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May 1, 2015

The Drought, Weather and Crop Insurance

As California stretches through its fourth year of a shortage of significant rainfall, farms are struggling to find solutions for their water needs.

Although deep wells may provide temporary supplies of water to many agricultural entities for the coming year, as more water is pulled out of groundwater supplies, those resources will become strained and may not be able to provide sufficient water for farming operations.  We are already hearing of many wells running dry that have produced abundant water supplies for many years.  Farming operations that once found water at levels of only a couple of hundred feet are now drilling several hundred or even thousands of feet in order to find reliable ground water supplies.

In many cases, farms have spent thousands of dollars to prepare the land, plant it, fertilize it and tend it only to have it seriously threatened by the potential of a shortage of water.  How can farms protect themselves from the possibility of losing their water supply?  Is there insurance for this type of situation?  There actually may be a couple of solutions for this problem.

Last year Western Growers started working with a company, eWeather, that allows business operations to buy insurance that hedges against the occurrence of specific weather events.  The buyer identifies an event he is concerned about, such as the lack of water, a period of high heat, or freezing weather.  If the event occurs, the buyer gets paid a set amount for the event.

For example, if the grower is concerned about several days of freezing weather, he can purchase a dollar limit of coverage for that event.  If he buys $100,000 of coverage and the feared event occurs, he will get paid a portion or all of the $100,000.  If the event does not occur, there is no payment.  There is no claims adjustor involved; the question simply involves whether the event happened.  If it happened, you get paid; if it did not occur, there is no payment.  The coverage is not inexpensive, nor is it always available.

At the current time, it may be difficult to secure coverage for lack of rain in some areas in California.  However, entities that might be interested in buying the coverage can apply for it and possibly receive a quote which they can then decide whether it is worth the cost.  Faced with the potential loss of thousands of dollars in their crops and related expenses, this coverage may be a viable alternative to losing the entire value of the crop.

Another possible option is to buy coverage for increased temperatures in the growing season.  Some weather experts indicate that the drought not only represents a lack of rainfall, but they also expect summer temperatures to be above normal.  We’ve already seen warmer-than-normal temperatures for the spring, so this option may be of interest to some growers as well.  eWeather may provide a solution for some growers to deal with the possible loss of some or all of their crops due to the warm and dry weather we have experienced this year.

Another option for some growers may be to purchase crop insurance.  Crop insurance is not available for all crops, but it can be purchased for a number of crops that require significant amounts of water such as strawberries and nut crops.  Crop insurance in some cases can provide protection for lack of water if the water source for your crop is unable to provide your needed water.

For example, reduced water district allocations, water license temporary curtailments, or dry agriculture irrigation wells (with restrictions) may provide coverage for a crop loss under a crop insurance policy.  This coverage may be available as long as the buyer is not aware of any current problems with their water source.  Crop insurance coverage is not a sure thing, but it may provide another option for growers who might be concerned about their water needs.

Western Growers Insurance Services is a full-service brokerage and can provide members with ideas and solutions for their business operations including weather and crop insurance.  If you want more information, contact Greg Nelson at WGIS.