GrainCorp bidder has a safety net, but on the ground growers choose risk factor

Those inside the LTAP camp suggest comparisons with MPCI offerings to farmers don’t do justice to their insurance breakthrough, mooted to cover GrainCorp operations over 25 years if the group’s takeover bid succeeds.

However, it is fundamentally the same in that it reduces volatility by providing a minimum level of earnings through drought and other bad seasons.

West Australian farmer Tony York suffered about $500,000 in hail damage this week when part of his wheat crop was ruined right in the middle of harvest.

He can claim for that under standard hail insurance but the loss won’t be enough to trigger a claim under York’s MPCI policy because a favourable season in the west means his overall result this year will be well above the claim threshold.

Each year at seeding big grain growers make the call to pump $1 million or more into their paddocks in the hope that it rains. Louie Douvis

The WA Farmers’ Federation president is in the minority when it comes to using MPCI in Australia. Lobby group GrainGrowers estimates about 1 per cent of about 20,000 growers nationally have policies.

A $30 million farm risk management initiative launched by then agriculture minister Barnaby Joyce to subsidise the cost to farmers of assessment for suitability for MPCI was a failure. Two years on from its launch in 2015, only $107,000 had been paid to 48 farm businesses.

MPCI products are heavily subsidised in the US but the Australian government has resisted lobbying from providers and grower groups for similar assistance.

Agriculture Minister David Littleproud this year rejected calls from Grain Producers Australia for a tax break of up to 150 per cent to encourage uptake.

York is a big believer in reducing risk and is baffled as to why more farmers haven’t adopted MPCI, notwithstanding the high premiums that apply.

“Maybe there are not that many people who run their businesses as businesses,” he says.

“Many farmers think that they are riding the elements and they don’t have control and don’t want to try to find ways of taking away that risk. They like risk.

“Some of them to manage that just make sure they don’t carry much debt and become very conservative decision-makers and investors, and that is how they protect themselves.

“If you want to grow a business, you can’t afford to work like that. You have to try to protect yourself.

“There may be a bit of a divide in the agriculture and farms sectors nowadays between those who want to drive their businesses and those that are still happy to be passive.”

York says that if LTAP was able to pull off a deal with Allianz to somehow insure east coast grain production over the long term it represented a brilliant breakthrough and might open the eyes of more farmers to crop insurance products for their businesses.

“Globally, I’m getting the impression that there is an interest in offsetting risk in the northern hemisphere by being in the insurance business in the southern hemisphere, which is counter-cyclical and protects those big underwriters,” he says.

“A big lick of that counter-cyclical process would be to underwrite GrainCorp.”

A major barrier to MPCI adoption in Australia has been the cost. It comes with a premium many multiples above what farmers pay on fire or hail insurance.

York pays a premium of about 6 per cent of the payout value of his safety net policy and he farms in Tammin, regarded as a reliable production pocket within WA’s vast wheatbelt.

“As far as I’m concerned, given the volatility and consequences of having a wipe-out, it is worth the price in today’s thin-margin business environment,” he says.

LTAP chairman Tony Shepherd and managing director Chris Craddock have yet to make public details of their debt-heavy, equity-light and insurance-reliant bid for GrainCorp and have also kept the Graham Bradley-chaired GrainCorp board in the dark during talks on terms of due diligence.

However, they have been telling farmers their new ownership structure will lead to a stronger balance sheet and greater capacity to invest in supply chain efficiency as seasonal volatility is reduced.

The volatility has seen GrainCorp make a big diversification push into global malting, into grain handling in Canada and accumulation in Ukraine.

It also tried in vain in recent years to hedge against fickle east coast harvests by grabbing a piece of CBH, the giant co-operative that dominates the WA grains industry.

Some east coast growers believe GrainCorp has taken its eye off the ball in terms of the grain supply chain, and farmers are warming to LTAP’s promises to lower costs by investing in greater efficiency.

CBH has made several attempts over decades to support MPCI products for its thousands of growers members in WA without ever gaining traction. In 2011, it formed a mutual company with broker Willis to offer a yield-based product but it was a flop, as was a similar attempt in 1999.

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