Platform offers farmers chance to insure against price drops

A platform that offers farmers the opportunity to insure against a fall in the price of major commodities or against a rise in the cost of fertiliser and diesel has gone live.

The platform, called Stable, describes itself as a simple, low-risk and affordable solution to the problem of volatility.

The business offers index insurance policies to UK farmers covering milk, oilseed rape, milling wheat, feed wheat, feed barley, beef, lamb, pork and diesel and AN fertiliser.

See also: How can options reduce grain price risk? 

The minimum size of policy is 10t of crops, 1,000kg of livestock or 10,000 litres of milk.

The ability to insure against rises in pig, poultry and dairy feed costs is expected to be available within weeks and the goal is that as the platform develops producers will also be able to insure at a gross margin level.

The platform uses independent index prices from AHDB and Defra to allow farmers to protect themselves against a fall in the price of a commodity, but still take advantage of any price rises.

Farmers choose which commodity they would like to protect, the volume of the commodity needing protection and for how long the protection is needed.

For example, a farmer may see that the current index price of feed wheat is £100/t and decide that they want to protect themselves from the price falling below £90/t.

Assuming that at the end of the insurance period the average index price has fallen to £70/t, then the farmer would receive a payment of £20t (£90 minus £70) on the insured tonnage.

‘Brilliantly boring’

Founder and chief executive Richard Counsell said it had taken two and half years of research and development and the input of around 300 farmer shareholders to get to the point of launch.

The fact that the product was based around insurance, rather than more complicated risk-management tools, made it accessible to everyone, he said.

“Insurance is brilliantly boring – we are so familiar with it I hope that will make a big difference.

“If you say to a dairy farmer ‘do you want to buy a put option on your milk?’ they look at you strangely.

“If you say ‘the biggest risk to your business is if the milk price drops, do you want to insure that risk?’ the difference is night and day.”

Mr Counsell said 12 policies were taken out on the first day of trading – a mixture of dairy, feed wheat and pork.

Stable has partnered with Arla, with the co-op’s members being offered discounted premiums if they choose to insure their milk price.

The business is a Lloyds of London coverholder, which means the policies are underwritten by members of a Lloyd’s syndicate.

How does it work?

The business was unable to trade until its official launch because of regulatory restrictions, so real-life examples are not available.

However, Stable has produced some hypothetical case studies to to show the costs and potential benefits of taking out a policy.

One of these is for an arable farm that in September 2017 looked at the option of locking into a futures price for winter wheat of £146.90/t for September 2018 collection.

However, rather than doing this, the farm insured the grain for a single month (September 2018) with Stable, setting a floor price of £146.90t in the policy.

This meant at harvest 2018 the farmer was able to take advantage of an improved wheat price, selling 250t of wheat for £181.70/t.

The insurance cost £9.76/t but gave the farmer flexibility to take advantage of a £35/t uplift in the grain price without the risk of losing out if forced to sell at less than £146.90/t.