When it comes to operating an agribusiness, here are the top risks owners and operators must keep an eye on.
But how often do we take the time to think about where our food comes from? What needs to happen to bring us together around the table each night to share our stories and connect with our loved ones?
Those in the agriculture sector know a thing or two about the process behind stocking the grocery store shelves. There’s sowing and weeding, watering, and raising livestock, for one thing.
And then there’s managing the risks.
“Those in the agribusiness space live every single day with immense amounts of risk that comes from all directions, whether that be domestic risk, international risk, political risk — risk comes from all areas,” said Chris Moore, president – farm ranch equine & livestock, EPIC Insurance Brokers.
“Essentially, if you own an agribusiness, you are a risk manager in and of itself.”
Here’s a look at some of the key critical risks facing the agriculture industry, from a hardening property insurance market down to a rise in severe weather and more.
1) Extreme Weather Impacting Crops
Every year, the continental United States faces hurricanes, wildfires, floods, drought, extreme heat, icy storms — the list goes on.
And every year, it seems like these weather events are happening with increased severity.
2020 clocked in as the seventh costliest hurricane season in recent history, bringing with it 30 named storms and almost $47 billion in damages.
California’s wildfire season continues to extend each year (an added 75 days in 2020, according to the California Department of Forestry and Fire Protection), wreaking havoc on homes, businesses and wildlife that can cost billions of dollars.
Outlier storms, such as the August 2020 derecho over the Midwest or winter storm Uri that devastated Texas earlier this year, are also on the rise, adding to the weather-related volatility agribusinesses must deal with.
One bad storm can destroy an entire crop or demolish livestock’s living quarters — not to mention devastate a farmer or agribusiness operator’s home and other physical assets like tractors and machinery.
“Drought is probably one of the most overwhelming concerns, whether it be an isolated or a regional drought or a widespread drought,” said Mark Mossman - SVP of Claims (Crop), NAU Country Insurance Company, a QBE insurance company.
He said this is because drought can lead to larger problems, including a more severe wildfire season or a poor crop yield for the year.
“When the wildfires hit last year [in California], it contributed to many crop production losses,” he said.
When it comes to the other big hitter — hurricanes — Mossman did note there is an upside for those in the agribusiness space: “We can see it’s coming, and we can prepare.”
2) A Hardening Property Market
Those in agribusiness know that pricing for commercial property insurance has been steadily climbing over the last two to three years.
According to Marsh’s Global Insurance Market Index — 2021 Q1, “Insurance pricing in the first quarter of 2021 in the U.S. increased 14%, year-over-year … Property insurance pricing increased by 15%, the fourteenth consecutive quarter of increase.”
The trend seems likely to continue, though “rates appeared to be at, if not above, technical pricing levels. Some insurers were more assertive, and writing new business.”
What makes this a critical risk for agriculture, however, comes down to one key point: geography.
“Geography can determine how hard it is to place property insurance [for the agriculture industry],” Moore said. This, he added, isn’t necessarily because of a farmer’s proximity to, say, a Nat CAT-prone area, but more so because of how many insurance players are in a particular space.
“How many insurance companies are licensed and are willing to play ball on some of these property risks? Often, the more insurance companies available and licensed, the better the results,” said Moore.
“But the fewer insurance companies willing to play ball means less insurance options available in those regions.”
Compounded to geography, insurance companies are also managing through reinsurance renewal seasons each year, where they re-evaluate and often look to limit their risk. This puts added financial stress on the agribusiness space as the products they buy face increased pricing.
“It does create a bit of a difficult risk placement matrix based on how many insurance carriers are available in an area, what is their appetite for risk, and how much is property in that given area,” said Moore.
3) Labor Safety Concerns
When it comes to labor in the agribusiness space, it takes a very particular set of people to work the long, grueling hours on the farm.
Whether daily tasks include working heavy machinery out in the fields, herding and feeding livestock or long shifts in all types of weather, the work environment for farmers, ranchers and other agricultural managers can be hazardous.
Tractors, tools, and farm machinery can cause serious injury, so workers must be alert on the job. Animals can be unpredictable and can lash out if stressed. Add these factors together, and employee safety is a must for the industry.
“There’s a certain skillset that is needed to fit these jobs,” said Moore. “Not everyone knows how to drive a semi-truck. Not everyone knows how to operate the required heavy machinery.”
And so, training is one way to start keeping ranch hands and other agriculture employees safe. The number one goal of many in the business is to return their employees home in as good condition as they showed up to work in.
Unfortunately, as many industries are seeing these days, there is a labor shortage to contend with.
“When there’s not enough skilled people to fit these jobs, agribusiness managers might find that they have an employee doing something outside their scale or comfort level. That can lead to workplace injuries,” Moore said.
