Weather insurance reinvented

Nov 4, 2011
by DTN

Weather insurance isn’t a new product. It’s been used for years in a variety of situations ranging from movie production to concerts, motorsport events and even weddings. Your favorite retailer may buy insurance against a blizzard on Black Friday or a cool summer that reduces sales of air conditioners and fans. What is different is that it now is being promoted to agriculture.

You can protect your profits from too much rain, too little rain, too much heat or cold at the wrong time with private weather insurance.

Most private companies view crop production as too risky to insure without federal subsidies. But in 2006, two former Google execs— David Friedberg and Siraj Khaliq—saw an opportunity to employ the millions of temperature and precipitation data points available from the National Weather Service. WeatherBill was born. It took the company a couple years to create a global weather simulation modeling system and in 2009, the company launched its first named-peril coverage for growers.

Today, the company is known as The Climate Corporation and its main thrust is Total Weather Insurance (TWI). For 2012 it will offer coverage for corn, soybeans and winter wheat, although ultimately it plans to expand to other crops. The company has identified key growth phases and weather events that might affect yields and TWI policies are written to address them given a specific county. Payments are based on anticipated yield losses due to the weather you get, Jeff Hamlin, director of agronomic research, told DTN.

Unlike federal crop insurance, weather premiums are a moving target like options for price protection. “Probabilities change every six hours,” Hamlin said. “Typically, corn and soybean premiums will be best on Nov.

1 when coverage sales begins,” and may increase 20 percent or 30 percent by the March 15 closing date in a normal season.

In extraordinary weather events like the 2011-12 record drought in the southern Plains, rate increases were even steeper. As an example, winter wheat went on sale in June. By July into early August, premiums in the Plains had tripled from about $20/acre to $60/acre, Hamlin said. In effect, that made coverage uneconomic for late comers.

Basis risk—how close the weather data collection is to your farm—was a top criticism farmers had of the company’s initial products. Originally, some weather stations were 30 miles from growers’ fields. For 2012, however, the grid size for rainfall has been reduced to 2.5 mile squares and soil types are reported for every 30-footsquare grid. This allows the “Soil Moisture Tracker” to net out the estimated water entering the soil (rain) and leaving the soil (plant uses and evaporation). In response to the past two summers’ yield effects, TWI now tracks nighttime heat stress in addition to daytime heat stress for corn.

“We have moved from seasonal to daily weather impact assessment and from regional to local weather data,” said Hamlin, noting

that for 2012, there is 25 times the rainfall measurement resolution available compared to 2011.

TWI 2012 includes six perils for corn and five for soybeans. Corn: planting rain, daytime heat stress, nighttime heat stress, drought with soil moisture tracker, excess rain with soil moisture tracker, low heat units/ freeze. Soybeans: planting rain, heat stress, drought with soil moisture tracker, excess rain with soil moisture tracker, early fall freeze.

When you buy the coverage, you define your ideal planting window. To determine drought or excess rain, Climate Corp. looks at cumulative rainfall events and adjusts for soil type and evapotranspiration. It makes payments that are weighted for the stage of growth (higher for tasseling and silking).

You don’t have to prove losses, you define the parameters and if the weather materializes, your payment first is deducted from the premium you owe, and then you automatically receive a check for any additional claim.

As the season progresses, you can monitor the weather measurements and your payment status online.

Imperfect matches

Several factors lead to variability in the relationship between the weather as measured by the contract and the effect of the weather on the farm’s yield, pointed out Carl Zulauf, Ohio State University ag economist. These include distance from the measuring point and the timing of the weather event specified in the contract versus the development stage of the crop. “Timing matters,” he said. Given these and many factors affecting yields in a given year, your policy and your yield outcome may or may not align with actual risks.

Sometimes the mismatch favors growers. Mike Cyrulik of Clinton, IL, experienced bumper crops in 2011 but collected on both excess rain at planting and summer time heat in 2011 anyway. “It worked out well for me, he told DTN. “I think our policy specified 75/100ths of an inch of rain in a four-day period. We were wet early, but we actually planted pretty much on time, with most done in April and finishing up in May. But because we got rain during the period specified in the contract, we collected. Then our summer coverage said 93 degrees for three days during July 15 to Aug. 15. I considered using 89 degrees, but it seemed too expensive.” His premium was $50 an acre. He collected $130 an acre, so he came out $80 ahead. “I wouldn’t bet the farm that will happen every year,” he said.

Even with an 85 percent crop revenue policy in place, he won’t collect anything on federal crop insurance because his yields were too good, Cyrulik said.

“Many farmers view this as a way to get coverage for high-frequency, low-severity losses,” Hamlin said, and the company is promoting that role in covering the insurance “gap” that exists due to the level of coverage available in federal crop insurance (often 80 percent or 85 percent maximum) and Ac tual

Production Histories that lag recent expected yields. Federal crop insurance tends to be geared to less frequent, more severe weather events.

Growers without realistic 10-year yield histories may find TWI attractive, for example. An Oklahoma producer noted that soybeans are a new crop on his farm. “I considered buying weather insurance in 2011 because we only had the T yield [transitional yield], and federal crop insurance coverage was so low, there was almost no protection.” Transitional yield is the county 10-year average as determined by the National Agricultural Statistics Survey. In the end, he decided to buy revenue protection without the harvest price so he would be eligible for SURE. But as that disaster coverage expires this year, he expects to give weather insurance another look.

Farmers may find it prudent—and easy—to buy insurance when a bushel of corn is worth $7; the question is whether they will do so if prices drop to $5 or even $4. — Linda Smith, DTN