Storm A Timely Reminder to Diversify

The widespread thunder and hail storms during the past week in the Bay of Plenty provide us with a graphic reminder of the need to diversify and also to have insurance to cover the unexpected.

When workers and shoppers went to Bayfair on Monday, they did not know what they were in for.  Imagine how it must have been when the storm hit, collapsing part of the roof and causing a lot of water damage.  The complex had to be evacuated.  The property owners (AMP Capital) will undoubtedly have adequate insurance cover to meet the costs of repairs.  But will the individual tenants have insurances that cover them adequately for business interruption while the property is in a state of disarray? Payrolls still have to be met etc.  The chances are that the property will be operational again within a matter of days.  In today’s economic environment every trading day counts.

The hail storms could probably not have come at a worse time for many kiwifruit growers, with the harvest only part way through.  Any indentation on the fruit no matter how small will significantly downgrade the crop.  It also puts a lot of pressure on the pack houses, to grade out the imperfect fruit, slowing the grading process and increasing the packing costs.

Kiwifruit production is based on a monoculture, albeit now with two main production varieties.  It also tends to be grown in tight clusters where land and climatic conditions are considered to be most suited.  Because of this, it increases the risk when unexpected events such as hail occur.  While hail storms are usually confined to small localised areas when they occur, the effect on that specific area is severe.  Most of the crop revenue can be lost, yet most expenses and in some cases increased expenditure is required to produce the following season’s crop.  It is a very concentrated, undiversified investment for the individual grower/owner.  There are reports of insurance cover, however it appears that this has a $4 million cap, which will be woefully inadequate for the more than 100 orchards that have suffered damage.

Concentrated investment is prevalent in New Zealand’s primary industry sector.  We have massive monoculture plantings of Pinus radiata.  The viticulture industry is similar, as indeed are much of the pip and stone fruit plantings, and also there are concentrated areas of vegetable production, particularly onions and potatoes.  This is the primary reason that it is essential that pests and diseases are controlled, especially at our borders. 

Irrespective of what we are investing in, be it horticulture, agriculture, forestry, property, shares and bonds a concentrated investment strategy can produce higher returns.  This has to be tempered against the significantly higher investment risks that occur with this type of strategy.  Where there is a reliance on income from these investments, a buffer fund should be accumulated to get through the inevitable periods of low returns.  This is effectively self insurance.  There is also the possibility of obtaining commercial insurance cover for unexpected events.

If any of the above relates to you, it could prove well worthwhile to have a review to see if you and your family can survive an unexpected event without suffering financial hardship.