Agriculture
Area Yield Index

Leveraging Parametric Insurance for Yield Stability

West Gaines Seed Inc.

Summary

West Gaines Seed, Inc., a leading seed provider in Seminole, Texas, partnered with Arbol to address climate-related risks impacting their cotton seed production and processing operations. Specializing in small grains and cottonseed production and processing, the company operates some of the most advanced seed delinting and treating facilities in the country. With multiple locations across Texas, Louisiana, and Oklahoma, West Gaines Seed serves a wide range of agricultural clients. Facing unpredictable weather patterns and yield volatility, West Gaines Seed implemented Arbol’s Area Yield Program (AYP) to create a financial safety net, ensuring business continuity and client support despite potential crop yield shortfalls.

Key Takeaways

  • Quick and Reliable Payouts: Fast, data-driven payouts triggered by objective criteria
  • Customized Coverage: Policies tailored to specific climate risks impacting cotton yields
  • Financial Stability: Improved financial health and operational continuity during adverse conditions

The Facts

Cotton production in Texas faces significant climate-related risks.

As a key player in the cotton seed industry, West Gaines Seed needed a solution to protect its operations and support its clients in the face of these unpredictable climate risks.

  • Yield volatility of up to 30% year-over-year
  • Droughts causing average yield losses of 20-30%
  • Potential for complete crop failures due to extreme weather events
  • Projected 10-20% increase in yield variability by 2050
“In the cotton seed industry, we’re at the mercy of weather patterns that can dramatically impact yields. We needed a solution that could provide financial stability in the face of these unpredictable climate risks, allowing us to support our clients consistently, even in challenging years.”
— West Gaines Seed, Inc.

Our Process

Arbol recognized West Gaines Seed's need for a financial buffer against cotton yield volatility that could impact their seed processing operations and ability to serve clients.

Arbol proposed a tailored parametric crop yield index derivative using the Area Yield Program (AYP). This county-level yield index product was designed to protect West Gaines Seed against revenue losses due to low crop yields.

How AYP Works
  • Insureds are paid when the yield index falls below a predefined yield trigger
  • Flexibility allows the insured to choose specific crops, data sources, and resolution, as well as set limits of liability and yield triggers
  • The data and calculation mechanism were pre-agreed upon, ensuring transparency and accuracy in determining payouts
Why AYP Works
  • Gap in Traditional Insurance: While farmers have access to government crop insurance and disaster assistance programs, businesses reliant on their production lack business income insurance for crop yield losses
  • Volumetric Protection: AYP covers volumetric losses that price risk management tools cannot insure, providing comprehensive protection against yield shortages
  • Aggregate Policy Limit: One aggregate policy limit can cover multiple sources of income loss, including lower volumes, additional expenses to import supply, price fluctuations affecting margins, and reductions in sales due to commodity substitution by customers
  • Independent Data: Payments are made fairly and objectively, utilizing independent data to ensure hassle-free claims

Our Solution

Arbol developed a parametric insurance structure with predefined triggers based on county-level crop yield data.

The policy covered specific location IDs in Texas, ensuring that payouts were aligned with the actual yield performance. The solution accounted for different irrigation practices in each county, with custom weightings for irrigated and non-irrigated cotton production.

  • Product: Cotton Yield Index Derivative
  • Coverage: Five key cotton-producing counties in Texas (Dawson, Gaines, Hockley, Terry, and Yoakum)
  • Trigger: Based on the USDA Risk Management Agency's Supplemental Coverage Option (SCO) County-Level Crop Yield Index
  • Maximum Payout: $5,000,000
  • Contract Period: 2023 Crop Year
Policy Benefits:
  • Rapid payout mechanism based on objective, county-level data
  • Customized coverage reflecting the specific risk profile of each county
  • Protection against yield shortfalls without the need for individual loss adjustment
  • Ability to support clients even in low-yield years
  • Enhanced financial stability and risk management

The Result

The parametric solution provides West Gaines Seed with up to $5 million in protection against low cotton yields.

This protection significantly reduces their financial exposure to climate-related risks.

  • Improved ability to maintain consistent operations and client support despite yield volatility
  • Enhanced reputation as a reliable supplier in the cotton seed industry
  • Potential for more stable financial planning and budgeting

Conclusion

As climate variability continues to impact agricultural production, West Gaines Seed is well-positioned to navigate future challenges.

The success of this parametric solution may lead to expanded use of similar risk management strategies across their operations and for other crops.

Is your agribusiness exposed to climate-related yield risks? Discover how Arbol’s Area Yield Program can provide tailored protection for your operations. Contact us today to learn how parametric solutions can safeguard your business against unpredictable weather patterns and yield volatility.

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