new pathways for agricultural risk management Jay Horton Founder - - PowerPoint PPT Presentation

new pathways for agricultural risk management

Jay Horton Founder & Managing Director Strategis Partners

AUSTRALIAN AGRIBUSINESS OUTLOOK CONFERENCE 2016

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

“No need to pay in full for the seed, fertiliser / ag-chem we supplied you.”

Imagine it’s been a bad season

WHAT IF INPUT SUPPLIERS WERE TO SAY TO THEIR FARMER- CUSTOMERS? “We can pay the full dividend this year and continue to invest.” WHAT IF AGRIBUSINESS BOARDS WERE TO SAY TO THEIR SHAREHOLDERS? “You weren’t able to supply the target volume, but we will pay you an income to cover this year’s costs anyway.” WHAT IF FOOD PROCESSORS WERE TO SAY TO THEIR FARMER-SUPPLIERS? “No need to pay the full interest owing on your loan this year.” WHAT IF BANKERS WERE TO SAY TO THEIR FARMER- CLIENTS? “No need to pay the full farm lease this year.” WHAT IF FARMLAND OWNERS WERE TO 
 SAY TO THEIR FARMER-TENANTS?

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

Source: CSIRO data; Strategis Partners analysis.

SLA WHEAT YIELDS 1996-2012

Mean Yields (T/ha) Yield Volatility 


(Coefficient of Variation of Yields)

• Aust. wheat: sd/mean = 0.4

U.S. Corn: sd/mean = 0.25

That is why we need all tools in the risk management portfolio

1

Self-insurance

3

Market-based instruments

2

Self-protection

The portfolio approach

Richter values Dam levels Surface temperature Regional rainfall NDVI & biomass index Soil moisture Other 
 Physical
 Measures Remote 
 Sensing Index-based Payouts based on values obtained from an index that serves as a proxy for losses Production Insurance Multi-peril Single-peril El Niño Southern 
 Oscillation index Crop & livestock insurance Crop & livestock insurance Crop insurance Crop insurance Crop & livestock insurance Crop insurance Crop insurance Crop & livestock insurance Earthquake insurance Irrigation insurance Flood insurance Revenue and yield insurance for single crop, multiple crops, crop quality, and whole farm Frost, hail, fire etc. on the farm Claim-based Pays an indemnity following a claim

• f loss by the

insured farmer Accumulated rainfall

• No. of rain days (> 1mm)

Hot days index Weather Daily min / max temperatures Applications

Index-based insurance versus Claim-based insurance

Tapout Self insurance Payout from Insurance ($) Trigger Cost of
 Insurance Insurance cover Probability distribution of farm revenue, crop yield or the index

Insurance can be customised to manage the downside risks

Revenue, margin, yield or weather / vegetation index Maximum payout

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

Meso Micro Regions facing catastrophic loss Ag-Chain partners facing upstream / downstream risks Farmers managing production risks Governments Corporates Family Farms

The mid-tier market for insurance is agri-chain firms

Potential buyers of index insurance are subject to input / output volume risk

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”

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

Case Study:
 Canadian grain handler buys index insurance

Why agri-chain firms can benefit from index insurance

Ability to fund investments internally Weather Company's Cash Flow Crop & Livestock 
 Yields Company's Input or Output Volumes High Low Create new wealth

• Need to raise costly external capital
• Possibility of financial distress
• Problems for employees, suppliers,

debt-holders & customers

An agribusiness risk management program has an overarching goal: 
 ensure there is cash available to make value-enhancing investments

Insurance reduces the likelihood that the company will have to raise costly external capital at the wrong times

Ability to fund investments internally Weather Company's Cash Flow Crop & Livestock 
 Yields Company's Input or Output Volumes High Low Create new wealth

• Need to raise costly external capital
• Possibility of financial distress
• Problems for employees, suppliers,

debt-holders & customers Insurance payouts

NDVI profile of crop growth*

* Normalized Difference Vegetation Index (NDVI) is a numerical indicator that uses the visible and near-infrared bands of the electromagnetic spectrum. It is used to analyse remote sensing measurements and assess whether the target being observed contains live green vegetation or not. Source: i-EKbase is a Farm Health Monitoring System that provides automated analysis and predictions to support farm management by (i) integrating public and commercial data sources, (ii) applying big data analytics, predictive modelling, and (iii) a visual overlay of analysis upon Google Maps. iEKBase | Dr Ritaban Dutta | Ritaban.dutta@csiro.au

Wheat Yield versus NDVI 2003-2011

Wheat Yield (T per Ha)

0.5 1 1.5 2

Crop NDVI Value 0.095 0.19 0.285 0.38

4 clusters of pixels (blue = crop) The day of maximum mean NDVI across the SLA Pixel clustering

Correlating Crop Yield with NDVI at a regional level

Source: CSIRO & Data61 data; iEKBase and Strategis Partners analysis NDVI across the Statistical Local Area of Merredin in WA (330,000 hectares)

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

Advanced analytics helps decode complex agricultural processes Using data visualisations Using correlation analyses Using significance testing Using machine learning methods

Use advanced analytics to manage business risks

• improve sales forecasts
• ptimise resource use

across geographies

• get better information,

more timely information

• increase your speed 

• f response
• design and market 


risk-contingent products

Example of spatial data analytics

• manage business resources on

the basis of regional differences
 in supply and demand

50 pairs of SLAs with the most counter-cyclical yield correlations, 1996-2012

Source: CSIRO data; Strategis Partners analysis.

what’s your plan?

• 1. DISCOVERY

• 2. DATA & ANALYSIS

• available. Collect and explore data sets, and verify data
• quality. Use prototype data to demonstrate Big Data

• 3. ACTION PLAN

Manage your Company’s risks through the use of Big Data and Index Insurance

Decisions

thank you

Strategis Partners Level 57, MLC Centre 19-29 Martin Place Sydney, NSW 2000 Phone: +612 9238 6886 www.strategispartners.com.au

Sydney

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