Strategic use of index-based frost insurance to reduce financial risk and improve income stability for wheat producers in Australia

Context

Losses due to frost undermine the financial sustainability of growing spring wheat, which is often managed by the late sowing of crops. While late sowing may reduce frost risk, it can compromise yields due to increasing risks of heat and drought stress later in crop development.

Objective

To develop and test a novel targeted frost index insurance cover called the heating degree day temperature minimum call option, which allows farmers to plant earlier and increases their chances of attaining higher yields while also financially protecting them in case of a frost event.

Methods

The potential value of the insurance was investigated using crop simulation modelling. Based on the integration of the Agricultural Production Systems sIMulator (APSIM) modelling framework and index insurance structures for 22 frost-affected farms over 40 years in Australia's wheat growing regions, we (i) determined the optimal sowing date and potential yield benefits, (ii) estimated the yield impact of frost for crops sown on that date, and (iii) examined the utility of index-based frost insurance options that may financially protect farmers from frost risk if they sow on the optimal date, assuming they sow and insure their crops every year.

Results and conclusions

On all farms modelled, gains were made on those sowed on the optimal date. Where frost occurred regularly, the use of the targeted frost index helped secure increased returns and, therefore, benefits. The targeted integration of the frost index insurance with optimal sowing dates, especially for frost-prone regions, may be an important strategy for reducing financial impacts and enhancing income stability.

Significance

The use of the targeted frost index where frost occurred regularly could help secure increased returns and, therefore, benefits to farmers and the wider community. The targeted integration of the frost index insurance with optimal sowing dates, especially for frost-prone regions, may be an important strategy for reducing financial impacts and enhancing income stability in frost-affected food bowls globally. We are not aware of any similar study that has been conducted.