Innovative economic levers: a system for underwriting risk of practice change in cane-farming
Led by: Dr Peter Thorburn, CSIRO
This project will enable reduced DIN exports from cane lands by developing and promoting a tested framework for commercial insurance businesses to underwrite risk of nitrogen practice change in sugarcane farming. We will work with insurance, other relevant businesses and, potentially, government to determine the methods and precision for assessing risk. We will then develop, in collaboration with insurance businesses, the sugarcane industry and government stakeholders, a technically sound and robust system where the negative impact of practice change on cane yield is distinguished from the year-to-year yield variability. We will pilot (and improve) this system with collaborating farmers, mills insurance businesses and, potentially, government in the wet tropics so that the framework can be operationalised by insurance businesses.
Discharge of DIN from sugarcane farms is a major threat to the GBR (Waterhouse et al., 2012; Kroon et al., 2016). The export of DIN from sugarcane farms is related to the application of N fertiliser in excess of the amount taken up by crops (i.e. the N surplus; Thorburn and Wilkinson, 2013). Thus there have been concerted efforts to change sugarcane farmers’ management of N fertiliser. To date these efforts have centred on the provision of incentives (e.g. Reef Rescue grants), the effectiveness of which has been arguably small and cost of which (relative to the abatement of DIN discharged achieved) has been demonstrably high (Rofle and Windle, 2016). New approaches to changing farmers’ management are required.
The application of N fertiliser in excess of crop needs is common in high value crops, including sugarcane. It is a rational response by farmers to (1) the uncertainty in crop growth and hence crop N requirements, and (2) the low cost of N fertiliser relative to income from crop yield. Sugarcane yields in GBR catchments are highly uncertain, i.e. yields can vary by +/-10% to 25% from year-toyear. The range arises because of the high climatic variability between years and the variable crop age (e.g. ∼8 to 18 months) and hence size at harvest (Thorburn et al., 2013). Thus, given the relatively low cost of N fertiliser, it makes sense for farmers to apply N at rates appropriate for a ‘big crop in a good year’: applying less N is seen by them as risking yield loss. Yield loss not only affects farmers, it is major concern to sugar milling businesses. However, there is considerable evidence that N applications to sugarcane cane be reduced with no discernible impact on yields (Schroeder et al., 2014). These results suggest that the risk of yield loss is being over-estimated by the sugarcane industry. Thus the question is how can the risk (real or perceived) of changing sugarcane management be overcome?
How Research Addresses Problem
Underwriting risk is a way to overcome the barriers to changing sugarcane management. The only approach to changing sugarcane management currently in use involving amelioration of financial risk are Reef Trust Tenders, a reverse auction program where the Reef Trust ‘buys’ reduced N inputs to, and hence reduced DIN exports from, sugarcane farmers. Under this program farmers are paid an agreed price (the tendered price) regardless of the impact on production. In comparison, with an underwriting approach to risk management farmers are assured of compensation should their production fall after lowering fertiliser rates, but they are only compensated if that negative outcome occurs. This is thus a much more cost-effective means of achieving reduced N fertiliser application rates and DIN exports. In addition, underwriting risk does not develop a farmer dependency upon payment for adoption of beneficial practice changes (i.e. reduced N input costs and similar productivity) which occurs in processes where farmers get paid regardless of the outcome.
The concept of farmers insuring crops against an adverse outcome has recently started to expand in other farming systems in Australia. Insurance companies are now targeting grains farmers for multi-peril crop insurance (MPCI), with products that can cover a range of climate-related risks, such as hail, frost, drought and heat. There are complexities with developing MPCI policies. One of these is having robust benchmarks against which to assess the extent to which an outcome is adverse and not part of normal year-to-year variability. Another is ‘moral hazard’, where there could be circumstances in which the insurance encourages a farmer to withhold inputs to the crop once a trigger in a policy is reached. [A common example of this hazard is when the MPCI is linked to district average yield (which is common in overseas farming systems) and a farmer might stop controlling weeds and pests if the crop looks likely to be below the district average]. Thus the creation of an MPCI product for managing N fertiliser in sugarcane requires careful design with a range of stakeholders. These complexities are not unique to MPCI; the Reef Trust Tenders design had to have a robust biophysical underpinning and be cognisant of issues such as moral hazard.
Alignment with NESP Research Priorities
1d) Innovative approaches for using economic levers for achieving nutrient/sediment loss reductions and/or to encourage land use or practice change.
Farm insurance; Underwriting risk; Nitrogen; Reverse tender; Sugarcane.
This project is jointly funded through CSIRO, CQU, JCU and the Australian Government’s National Environmental Science Programme.
Markers are not an exact position of where the research is taking place, they are only to be used as a guide to the general area in which it is being carried out.