepare action plan for implementing an enterprise risk management strategy that Analytics incorporates Big Data and innovative forms of insurance. Data
thank you
Contact us Sydney Strategis Partners Level 57, MLC Centre 19-29 Martin Place Sydney, NSW 2000 Phone: +612 9238 6886 www.strategispartners.com.au
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