Such incidents and accidents increase turnover rate as well as drive up workers’ compensation costs for the agriculture industry, further putting financial stress on the business while slowing down production.
4) Political Risk
FCIC was created by Congress in 1938 to provide insurance for farmers’ produce, essentially providing agribusiness owners with compensation for crops in the event they were unable to produce a full yield in a year. It was signed into law in 1980.
As of 2015, data shows the crop insurance program provided approximately $102.5 billion of insurance protection for over 100 crops on about 238 million acres, which equaled about 86% of eligible acres. It is clear that farmers are relying on this product to get them through tough times.
However, because such crop insurance is regulated by the federal government, agribusiness is at the mercy of changing political tides.
“The federal government writes the rules and sets the rates,” explained Mossman. “Every time there’s a farm bill being reviewed or proposed, the crop insurance program is at risk of cuts or even elimination. However, the program has very strong bipartisan support within both the House and the Senate as the primary safety net for U.S. production agriculture.”
Elimination, he stressed, is unlikely.
Still, the possibility exists, and that adds stress to a farmer’s already-full plate of risks to manage.
5) Global Concerns Abound
Agribusiness concerns reach beyond the U.S. borders, adding yet another element to the risks the agriculture sector faces.
“Trade is a huge deal,” said Mossman. “Agriculture has become an international marketplace, and what’s going on internationally affects us.”
Increased soybean and corn production from South America, where farmers have planted more of these crops in place of waning rainforests, have posed competition for and lowered prices of American crops in recent years. Though, this last year has shown that the tides are turning — Brazil and Argentina faced a devastating drought season that impacted overall yield.
Still, U.S. crops competing in the space must keep a pulse on how competitors are fairing.
Trade wars with China and supply chain disruption due to COVID-19 have also diminished farmers’ ability to ship products overseas.
6) Commodity Pricing and Production
Agriculture industry managers and operators saw commodity prices depressing in recent years.
Much of the reasoning behind this is related to the global risks farmers face: first, the increased pressure placed on American farmers from foreign production of corn, soybeans and wheat; and second, trade wars and tariffs with China contributing to a lag in the purchasing of U.S. product, including top commodities like corn and soybeans.Such pressures, compounded with volatile weather disrupting the growing season and hurting production, make every end-of-season yield feel that much more vital for farmers.
The partially good news: Coming out of 2020, reports are showing an uptick on commodity pricing.
As Ben Nuelle explained in an AgriPulse post, “Around May 28 a year ago , nearby corn futures were around $3.18 per bushel, soybeans were at $8.35, and wheat was at $5.16, according to Brock Associates, an Indiana-based commodity futures consulting firm. This year, prices were at $6.59, $15.26, and $6.74, respectively, on May 28 .”
However, Nuelle still cautioned, economists and land investors alike shared that these highs might be short-lived and those in the agribusiness space should still proceed with caution.
7) Expanding Operations
To keep on top of changing times, many farmers and others in the agriculture space are looking for ways to broaden their reach and expand their business.
From the business-side of things, this creates new avenues for revenue, as well as year-long operations that extend beyond the grow season.
But this can also open the business to new risks.
“Let’s say there’s a farm that owns and operates a semi-truck to haul crops at the end of the growing season,” Moore posited. Typically, the semi wouldn’t be in use year-round, just during harvest season. “In their auto policy for the semi, the agribusiness would likely be given what we call seasonal layup credit.”
Essentially, the semi would only require coverage for those few weeks/months it’s in use.
“Today, there might be a need to have that semi always moving. Farms might branch out and start a trucking business or start hauling for hire. And so their semi would need year-round coverage different from what it was used for originally.”
Because agribusiness owners are looking for new streams of revenue, their risk landscape often becomes more than agriculture-based.
What Agribusiness Owners Can Do to Bolster Risk Management Efforts
With risk coming from all angles, agribusinesses must prepare now in order to remain above water when the storm rolls in or their crop insurance is slated for discussion on the Senate floor.
“Talk to your insurance team and your insurance broker. The agribusiness space is constantly evolving, and unfortunately, sometimes, the insurance products themselves don’t evolve at the same speed,” Moore advised. “If you have an insurance partner and an insurance broker who know you and know your business, they can guide you and get you the tools you need.”
“Make sure the agent you’re working with and buying from is well-informed, has answers to your questions and can tell you what you’re getting” added Mossman.
Mossman also said now is the time to invest in the technologies available to help mitigate risk.
“We’re really focused on apps,” he said. These apps may aid in the claims process, in weather forecasting, in monitoring crops and more.
“Partner with a team that’s really pushing the boundaries on how technology can help the American farmer today,” said Mossman.
Source: Previously published on June 21, 2021 | Risk & Insurance - https://riskandinsurance.com/7-critical-risks-facing-the-agriculture-industry