Going up in smoke

On January 18, as fires raged into the south, west and north-western flanks of Canberra, ACT Forests lost or had severely damaged about 11,000 hectares of its 16,000 hectares of publicly-owned pine plantations in less than 12 hours.

In the case of ACT Forests, which was fully insured, much of the losses, estimated at about $30 million, will be recouped. Insurers estimate that the average value per hectare of a 10-year Canberra plantation is about $2,500.

But should this disaster serve as a warning to individual investors in agricultural schemes?

The answer is both yes and no.

Extreme bush fires, such as those in the ACT last month, occur only about every 20 years, says John Kelly, underwriting agent with IUS Holdings.

“In Australia, bushfire risk is obviously the biggest risk. But you don’t get really huge fires that often,” Kelly says.

Bushfire is more relevant to timber plantations than to other agricultural investments, because the trees themselves provide fuel.

And although bushfire remains the predominant risk, it’s not the only one. Kelly says there has been a marked increase in the incidence of (not just the damage from) windstorms over the last few years. Then again, some growing areas of Australia are relatively trouble-free, in which case the investor could justify self-insuring.

Most financial planners who recommend agricultural schemes are well aware of the obligation to also recommend insurance. And many will find themselves swamped with client queries about the status of their investments’ insurance, as this year’s bushfires ram home the vulnerability of agriculture to natural disaster.

There are three main underwriting agents of agricultural insurance in Australia. They are Agricola Crop Insurance, John Kelly at IUS in Sydney, and Murray Turner at Jardine Lloyd Thompson in Melbourne. QBE and CGU are the main underwriters of broad acre insurance, while both Kelly and Turner specialise in timber and act for Lloyd’s of London.

Most managers arrange a group policy with one of the providers, and then leave the decision on whether to buy insurance to the individual investor (usually called ‘grower’), unless the investor has borrowed money from the manager. In that case, insurance is compulsory.

Harry Sookias, who is a director of agricultural research at van Eyk Capital, says it is important to look at how the insurance policies are structured when considering an investment.

While some investments bundle insurance up with other payments for at least five years, most nowadays provide optional insurance after the first year or two.

Sookias says he prefers the optional approach, which allows him to insure only in times of high risk, such as during a drought.

Ian Blanden, manager of Gunns Plantations Ltd (hardwood only), says most investors in Gunns don’t insure.

“GPL provides a guarantee for the first two years, which covers 90 per cent of the seedlings. After that we provide access to insurance, which is optional at the discretion of the growers. It’s insurance against fire only, which we think is the main insurable risk, and it’s renewable each year.

“Also, it’s a pooled investment. You have an identifiable wood lot but the overall risk to a single investor is small, because if a lot does burn, you get a share in a diminished pool. Of course, by insuring your wood lot, you would get a full payout if your lot burned,” Blanden says.

Sol Rabinowicz, executive director of Timbercorp (hardwood), says the company provided access to fire, hail and windstorm insurance.

However, the uninsured faced a higher risk than those uninsured in Gunns, because of Timbercorp’s policy regarding returns.

“If they’re not insured and a fire wipes out their wood lot, they don’t get anything. One investment equals three wood lots. We try to distribute across Western Australia, South Australia and Victoria.

“In the first year, you insure in order to replant. But from the second year onwards, you get back every dollar. Then, from about year nine, you get a higher amount. We pay an excess but we don’t break it out. It’s a dollar figure, not a percentage of the return.”

Timbercorp also has olive and almond groves. For these horticultural products it provides only insurance against loss of trees, which is just for the replacement value.

“The investors own the olive and almond crops, so it’s up to them to take out crop insurance. We don’t recommend it, as it’s expensive. But the grower does bear the risk of losing income. However, we are looking at some kind of loss of income insurance.”

Willmott Forests is one of the few managed investments that has softwood as well as hardwood plantations. Willmott Forests bundles insurance for five years, after which it is optional for the investor.

Although operators like Timbercorp and Gunns insist that hardwood is a lower risk than pine plantations, the disparity in the yearly premiums amounts to only a few dollars. Depending on the excess, premiums amount to around $34 a hectare for a 10-year crop of blue gums, and $37 for softwood.

Graham McKenzie-Smith, a Perth-based forest consultant with Grimwade Forestry, says the only thing that matters in a bushfire is fuel loading. Softwood and hardwood have different risks, but neither has an overall greater risk than the other.

There is, however, a significant difference between timber and horticultural investments. With a pine wood plantation, 60 to 70 per cent of the value is in the final harvest.

Horticultural losses tend to be less devastating. Graeme Shaw, managing director of Shaw Vineyards, says the majority of his investors do take up the option of crop insurance. The premium amounts to three to five per cent of the crop value. It takes at least three years for grape vines to yield a usable crop, but the biggest risk for Shaw Vineyards is frost wiping out a percentage of one year’s crop.

But no matter how much insurance you’re willing to take out, remember there’s one thing you can’t insure against in Australia — loss of rainfall.