How insurance gap coverage could transform agribusiness lending [Podcast]

Steven Kilger - 00:00

Hello! My name Steven Kilger, I’m the managing Editor for Feed & Grain Magazine and the host of the Feed Grain Podcast. Thank you so much for joining me today as we dive deep into the issues affecting the Feed Manufacturing, Grain Handling and allied industries.

Today’s episode is brought to you by The BinWhip from Pneumat Systems. The powerful Dual Impact BinWhip removes the toughest buildup and blockages in industrial storage silos – without hazardous silo entry. Learn more today at binwhip.com.

Today's podcast guest is Don Preusser, Founder and President of VANE, a provider of specialty agricultural insurance. Don is here to talk about the agribusiness lending market, revenue insurance protection for agribusinesses and lenders, how agribusinesses need a better system to deal with disruptive markets and weather events to stay viable in today’s environment.

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Now onto the show!

Hi Don, thanks so much for joining me today. I really appreciate it.

Don Preusser - 01:08

Good morning and thank you for having me join.

Kilger - 01:10

Oh, happy to. As we talked a little bit, insurance is confusing to me, and I need an expert to explain it. And I think I'm not alone in that boat. So can you tell us a little bit more about your company, Bain, and its mission in the agriculture insurance space?

Preusser - 01:26

Sure, VANE was created out of what I believe was a necessity to fill a major gap in the insurance area of agriculture. So everyone is familiar with federal crop insurance and the good job that it does in protecting farmers for any loss of revenue they have due to weather events, but we often forget that there's an even larger Agribusiness market that provides products and services to farmers and those agribusinesses are at the same risk of losing their revenue if their farmer customers either don't plant a crop or they lose the crop somewhere during the production cycle. So what we've created is a set of revenue insurance solutions tailored to various types of agribusinesses to protect their revenue In the same way that crop insurance protects a farmer or rancher.

Kilger - 02:26

Yeah, which is really prevalent in the industry we cover, which is, you know, grain handling, grain elevators, feed manufacturing, grain processing, that sort of thing. And because you do, you hear a lot when bad weather event happens, when there's a drought, when there's not a big crop about the farmers and what they're going through. And, you know, that's important. They're the base of this whole operation, but it does affect everyone down the line. So, you're on today to talk about how you're expanding your portfolio to include insurance coverage for Agriculture financing institutions. What prompted this expansion? How does fit your broader mission?

Preusser - 03:04

Yeah, as we started talking with more and more agribusinesses about their exposure and starting to write policies to protect them. We stumbled into what I thought was really an amazing gap that kind of exists and that is there's a lot of agribusinesses in the marketplace today that would love to grow their business more but they're challenged to get the types of operating loans or additional financing if they're unable to demonstrate how their revenue Is protected in the event that weather causes loss to their business.

So, we started to reach out to lenders and I'm today at the Rural Bankers Association meeting and we're talking to lenders about how the Vein Solution can work for both the lender as well as the agribusiness. So, from a lender's perspective if we can provide a solution that protects the bank's portfolio of agribusiness revenue exposure, then that can work directly for them. On the other hand, they might very well be a facilitator back to the agribusiness so that we can work with the agribusiness to write the solution specifically on their business and then the lender becomes a loss payee or is otherwise covered under the protection of the policy that we have written with the agribusiness.

Kilger - 04:39

Especially important because weather events seem to be happening more and more. I mean look at this year we had two hurricanes, three hurricanes that decimated large parts of the southeast. We've had drought throughout the entire summer. It's been a rough couple year when it comes to weather and how it affects agriculture overall. Could you explain how does a weather event disrupt the operations of an agribusiness? How have they historically affected how agriculture lenders give money to their clients?

Preusser - 05:10

Yeah, it's a great question and of course there's varying opinions as to are we in unique weather patterns today any different than what we may have seen in the past. But whatever your view is about current weather, I think it's fair to say that the frequency and severity of events are definitely increasing.

