The announcement that Monsanto will acquire high-tech weather insurer Climate Corporation for $930 million could fill the missing link in the seed company's fledgling prescription farming business, as DTN Editor-in-Chief Greg Horstmeier and I reported yesterday.
It's clear the company priced its offer based on Climate Corporation's weather analytics, not as a pure insurance deal. As recently as 2010, Swiss insurer ACE paid $1.1 billion for its remaining 80% stake in one of the "jewels in the crown" of crop insurance, Rain and Hail. It is the second largest crop insurer and promised to give ACE a better than 15% return on its capital investment at the time.
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In contrast, Climate Corporation's weather insurance sales are relatively tiny compared to the 18 traditional insurers who split $13 billion in sales. The privately held company won't reveal revenue, but does say Climate Corporation policies cover "several millions" of acres.
Since its inception in 2006, Climate Corporation has become best known for applying Silicon Valley-style algorithms to the stodgy U.S. crop insurance industry, then selling policies insuring against perils like drought, excess rain or heat at pollination. That was a departure from traditional government-subsidized insurance based on actual yields and futures prices to determine insurance claims. It brags it needs super computers to simulate 10,000 weather outcomes daily for specific locations.
In the Great Drought of 2012, farmers won the insurance bet. Climate Corporation paid on 80% of all policies sold nationwide in 2012 --and 98% or more of their policies in seven states (Illinois, Nebraska, Colorado, Kansas, Kentucky, Missouri, Oklahoma and Tennessee). When Jesup, Iowa, farmer Ben Riensche harvested a 2012 corn crop about half of its normal size, his Total Weather Insurance policies paid about $8 for each $1 of premium thanks to excess heat and drought. "This doesn't indemnify a total crop loss, but I feel like I won the lottery," he said at the time.
It's no wonder Monsanto downplayed insurance and portrayed the Climate Corporation purchase as a move to help manage Big Data down on the farm. It's banking that through the FieldScripts program in its Integrated Farming Systems unit, precision weather can help growers make better agronomic decisions. As with most science-based businesses, however, the payoff could be years down the road.
Follow Marcia Taylor on Twitter@MarciaZTaylor.
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