climate change and commodity price trends, new cover

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


New Cover Concepts in agricultural insurance

Crop insurance

Price protection in crop insurance

Forestry storm covers

Aquaculture

Parametric covers

CO2 trading


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


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


Rise of global average temperature

Source: Summary for policymakers IPCC 2007 report of working group


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


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


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


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


Biodiesel production in the EU

Source: UFOP (2007)


“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)


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


Indirect Subsidies

Total US$ 250 billion, of which US$ 175 billion was for allocating water to agriculture at below market price


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


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


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


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


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


Positive outlook for aquaculture


New species for farming – Atlantic cod


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


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


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


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


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


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)


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)


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

climate change and commodity price trends, new cover

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