Business interruption : estimating losses in Swedish dairy production

Sammanfattning: Dairy production is a complex biological production that involves large investments, both in buildings and in equipments. The investments are supposed to generate cash flows during the economic lifetime, which for a dairy barn generally is comprised by 25 years. If a fire destroys a dairy barn it would not only involve losses of the assets themselves but losses of the cash flows as well. A business interruption insurance is included in the Swedish agricultural insurances and is supposed to cover these losses. However, there has been limited previous research regarding the calculation of such losses. Furthermore, it is essential for a dairy producer to regain the production as soon as possible since each day out of production involves a loss for the business. A model for insurance companies to use when estimating these losses may speed up this process. The aim of this thesis is to develop a model for estimating losses due to business interruption and utilize the model to assess the production losses arising in a Swedish dairy production subject to a fire. Factors affecting business interruption losses are in previous studies argued to be; length of business interruption, annual lost sales, future changes in performance, seasonality and business characteristics. A common way to measure the losses is by comparing the business financial setting before a business interruption with the situation after. Theory regarding business interruption calculations, investments and production economy are relevant in order to understand what factors to include in such calculations. The calculations can be conducted using a production function of the business before an interruption compared with a production function of the business after the interruption. This thesis is of quantitative character and bases on two quantitative case studies along with interviews with experts. Eight simulations are made with various key characteristics features in a dairy production in order to estimate the losses in different situations. Since a dairy production is complex there is a need for assumptions in the simulations in order to make them comparable. The simulations are compared in order to see how the differences within the variating dairy farms are affecting the results. The case studies and the interviews are used to validate the figures in the model in order to enhance the reliability. The results in all simulations show that it takes at least two years in the new barn to regain a production similar to the one prior the business interruption. During the two start-up years, the production is still suffering from the business interruption resulting in lower contribution margin in the business. Larger herds may require even longer time since it can be difficult to get enough animals in the beginning. Furthermore, it may take longer time before the milk yield has recovered to an even distribution, which is preferable in a dairy production. The results also indicate that the profit margin of the investments are 1,8 - 2,8 percentage points lower, across a 25 year economic lifespan, after a business interruption, which affect productions with lower original profit margin more extensively since these farms are more sensitive to such changes. The conclusions in the study states that the economic losses are highly dependant on factors such as milk price, milk yield, number of dairy cows, operational cost for feed production as well as the length of business interruption and start-up process. Additional factors that are recognized to impact the losses are the production disturbances. Thus, the economic losses due to a business interruption in a Swedish dairy farm need individual calculations for the indemnities in order to be properly estimated.