KAP Explores Weather-Indexed Production Insurance

“I guess it really boils down to kind of a philosophical discussion over who should be delivering crop insurance.”

– NEIL HAMILTON

If Manitoba farmers could’ve insured against a killing frost occurring in late August, many would’ve, suspects Keystone Agricultural Producers (KAP) president Ian Wishart.

Fortunately, the frost held off and disaster was averted.

Farmers might also insure against too much heat or rain or not enough if such insurance was available. And it just might be as early as next spring.

KAP is exploring weather-based production insurance, touted as tailor-made to meet individual farmers’ needs, especially for production not well covered by the current crop insurance program. (See sidebar.)

Instead of insuring against yield loss, the program being considered would let farmers, or anyone willing to pay the premium, bet on the weather. The cost would depend on the odds of a payout.

The insurance would be available on the Internet and signing up would take just a few mouse clicks. Farmers could “try before they buy,” running any number of scenarios on premiums and payouts based on historical weather data.

But because this insurance is being developed by the private sector, using the derivatives market rather than farmers’ production history, it raises questions about its fit with conventional government-subsidized and publicly administered and delivered crop insurance.

The research is funded by the federal government through the Private Sector Risk Management Partnerships program. KAP is working with Alber ta-based consul tant Rick McConnell of DYMAC Risk Management Solutions and Watts and Associates, an American firm specializing in risk management. Most of the funding will be used to gather historical weather data and integrate it into the program McConnell and Watts and Associates have been developing for Alberta farmers since 2005.

KAP likes the flexibility of the weather-indexed concept, but wants to know whether it’s practical and affordable for Manitoba farmers, especially if it isn’t government subsidized, Wishart said in a recent interview.

McConnell left the impression with delegates at KAP’s general council meeting in October that both Alberta and Manitoba crop insurance could play a role in administering and delivering weather-indexed insurance.

“But because of resource constraints… they (crop insurance) couldn’t get on to this thing this year,” McConnell said.

Because funding runs out next March 31 McConnell said he hopes to make the insurance – which he stressed is designed to supplement, not replace, regular crop insurance – available to Alberta and Manitoba farmers next spring.

“If we get it up and going then we could approach the provincial agencies about partnering with them,” he told KAP delegates.

However, in separate interviews, crop insurance officials in Alberta and Manitoba said they have no plans to participate, noting they already offer programs based on weather derivatives, although not as convenient or flexible as what’s being proposed.

“We looked at it and in the end said ‘it might not be the right time to move into it,’” said Merle Jacobson, vice-president of risk management at Alberta’s Agriculture Financial Services Corp.

“We don’t have any agreement in place to work with these folks on del iver ing this thing either,” said Neil Hamilton, president and CEO of the Manitoba Agricultural Services Corp. “I guess it really boils down to kind of a philosophical discussion over who should be delivering crop insurance.”

In Canada, crop insurance is cost shared by farmers (40 per cent) and the federal and provincial government (36 and 24 per cent, respectfully). Administration is all covered by government: 60 per cent federal, 40 per cent provincial.

In the U. S., where Watts and Associates operates, government subsidizes crop insurance but programs are designed and delivered by the private sector.

“It seems to me that they’re (Watts and Associates) interested in developing a private sector product to offer in Canada, which is OK, I guess – anyone can develop whatever they like – but I don’t think we’d co-operate with that,” Hamilton said.

So long as weather-indexed private insurance is an “add-on” and funded solely by users without subsidy, Hamilton said he wouldn’t oppose it, although it could be the thin edge of the wedge.

“Pretty soon someone says, ‘Well, why don’t we get the subsidy on this? It’s a crop insurance product, we should get the admin paid for and the subsidy,’” he said.

If that happened there’s a risk the money would come from the current crop insurance budget making a smaller pie, he said.

“The whole insurance principle is built on offsetting risk and getting enough total premium income to pay your losses,” Hamilton said. “As soon as you start losing that you run into some difficulty running the program.”

Administration costs will rise too if there are multiple insurance providers, Jacobson said.

KAP supports Manitoba’s crop insurance program and doesn’t want to undermine it, Wishart said.

“They (MASC) don’t want to start turning insurance over to the private sector and we don’t either,” he said, adding Manitoba has the best crop insurance program in Canada. “Our hope was that if it turned out to be something producers wanted to participate in that Manitoba crop insurance would be the delivery agent and would change their position.”

That’s unlikely, Hamilton said, but added “you can never say never.”

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About the author

Reporter

Allan Dawson

Allan Dawson is a reporter with the Manitoba Co-operator based near Miami, Man. Covering agriculture since 1980, Dawson has spent most of his career with the Co-operator except for several years with Farmers’ Independent Weekly and before that a Morden-Winkler area radio station.

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