climate change and commodity price trends, new cover
TRANSCRIPT
November 12, 2008
Climate change and commodity price trends, new cover concepts in agricultural insurance Specialty Line Agriculture – Daniel Hammer, Senior Underwriter
November 12, 2008 2Climate change and commodity price trends
Content
Situation according to IPCC report
Effects of climate change on agricultural production
Renewable commodities as energy sources
Impact of biofuels on commodity price and food affordability
State support for the agricultural sector
Agricultural insurance: status quo in 2007
November 12, 2008 3Climate change and commodity price trends
New Cover Concepts in agricultural insurance
Crop insurance
Price protection in crop insurance
Forestry storm covers
Aquaculture
Parametric covers
CO2 trading
November 12, 2008 4Climate change and commodity price trends
Status quo
According to the Intergovernmental Panel on Climate Change IPCC Report 2007 - 4th assessment report on climate change- both the causes and the effects of climate change are now alarming
The report‘s key findings can be summarized as follows� Climate change in now unequivocal� The global anthropogenic greenhouse gas emissions
increased by 70 % between 1970 to 2004, the CO2-emissions even by 80%. Annual rates of increase accelerated further over the last decade
� The long-term downward trend in the CO2-emission intensity in the global energy supply has reversed since 2000
November 12, 2008 5Climate change and commodity price trends
Status quo
� Global GHG concentrations have increased markedly since 1750 and now far exceed pre-industrial values
� The global average net effect of human activities has been one of warming. Most of the observed increase in global average temperature since the mid 20th century can be linked to the observed increase in anthropogenic GHG concentrations
� The consequences of climate change can now be proven and are far reaching. In many cases they can be linked to human
November 12, 2008 6Climate change and commodity price trends
Rise of global average temperature
Source: Summary for policymakers IPCC 2007 report of working group
November 12, 2008 7Climate change and commodity price trends
Positive Effects
Thermophilic plants may push into more northerly producing regions
Higher temperatures will allow farmers to grow crop varieties with a longer vegetation phase leading to higher yields
A longer pasture growth phase extends the grazing period
Higher atmospheric CO2 concentrations favor photosynthesis
Global warming will lead to increased precipitation, enhancing yields
November 12, 2008 8Climate change and commodity price trends
Negative effects
� Temperatures exceeding 35°C for extended periods in the subtropics will expose grain to heat stress during flowering; grain yields in these areas could fall by up to 70%
� Higher temperatures in northerly latitudes will increase evapotranspiration, significantly disrupting the water balance in the soil and plants.
� Higher evaporation rates in the tropics and subtropics will dry out the soil causing salinization and a reduction in the amount of arable land
� Higher temperatures speed up the flowering process of fruit trees, putting the blossom at greater risk of damage from late spring frosts
� Infestation patterns change and may increase in terms of organism density and geographical range. For example, in recent years, mild winters have caused the mountain pine beetle population in British Columbia to explode. The infestation has now devastated around 13 million hectares of pine forest. Temperatures of -35oC are the only thing that will bring the population back down to manageable levels
November 12, 2008 9Climate change and commodity price trends
Precipitation
� In many grain-producing regions, melting snow supplies a large proportion of the soil moisture urgently needed by crops in the spring. Warmer temperatures increase the amount of precipitation that falls as rain rather than snow. Rain drains faster, meaning that moisture in the upper soil layers is exhausted more quickly
� Water stress during spring flowering impairs pollination and can cause complete crop failure
� Even if it were possible to predict shifts in precipitation distribution, this would not help farmers, as sowing cannot be delayed or brought forward at will. Their window of opportunity for sowing is restricted by other key factors, such as optimum temperatures and daylight hours
November 12, 2008 10Climate change and commodity price trends
Ethanol Production in Brazil and the USA
Source: Observed growth in the amount of grain allocated to ethanol production between 1975 and 2007. Brazil and the U.S. now account for approximately 90% of this market. Source: F.O. Licht Commodity Analysis, Impact of Biofuels on Commodity Markets, 2007
November 12, 2008 11Climate change and commodity price trends
Biodiesel production in the EU
Source: UFOP (2007)
November 12, 2008 12Climate change and commodity price trends
“Climate yield” comparison per hectare (Net CO2aq-avoided)
Source: VTI Institut für Betriebswirtschaft Braunschweig
Legend:
Wood-chip heating, Cereal grain heating, Biogas (electricity), Biogas (electricity & heat), Biogas (network supply), Wood-chip CHP, Straw co-combustion,
Wood-chip co-combustion, Biodiesel, Ethanol (grain), Biogas (fuel)
November 12, 2008 13Climate change and commodity price trends
Direct Subsidies
Total US$ 350 billion
OECD countries US$ 310 billion, rest US$ 40 billion
US$ 60 billion for tax breaks
US$ 25 billion for direct transfer payments linked to surface area, plant product or livestock numbers
