Industry – Why don’t more farms utilize insurance strategies?
My Answer – It’s just not sexy; you can’t park it on the front lawn like a combine and look at it all year.
This blog is one of the hardest for me to write. When we started as a brokerage selling private insurance as one of our service lines, it honestly made me more uncomfortable than motivated. I had spent years in public accounting sitting on the other side and analyzing insurance (mostly from a cost benefit discussion).
Now, as a direct revenue generation, I had a moral dilemma. How do you keep an independent perspective when the sale dictates the profit our company makes?
In all aspects of the word, I consider myself a “terrible salesman”. I am an introvert at heart unless I am in front of a crowd, then I call it forced extroversion. But, put me in a networking event where I don’t know anybody, or make me cold call or walk up a farmer’s driveway, I am literally sick to my stomach. That is why Maverick was built the way it was, data and numbers dictate most of my sales process. If the numbers work, I sell. If they don’t, I walk away. Like it or not, this is the game I play.
When it comes to 2024 and the insurance world, why should producer’s make a strategy?
The truth is because you honestly don’t have much choice.
Whether you believe the risk is in yield or price or costs, all three have begun to squeeze in the current year. Even if you are only looking at government subsidized insurance, there are still numerous options. So, how do I make it clearer?
I have spent a lot of time south of the border these days. Whether the week at TEPAP in Texas or a few days speaking in Phoenix, I have begun to learn about the U.S. insurance and government systems. The most interesting fact was how they discussed margin insurance in combination with their government crop insurance. They refer to it as the hedge.
In Canada, we are a long way behind our southern neighbours in terms of marketing. Call it an aftermath of the Canadian Wheat Board, or the fact that our logistics can be considered terrible from port to port. A significant portion of grain in the U.S. is sold off the combine and then repurchased on paper for the future marketing benefits or loss in some cases. They also are already discussing 2025 issues as the commodity markets drop, where the majority of Canada is still focused on selling off the large stocks of 2023 crop still in the bin.
When it comes to private insurance, I have begun to refer to it as the hedge.
Don’t get me wrong, it still has all the benefits of yield insurance, but it considers the commodity markets and any drop in price relative to yield. It is a way of creating a base, much like a put or option or hedge, and then allowing the producer to try and market higher than the fixed floor. In the end, if you lose, you are covered at the bottom end. And if you win, you spent money on a premium that allowed you to sleep and market more soundly throughout the growing season.
We are not in Kansas anymore Toto.
Welcome to the new world of agriculture, high cost and tight margins.
I like to say that we got spoiled since the pandemic, but honestly it probably just created some complacency in production. Don’t kid yourself, primary producer agriculture is in a time of its highest risk ever in history.
The average cost of production a decade ago was well below $350 per acre. Now I personally don’t see many farms managing under $500 or even $550. So as the commodity markets continue to be as volatile as they have been, this creates more risk.
In addition, we are currently sitting on more debt and leverage than ever before as combines cost $1.5M and land is pushing towards $3000 to $4000 per acre in many areas of Saskatchewan (although Alberta and Manitoba may be foaming at the mouth right now with these “low” prices).
To be upfront, government insurance just cannot handle the requirements alone.
Let’s pick an average yield guarantee across Saskatchewan of 40 bu per acre of canola. Based on the estimates of where our insurance pricing may come out let’s assume $15 (although bravo Manitoba for being highly competitive at over $16). Lastly, lets pick a coverage of 80% individual which then identifies a top end of $480 on yield. On many farms the cost of production to grow canola is well over $550 and closer to $600 as the amount of inputs has pushed much higher to grow these yields. So, on one of our largest acre crops in the province we are looking at a possible $100 per acre loss before collecting insurance, and that does not include price changes.
This is called being naked when the tide goes out. For many, this is the reason they are looking to stack or doubling insurance products into 2024.
The highest risk area is at 80%. I used to use this line religiously as an accountant, and still probably throw this out a time or two. My other two favourites were, you must plan for one disaster out of every ten years or with the new drill technology we will always grow a crop. Then we entered 2020, 2021, 2022, and 2023 in Western Canada.
The days of playing probabilities are long gone.
We are entering what could be the fifth drought year in a row for many areas and these lines or quotes don’t work anymore (and if your advisors are still using them move on). I have now seen 6 bu canola seeded with the best drill technology in the world, and I have seen farms that have survived on insurance for three to four straight years. The premium for many farms has become irrelevant, as the risk of “Ritchie Brothers” keeps them up at night often.
In most service businesses, you work off referrals. I can honestly say that we have a hard time with this as most of the individuals who use us now consider it a competitive advantage. Don’t kid yourself, the farms that sit across from you at the farm shows are your competitors. Land is a high demand item, and those that can gain advantages have a better chance. When it comes to insurance, most of my clients don’t ever refer me to their neighbours. In down years, that is when the most opportunities come.
In the end, whether I have changed your opinion of insurance or not, I hope that I have at least provided you with some indication of its use. The first steps are always identifying your true risk and costs, then mitigating based on those. Will some farms still have insurance that is “good enough” for 2024? Most likely yes. Will others look to utilize double insurance and make more money not growing a crop, likely yes. You just must determine early in the year which of these producers you will be for the growing season. In the end, the combine is sexier, until you have to give it back.