Two million dollars has been put on the table to look at creating a nationwide income protection scheme that could protect farmers from financial strain during future droughts.
The state government will work with the National Farmers Federation to brainstorm models that could provide income loss protection during droughts and natural disasters.
"We're starting with a blank canvas here in terms of what a potential scheme could look like and that's why it's important all parties come together and work collaboratively to design a scheme that genuinely benefits farmers," NSW Deputy Premier John Barilaro said.
NSW Agriculture Minister Adam Marshall said this kind of scheme was the best way to help farmers survive drought.
"The best drought assistance measure a government can deliver is to help the agricultural industry to self-insure," Mr Marshall said.
"As this drought rolls on it's obvious we need to be looking at ways to roll out a product that would cover all producers - whether croppers, graziers or horticulturalists - against the devastating loss of income that comes with drought and other natural events."
The NSW Farmers Association has long been campaigning for such a scheme.
"NSW Farmers is pleased to see the NSW Government acting on our request to demonstrate national leadership on a farm risk insurance market for Australia", Chair of NSW Farmers' Grains Committee, Matthew Madden, said.