Arbol Case Study | David and Celesta Hicks Farms

Summary

David and Celesta Hicks Farms, a family-owned agricultural business in Seminole, Texas, partnered with Arbol to mitigate climate-related risks threatening their cotton production. With unpredictable weather patterns—including droughts, extreme heat, and severe storms—creating yield volatility and financial uncertainty, the farm needed a reliable risk management solution to protect its operations and financial stability. While traditional crop insurance covers direct farmer losses, it doesn’t mitigate loss of income for farms experiencing inconsistent yields. By implementing Arbol’s parametric Area Yield Program (AYP), David and Celesta Hicks Farms secured a data-driven financial safety net that ensures business continuity and resilience, even in low-yield years.

Key takeaways

Future-Proof Strategy – Strengthened resilience for long-term financial sustainability in a changing climate.
$5M Financial Protection – Safeguarded against low cotton yields across key Texas counties.
Fast, Objective Payouts – Triggered by USDA crop yield data, ensuring immediate financial relief.
Custom Risk Coverage – Tailored policy addressing drought, heat stress, and regional yield variability.
Operational Stability – Enabled the farm to maintain production and fulfill commitments despite climate challenges.

The facts

The Challenge

David and Celesta Hicks Farms faced a complex set of climate-related risks that threatened their cotton production:

Climate Volatility:

Drought: Extended dry periods reduced water availability, impacting yield and fiber quality.
Extreme Heat: High temperatures during critical growth stages affected flowering and boll development.
Flooding: Excessive rainfall led to waterlogging, root rot, and soil erosion.
Hurricanes and Severe Storms: The farm's location in Texas made it susceptible to destructive weather events.
Temperature Variability: Unexpected temperature fluctuations disrupted cotton growth cycles and planting schedules.

Biological Threats:

Pest and Disease Outbreaks: Changing climate conditions altered the prevalence of threats like boll weevils and cotton wilt.

Economic Pressures:

Rising Production Costs: A 15% increase in costs for fertilizers and chemicals in 2023 squeezed profit margins.
Supply Chain Disruptions: Global logistics issues caused delays and additional expenses for critical inputs.
Declining Demand: A 10% drop in consumer demand for cotton products compared to the previous year added market uncertainty.

Arbol's parametric Area Yield Program (AYP) was identified as a potential solution to address these complex, interrelated challenges and provide the farm with a tailored risk management tool.

With the unpredictable nature of cotton yields due to fluctuating weather patterns, our farm was at risk of significant operational disruptions. Arbol's parametric solution gave us the peace of mind that we could maintain our operations and support our local community without interruption even in the face of severe droughts or other climate events. This partnership has been crucial in securing our financial stability and ensuring continuous support for our clients in the agricultural industry."

David Hicks

Our process

Challenge Identification: Challenge Identification Arbol recognized the farm's need for a financial buffer against cotton yield volatility that could impact their production and processing operations.

Solution Design: 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 David and Celesta Hicks Farms against revenue losses due to low crop yields. Here's how it works and why it was crucial for David and Celesta Hicks Farms:

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:

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

Implementation:

Arbol developed a parametric derivative structure with predefined triggers based on county-level crop yield data. The agreement covered specific locations in Texas, ensuring that payouts were aligned with the actual yield performance.

Product: Cotton Yield Index Derivative
Geographic Coverage: Two key cotton-producing counties in Texas (Gaines 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

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
Enhanced financial stability and risk management
Ability to maintain operations even in low-yield years

the result

Financial Impact

The parametric solution provides David and Celesta Hicks Farms with up to $5 million in protection against low cotton yields, significantly reducing their financial exposure to climate-related risks.

Strategic Implications

Improved ability to maintain consistent operations despite yield volatility
Enhanced capacity to fulfill commitments to clients and partners
Potential for more stable financial planning and budgeting
Strengthened resilience in the face of increasing climate variability

conclusion

Future Outlook

As climate variability continues to impact agricultural production, David and Celesta Hicks Farms are 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 they produce.

Are you a cotton farmer or agricultural business owner concerned about 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.

David and Celesta Hicks Farms' Climate Risk Management: Leveraging Parametric Insurance for Yield Stability