Now again, maybe that's just over a period, we don't know that. But the frequency and severity of events are occurring, and they have significant impact on the agribusiness community as well as the lending institutions. And so, one of the things that I think can help people understand not only the frequency of these events but what is the actual impact. So, one of the things we do for agribusiness is provide a Free, no obligation assessment of their risk exposure. And this is really kind of the foundational piece for every agribusiness. And what we do is we look back over 20 years at the footprint of the agribusiness. In other words, their sales territory, where is their product or service sold down to the county level. And we look at every federal crop insurance claim and a variety of other data. To understand what the exposure is A territory that they're in today is much larger than what it was say five years ago and as a result they may not realize that events that happened five years ago in their territory would have a much greater impact to them today We help them to understand what that exposure looks like and that's where our insurance policy can come in to protect the interests of both of them.

Kilger - 07:27

Yeah that's a good point especially because I mean for a lot of these companies their territories have either usually expanded over the last year there's been a big surge in consolidation to the point where a lot of companies may own assets in areas that they haven't before even you might not have owned that grain elevator in a flood zone.

It would be hard to keep up with and a service like yours seems valuable. Especially, I mean, when we have agribusinesses at all levels, right? Some are really big and they can do this kind of work themselves and then some are relatively small with an eight person staff and they really can't be expected to do this kind of work.

Preusser - 08:05

And that's why providing the tools necessary for large or small agribusinesses becomes a really value add to them so that they can make a clear and more logical decision about what is that exposure and how significant is it and how can we best reduce that risk impacting not just their revenue but their balance sheet on a year-over-year basis.

Kilger - 08:32

Yeah. Can you go a little more in depth into what revenue insurance protection is for agribusiness and lenders? Like what does it entail and how does it work in practice?

Preusser - 08:44

Sure, and it's important to understand there's a difference between a basis risk type of insurance policy versus a parametric. So in the marketplace today, you'll often see parametric insurance solutions being used as a way to cover the exposure to weather risk that various kinds of agribusinesses have. Now a parametric is generally based upon an index.

So, an example might be that the measurement is rainfall and parametric works in a way that if the amount of precipitation in a particular county is less than what the index indicates then it will either trigger a payment or not and it pays the same to everyone. Now the problem with that type of coverage is that you can have winners and losers so for example if the index was There must be at least 2 inches of rain in this county and if there isn't then we assume that there is some type of drought damage. If there is less than two inches, it may not affect everyone the same, right? So that's where we say you can have winners and losers under a type of index or parametric program. They serve a purpose for certain kinds of businesses, but it doesn't align very well if you're really concerned about how it affects exactly my footprint as compared to a broader area. Now, our policy is much similar to a federal crop insurance policy in the sense that we ensure the risk down to the farm level of that agribusiness' customer. For example, if it's a custom harvesting business that has farmers located throughout the county, when it comes to evaluating a loss, we're going to look at the Specific locations of where those farmers are located in applying the loss evaluation.

So if it's a drought or it's excessive moisture, hail storm, wind storm, whatever type of weather event it might be, we're going to match it down to where their customers are located. Because agribusinesses want to know that when they suffer a loss from the loss of their customers' revenue, that's when they want to be paid, not whether a certain general area may have had sufficient rainfall or insufficient rainfall.

Kilger - 11:21

Weather effects can change drastically from field to field not to mention county to county. You can drive down the road and on one side you see the corn barely growing and the other side it's to your head and you're like what's going on between these two and it's all elevation and leveling and all those kinds of things.

But your new insurance coverage for agriculture financial institutions though How does that solution protect not only the banks that are giving these loans and the agribusiness' customers they serve; how does that make sure that the ag lending economy keeps going? Especially when I think of insurance programs that lost a whole lot of money, well maybe they no longer want to lend you or insure you in that area.

Preusser - 12:03

Yeah, I think it comes back down to lenders are hesitant to lend money if they don't have assurances that, in this case, if a weather event occurs, that they're going to be paid by the borrower. And so banks align very well around any time there is a risk protection solution for factors that are outside of the control of the, in this case, agribusiness. So it's really no different than other areas of business where you can't buy a home and obtain a loan from a bank unless you have homeowners insurance, right? And so it's really the same thing here where if I'm an agribusiness that's growing and I need money to buy new equipment or to hire more employees or add to my inventory and I need to go get an operating loan from the bank, The first question the bank is going to ask is how will you repay this loan if there has been a weather event that eliminates the need for your services to those customers? We're filling that gap. We're giving the tools to the agribusiness to be able to negotiate a loan or other financing with the bank with those tools and the same can be applied from the lender's perspective.

