Basics of Crop Insurance
February 9, 2023If you are a crop producer, crop insurance is a coverage option you need. There are many ways to insure crops and the best approach will vary on a number of factors. Here are the basics of crop insurance to get you started:
What is Crop Insurance?
Agriculture is a tremendous industry in the US. As of the most recent census, agricultural producers in the US operated 2.1 million farms. These farms employed over 3.2 million people and generated $394.6 billion in sales. Naturally, with an industry this large, there are safety measures available. Various government agencies along with insurance companies have developed protection policies for farms. Crop insurance, in particular, has a fascinating past.
History of Crop Insurance
Crop Insurance has evolved in many ways over the years. The 1930s was a time of revitalization. After the Great Depression, Congress set forth to recover what was lost. Agriculture was in desperate need. To spur growth, Congress approved utilizing crop insurance for struggling farmers. In 1938, they conceived the Federal Crop Insurance Corporation (FCIC) to execute their plan.
In the beginning, the prospect remained experimental. After expanding to include more crops and subsidies, participation continued to grow. The Federal Crop Insurance Act of 1980 incorporated many smaller bills designed to further assist farmers. It underwent several reforms until reaching its final state in 1994.
2000 saw the FCIA expand into the private sector. Insurance providers created and enhanced new policies to best protect their clients. The current state of crop insurance offers a wide array of security – covering weather-related losses, wildlife damage, insect infestation, and fluctuation in the commodity market.
Crop Insurance is Valuable
All crop producers are aware of the high cost of production. Seed cost has increased with the advent of improved hybrids due to the stacking of Genetic Modified Organisms, GMOs. Seed costs now can vary from $100 to $150 or more per acre. Fertility expense has reached new highs due to energy costs.
Also coupled with energy costs are machine and equipment costs. And then land values have skyrocketed which brings the cost to produce an acre of corn in excess of $500 to $600 and soybean costs can easily exceed $400. With this initial investment, few farms can afford less than an average crop.
Weather patterns seem to vary over very short distances and it is not uncommon to see excellent crops literally less than a mile from very poor or marginal crops. Most, if not all crop producers cannot sustain any type of substantial reduction in production for any reason. Crop insurance is the risk management tool available to mitigate these unplanned and uncontrollable crop production outcomes.
Crop Insurance Deadlines
The annual deadline to sign up for Federal Crop Insurance for the following year’s Spring seeded crops such as Corn, Soybeans, Spring Oats, and Grain Sorghum, (Referred to as the Sales Closing Date, SCD) usually falls on March 15 of each year. This date is established by the Risk Management Agency, a federal entity that administers and regulates the Crop Insurance program.
Other types of crops carry other deadlines. In the case of the above-mentioned Spring seeded crops, this March 15th date is the cut-off for 1) purchasing a new policy, 2) adding a new crop for coverage that a farmer has never grown before, or 3) changing the coverage on a currently insured crop.
It is also important to remember that a Crop Insurance policy is a continuous policy that renews automatically. If a crop producer does not want their policy to continue, they must cancel their policy by the March 15th deadline.
5 Types of Crop Insurance
Through years of evolution, crop insurance has been refined into very specific products. Today, it is referred to as Multi-Peril Crop Insurance (MPCI). By using the Actual Production History (APH) of a farm, insurance companies can create estimates for future returns. If an unforeseen event occurs during the crop season and production is not where it should be, crop insurance may compensate for the loss. Here are the types of crop insurance options available:
1. Yield Protection Insurance
Yield Protection Insurance, YP, protects farms from various events. YP Coverage typically safeguards against drought, excess moisture, hailstorms, floods, insects, diseases, freezes, wildlife, and more. As long as these conditions are included in the package, the farm will be guaranteed reimbursement up to the agreed-upon percentage.
2. Revenue Protection Insurance
Revenue Protection Insurance, or crop insurance for market change, insures farmers a certain dollar value per acre based on production history and market prices. The estimated value of the farmer’s crop is based on their own production history times the projected price from the Chicago Mercantile Exchange (CME).
The farmer then purchases a percentage of the estimated value as their level of protection. If the value of their crop declined due to a soft market or low yield, they may receive a payment if the crop value is below their purchased guarantee. Even if they do not sell any of their crop, they may still be reimbursed for the reduced value had they sold the crop at the expected market value.