US$ 145 billion price protection i.e. difference between domestic and global market, export subsidy
US$ 80 billion. Subsidized production cost, reduced (subsidized) cost of borrowing, state research and development, subsidized insurance premium
November 12, 2008 14Climate change and commodity price trends
Indirect Subsidies
Total US$ 250 billion, of which US$ 175 billion was for allocating water to agriculture at below market price
November 12, 2008 15Climate change and commodity price trends
Direct subsidies in 2005 in US$ billion
11,44337388126Subsidy/ha
139,2007,50012422,500Subsidy/Farm
49 billion55 billion13.7 billion47 billionSubsidy US$
JapanEuropeIndiaUSACountry
Source: Direct subsidies in the U.S., India, Europe and Japan (in US$), showing widely contrasting subsidization by region. Source: http://farmsubsidy.org/ and internal PartnerRe estimates
November 12, 2008 16Climate change and commodity price trends
Global cultivatable land per capita in ha
1960197019801990200020102020
0.45
0.38
0.32
0.250.23
0.20
0.28
3 Billion
8 Billion
Source: Graph showing the reduction in total cultivatable land per capita of world population from 1960 to 2007, and the estimated trend to 2020. Source: Yara International, 2007
November 12, 2008 17Climate change and commodity price trends
Crop production and usage in billion metric tons
Source: US Ministry of Agriculture, Goldman Sachs
00.20.40.60.8
11.21.41.61.8
22.22.42.6
1960
1965
1970
1975
1980
1985
1990
1995
2000
2005
2010
2015
1.8
BiotreibstoffeFuttermittelNahrungsmittel
BiofuelsAnimal feedFoodstuffs
November 12, 2008 18Climate change and commodity price trends
Per capita consumption of meat/year in China
Annual average per capita meat consumption in China rose from 4.5 kg in 1965 to 50 kg in 2005. Given a feed conversion rate of around 2.5 -3.0, this increased meat consumption means that Chinese farmers now have to produce 120 million instead of 10 million tons per year of grain for livestock rearing
Australia exports in normal years approx. 12 -15 million tons
November 12, 2008 19Climate change and commodity price trends
Global commodity prices in 2007 in USD per ton
92%48%91%123%Growth in %
3685214294282007
1923522241922006RyeRapeseed
Malting barley
Bread wheat
Source: Crop commodity prices (in US$ per ton) rose sharply from 2006 to 2007. Source: FAO Food Price Index
November 12, 2008 20Climate change and commodity price trends
Positive outlook for aquaculture
November 12, 2008 21Climate change and commodity price trends
New species for farming – Atlantic cod
November 12, 2008 22Climate change and commodity price trends
Successes in lobbying for aquaculture
The inclusion of fish diseases in epidemic control regulations
Payments from agricultural catastrophe funds for damage sustained in aquaculture
The dismantling of protective duties
The subsidization of insurance premiums
November 12, 2008 23Climate change and commodity price trends
Aquaculture producers
Source: Global “capture” and “aquaculture” fish production (in millions of tons) showing aquaculture as one of the fastest growing food production sectors. Source: FAO aquaculture statistics, 2006
November 12, 2008 24Climate change and commodity price trends
PML estimate e.g. algae bloom in British Columbia in 2006
Source: Algal bloom in British Columbia (2006). Such events cause high mortality rates amongst farmed fish because of their inability to escape suffocation/intoxication by swimming to lower depths or unaffected water
November 12, 2008 25Climate change and commodity price trends
Insurance premium spent in US$ million 2007
6883‘823748Subsidy US$ millions
32%58%65%% Subsidy
2,1506,5621,150Premium US$ millions
EuropeUSACanadaRegion
Source: Approximate agricultural insurance premium expenditure (in US$ millions) by region, showing widely differing subsidized premium percentages. Source: PartnerRe
November 12, 2008 26Climate change and commodity price trends
Insurance premium subsidies in Italy
Multi-peril3.8668326.21902007
Multi-peril3.5266.533.56.61602006
Hail/frost/wind3.6465356.971502005
Hail/frost3.5857.542.57.251002004
Hail3.3343578.141002003
Hail3.244568.381032002
Hail3.0341597.571002001
Insured perilsSum insured
(euro billions)
Subsidized premium
(%)
Premiumpaid by farmer (%)
Average premium rate (%)
Total subsidy(euro millions)Year
Source: Premium subsidy trends in Italy following a national project to introduce subsidized multi-peril covers. Source: PartnerRe
November 12, 2008 27Climate change and commodity price trends
Insured interest in forestry include
Market value of destroyed timber
Replanting costs
Clean-up costs and the cost of building harvest access roads
Storage costs (often for multiple years due to collapse in timber prices)
November 12, 2008 28Climate change and commodity price trends
Key information needed for re/insurance
Geographical distribution/tree variety/age class
Tree variety (coniferous or deciduous)
Value per tree variety and age class
Topography
Tree height
Husbandry (e.g. thinning)
November 12, 2008 29Climate change and commodity price trends
Parametric Covers
Basis risk
Traditional structures are very personnel-intensive, especially in loss assessment
Conventional distribution channels are often unsuitable for rural settings
Smallholdings farmed in open-field strips already bear high administration costs
Trading in CO2 Certificates
Increase of the sum insured for standard covers
CO2 Accounting standards / trading risks
November 12, 2008 30Climate change and commodity price trends