Decile-based index drought insurance to help improve income stability for wheat producers in Australia

Droughts are a major challenge to the financial sustainability of wheat growers in Australia. While adaptive farming practices can reduce exposure to drought risk, they may fall short when unfavourable climate conditions occur during critical stages of crop development. This study proposes a novel crop insurance solution: a decile-based index insurance policy with weighted payouts that align to rainfall deficits. We integrated 40 years of crop simulation data from the APSIM (Agricultural Production Systems Simulator; v7.10) to model theoretical wheat yields across 22 farms in the Australian wheat belt. The impact of drought on farm income was assessed, and the effectiveness of the proposed insurance structure was evaluated in terms of income stability and financial utility. Results indicate that, for optimally sown crops, the average financial gain from adopting the insurance contract was $182 per hectare, while the average drought-related loss was $71 per hectare. The insurance proved effective on 95 % of farms, significantly reducing income volatility. Notably, 82 % of farms experienced improved income certainty in the poorest 50 % of years, and average farm income increased by 21 % over the 40-year period when input costs were insured annually. Given the increasing frequency and intensity of droughts due to climate change, this targeted approach offers a compelling solution for enhancing resilience and income stability in wheat production. To our knowledge, this is the first study to design a drought insurance product explicitly around deciles on in crop rainfall with weighted payouts for wheat. Schematic showing potential actions by farmers regarding sowing dates and dry season index insurance and the likely outcomes of these actions • Drought impacts the financial sustainability of wheat farmers, yet yield insurance is scarce. • Insurance should be used to help stabilise farmers' income during periods of drought. • Innovative parametric insurance policies could offer a viable solution. • We test a novel policy that triggers on Decile 1 and 2 rainfall events, with scaled payouts. • On 95 % of farms, the drought index insurance policy proved effective.