Preusser - 13:29

They could do it on their portfolio if they chose to do it.

Kilger - 13:33

Well, yeah, and gap insurance isn't uncommon in other areas of life, right? Like you said, when you buy a home, you usually have to get some kind of gap insurance if you can't put the whole deposit down or same with the car or anything else. It's kind of a similar idea behind this, right?

Well, I mean this all sounds great but money's tight everywhere across the economy and that includes insurance companies and banks and everywhere else. So, it seems like this might be a step towards evolving how we do agriculture insurance. How do you see the insurance landscape evolving over the next few years? Preusser - 14:13

Part of what we've brought to the market here is bringing the agribusiness community up to the same level that farmers have been for some time with the use of the federal crop insurance program. So, I think we're helping to unleash additional capital.

Into the agribusiness market by providing the kind of risk management tools that agribusinesses and the agricultural banks need to protect the investments that are being made. think that what we see in the future is, and I've been saying this for many years, I was the former president of the John Deere insurance company that built into a crop insurance business One of the things that always struck me about the differences between farms and other businesses were the tools that were used.

Precision technology, for example, was just coming into play in 2012 as more farmers began to utilize those tools. The future is going to be the more complete integration of satellite imagery, remote sensing, ground sensors, equipment, and other types of tools that will help us digitize data down to the field level. And the more that we are able to use information that gives us a clearer picture of the risk at the field level, the better we can fine-tune the cost and the type of coverage that's being provided. It's true for either the farmer or the agribusiness. We're moving in that direction. It's taking time for the technology to be adopted at the farm level and of course with agribusinesses as well, but we're going to get there and that is going to change significantly how risk management solutions are delivered to the agricultural space.

Kilger - 16:14

Oh yeah, even what you do with going down to individual farms and being able to kind of map out an entire company's area. I mean, would that have even been possible 20 years ago? Probably not without a huge amount of manpower.

Preusser - 16:28

Yeah, you're absolutely right, it would have been impossible to do, but today we're in a much greater position to use satellite imagery, remote sensing, create field boundaries and attach digitized information to each of those field locations in order to better understand what is the risk at the individual farm level.

You made a comment earlier about driving down a road and see the differences between two fields. In some cases, that's due to the management practices perhaps of the farmers themselves. In other cases it's due to soil type, topography, and a variety of other environmental conditions including things like tiling and irrigation and that. And the more you understand all those components and how they The more likely it is that you're going to dial in the type of understanding of the exposure of that field for that crop and so forth and apply then the right type of coverage at the right price to fit that.

Kilger - 17:35

I mean, plus just really valuable information to have about your customers. Tell me what I see is the other side of our industry, which is helping farmers and producers do what they do best and aiding them in that. Really fascinating what you guys are doing. I think it's refreshing in the industry to see people, I don't know, coming out for these agribusinesses, which often get overlooked in the discussion about all this stuff.

So for listeners who want to know more about Vein's offerings and hopefully want to get in touch with you for a little further information, further discussion, where should they go?

Preusser - 18:13

Sure, the best place to start is at our website which is vein.ag. There's a world worth of information available on the site. You certainly can contact me directly at [email protected], and we'll be happy to help you do an exposure analysis, tell you more about the programs and how they can fit almost every type of agribusiness sector or segment. And, of course, how we can help banks in understanding their exposure as well as providing solutions from their side of it as well.

Kilger - 18:50

Well Don, thank you so much for joining me today. I really appreciate it. was a fascinating discussion.

Preusser - 18:56

Thank you so much. I also very much appreciate the opportunity to tell you about what Vein does and how we can help agribusinesses and lenders. Thank you.

Kilger - 19:07 Excellent. Well, for everyone out there listening, thank you so much. And until next time, stay safe!