New tools protect crop producers when dire weather strikesNew tools protect crop producers when dire weather strikes
Weather insurance can help protect farmers' bottom lines when destructive weather strikes. Read additional weather stories from Farm Industry News:La Niña patterns to affect spring planting in MidwestUnbelievable March temperaturesCOMBO crop insurance changes in 2012
March 19, 2012
Last summer, when extreme heat hit his crops, Jon Kenady slept easier than he has in the past, thanks to innovative weather insurance that paid $64,000 in claims even before the crop was harvested.
“It helps me sleep better at night when the weather goes against me,” says Kenady, who farms in west-central Illinois near Plainville. “Why sit up at night worrying about the weather?”
Kenady’s in-season payout resulted from his purchase of weather insurance from The Climate Corporation, one of two companies that began marketing weather risk management products across the Corn Belt in 2011. Kenady also protected 80% of historic yields with Multiple Peril Crop Insurance, which also made an indemnity payment for yield losses following harvest.
The other new weather risk management tool is from eWeatherRisk, which sells weather hedge contracts based on underlying weather indexes. “Our product is not insurance; it is a weather-indexed risk management contract,” says Brian O’Hearne, eWeatherRisk president. But like insurance products, it is designed to minimize the financial impact of poor crop yields resulting from contracted weather events. And like insurance products sold by The Climate Corporation, it makes payouts soon after a weather event has concluded, without proof of actual harm to the crop.
In-season payouts are possible because both products are based on the presumption that extreme weather reduces yield, even though it is theoretically possible for a crop to rebound. “Our insurance pays for weather events that have a correlation to yield without having to prove actual yield loss,” explains Jeff Hamlin, director of agronomic research for The Climate Corporation. Excess moisture that delays planting, drought, high temperatures during pollination and other factors all can trigger in-season payouts, depending on what coverage has been purchased, he adds.
“These products are coming on the market now because we can measure weather events better than we could in the past,” says William Edwards, an Iowa State University farm management specialist, who notes that other weather insurance products have come and gone in past decades. “The concept boils down to how well weather events these products are based on correlate to yields on your farm.”
From his standpoint, Kenady thinks that buying additional protection against poor weather is a no-brainer. For 2012, he has purchased weather insurance on his entire 2,500-acre operation — up from 1,000 acres of coverage last year.
“With federal crop and weather insurance, I am paying $70/acre on corn,” he says. “I run more out the back of my combine than the extra premium for weather insurance.”
Total Weather Insurance
The Climate Corporation’s flagship product is called Total Weather Insurance (TWI). Although it is a stand-alone product, it is designed to supplement federal crop insurance. Like Multiple Peril Crop Insurance, it has a March 15 deadline for coverage of 2012 crops.
TWI is designed to address the gap between federal crop insurance coverage, which insures up to 85% of historic yields, and actual yield. “We are looking at top-end bushels that ensure the grower’s profit,” Hamlin says.
Although TWI can cover most weather perils from planting through harvest (hail is a notable exception), it’s designed to allow customers to zero in on specific perils if they wish, and buy coverage on as many or as few acres as they want. Complete packages cost $30 to $40/acre or more for corn, but insuring against specific perils — such as excessive moisture during planting — costs significantly less.
An example TWI policy for corn on an east-central Indiana farm near Lynn highlights available coverage. The policy, which has a $36.18/acre premium, would insure against delayed and late planting, daytime and nighttime heat stress, a cooler-than-normal growing season, early frost, drought and excess rain. Each policy highlights theoretical payouts based on 30 years of local weather data. In the example policy, the average annual payout would have been $12.43/acre. The largest payout over the period — $180/acre.
Policies are automatically customized to a grower’s operation, including crop, location and soil type — with soil type data available in 30-ft. grids across the U.S. Policies precisely define how various stresses are measured using temperatures from the customer’s choice of area weather stations, plus Doppler radar-based rainfall amounts in 2.5-mile grids from the National Weather Service. Payouts, minus premium costs, are made within 10 days of the closing of each weather stress window. Remaining premiums are due at the end of the growing season.
Throughout the growing season, customers can access local weather data on the company’s website to monitor weather stress measurements versus policy parameters. Policies are sold through insurance agents, who also typically handle Multiple Peril Crop Insurance. To locate an agent, visit www.climate.com.
Weather hedges from eWeatherRisk are customized to specific weather perils. They are sold in $10,000 denominations based on the value at risk, not on a per-acre basis. Working with a sales agent, a customer can build a contract package that protects against a range of key growing season weather risks.
“We offer protection for any crop and any risk period,” says O’Hearne, who has worked in weather risk management for energy, agriculture and other industries and is past president of the Weather Risk Management Association. “The customer decides what he wants to protect against and together we structure a contract.”
Contracts, which must be purchased at least 15 days before the beginning of the contracted risk period, are tied to weather data from local weather stations chosen from a list of 6,000 weather stations. Using historical data from those stations, contract documents show theoretical contract payouts over the past 60 years, as well as average, minimum and maximum data for the weather parameter being hedged.
For example, a contract to protect against excess heat (daily highs above 85°F) during pollination in Franklin County, Iowa, shows 18 payouts ranging from $20,000 to $190,000 on a $200,000 contract over the past 60 years. The example $200,000 contract for the month of July would sell for $28,760. It would pay $2,353 per cumulative degree when the daily average cumulative temperature above 85°F exceeded 75 degree days.
As with other hedge instruments, customers must meet financial requirements — including a net worth of at least $1 million — to purchase contracts. Contracts are available through select federal crop insurance agents and commodity brokerages. For more information, and to access a weekly weather newsletter to inform customers about emerging weather risks, visit www.eweatherrisk.com.
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