14 May 1999

Insurance scheme aims to safeguard cereal incomes

By Robert Harris

CEREAL growers can now insure crops against excessive yield loss and price falls using a new scheme allowing them to underwrite their income at the beginning of each season.

Dalgety Protect is the first product of its type to be launched in Europe and comes at a time when UK grain prices are becoming more susceptible to climatic and market forces, says the companys Gary Hutchings.

"UK climatic extremes seem to break new records each year which puts yields at risk, and the intention to trade European agricultural produce on the global free market affects the final grain prices."

The scheme is similar to US-style agreements used by up to 80% of growers who insure $28bn-worth of crops.

Dalgety Protect is based on regional performance, not individual farms. If crop revenue within a particular MAFF region falls below a predetermined minimum, any farmer insured under the scheme will, regardless of individual performance, receive a pay-out.

This minimum is calculated using a yield 10% below the 10-year regional average and a price which is 95% of the March futures opening or closing price, whichever is the higher, says Mr Hutchings.

Different regions pay different premiums, according to risk. The average regional premium is 1.94% of expected return, equating to a premium of less than £10/ha, says Mr Hutchings. But this ranges from 1.36% in the East Midlands to 3.91% in Scotland.

For example, if an East Anglian farmer wishes to insure 120ha of wheat, he will have to pay a premium of £8.51/ha, a total of £1021. This is calculated by taking the 10-year average, or reference, yield of 7.6t/ha, and the Mar 2001 opening price, assumed here to be £80/t. The two figures are multiplied together, and the result multiplied by the regional premium rate, in this case 1.4%.

What does the farmer get for this? If the market falls £10/t and the regional yield falls to 6.5t/ha, without insurance the farmer in the example above will only receive £455/ha.

But the underwritten income amounts to almost £520/ha, £65/ha more. This is calculated by multiplying 95% of £80 (the higher of the two March values) by 90% of the reference yield.

Total pay-out across the 120ha therefore comes to almost £7800, or about £6750 net of premium, leaving the farmer over £56/ha better off, says Mr Hutchings.

But if the March closing price had stayed the same, even at 6.5t/ha the actual return would rise from £455 to £520/ha. This is slightly higher than the underwritten value, so the scheme would not pay out.

The scheme has been developed in partnership with Marsh Incorporated and is underwritten by the Wellington Syndicate, the largest Lloyds syndicate specialising in agricultural insurance.

Insurance will be available for harvest 2000, and prices will be based on the March 2001 LIFFE futures market. Farmers can insure from 50ha (123 acres) up to their IACS cereal area, says Mr Hutchings. &#42