3. Whole Farm Revenue Protection (WFRP)
Whole Farm Revenue Protection (WFRP) is coverage that looks at the entire farm operation. It is not specific to crops or the cropping operation. It takes into consideration all aspects of the operation from a revenue perspective.
So, if you are cropping as well as livestock or poultry raising, it will include the entire farm enterprises. Your protection is based on the revenue that your operation generates. It takes into account the profits generated in a particular year. With this approach, you have protection against low production as well as low commodity prices.
The basis is established from either 3 years or 5 years of history on the farm, depending on the size of the farm. Also, there is a limitation on the dollar value generated from the livestock portion of the farm. WFRP is often coupled with a standard crop insurance policy.
4. Beginning Farmer/Rancher Options
If you have never maintained or been responsible for the financial records and outcome of a farm operation, you may qualify for “Beginning Farmer/Rancher” status. Having this status will provide a 10% discount on the premium for the first 5 years that you have crop insurance.
You can also use the production history from previous years of farm operation provided you have been involved in the decision-making process or the physical operation of the farming operation. This can be valuable in regard to cost and your level of guaranteed production history.
5. Written Agreement
Not every county has a program for certain crops that are grown. If insurance is desired for a “specialty crop” in a county, then the option for insurance coverage may be available with a ‘Written Agreement.”
This is an option where data can be pulled from a county with a program for your specialty crop, and then applied to your county to establish a guarantee. An example would be a crop such as wine grapes. In Pennsylvania, there are limited counties with a program for vinifera grapes. You may be able to establish a Written Agreement for your grapes by using the data from that county that has a program. You could also be eligible for new USDA grape crop insurance options.
The Difference Between Yield Protection and Revenue Protection
There are several options available to insure your crops. In terms of standard crop insurance programs and plans, Yield Protection and Revenue Protection are two of the most common.
2 Primary Protection Plans for Small and Coarse Grains
For small grains, like wheat and barley, and coarse grains, like corn, soybeans, and grain sorghum, there are two types of crop insurance plans that are most popular. Each of them starts with the same principles but soon diverge as to how they respectfully respond in providing protection and risk management, for the producer.
The two plans are referred to as Yield Protection, YP, and Revenue Protection, RP. Each of these products uses an “established price” for the commodity which is set prior to the Sales Closing Date, SCD, the deadline determined by the Risk Management Agency. The price is determined based on an average trading price on the Chicago Board of Trade, CBT, over a time period. At SCD, this is referred to as the “projected price.”
1. Yield Protection
Yield Protection, YP, is the simpler of the two plans. This plan is the basic plan where Crop Insurance originally started. Yield Protection is based strictly on the number of bushels of grain produced on a given acre of the crop.
When the policy is purchased or renewed by the Sales Closing Date, SCD, the protection is determined by the “established price” per bushel X the bushel guarantee per acre. (Note: The SCD and the “established price” vary depending on the crop and the region of the country, i.e. state and county.) Let’s look at a simple example to explain the mechanics of the policy.
Example of How Yield Protection Crop Insurance Works
If a producer has an Actual Production History (APH) of 100 bushel per acre and they buy a level of protection at 70%, then they are guaranteeing that they will get at least 70 bushels of production per acre. If at the SCD the “established price” per bushel is $6.00 then they will be paid $6.00 for every bushel below the guarantee of 70.
So, at harvest time, if their production averages 50 per acre a specific farm, then they will be paid for 20 bushels, 70-50, at $6.00 per bushel for a total of $120.00 per acre. The crop producer only has a loss if their production is below the guaranteed number of bushels. It is strictly dependent on the yield.
2. Revenue Protection
Revenue Protection, RP, is a more comprehensive plan and provides protection for a revenue loss; a dollar value per acre on the crop produced. Essentially, the producer is guaranteeing that, at the completion of harvest, they will have a pre-established gross revenue in hand per acre. When the policy is purchased by the SCD, their revenue guarantee is determined by the “projected price” per bushel X the bushel “trigger yield.”
Example of How Revenue Protection Crop Insurance Works
Again, let’s look at an example for explanation and illustration. We will again use an APH of 100 bushel per acre and a “projected price” per bushel of $6.00 for easy math.
If the producer purchases the 70% protection level, then 70 bushel will be what we call their “trigger yield.” (100 X 70%.) To calculate the revenue guarantee, we would multiply the “trigger yield”, 70, times the “established price”, $6.00 per bushel. This guarantees the producer revenue of $420.00 per acre. This is all established by the SCD.
How Does Crop Insurance Work?
In order to understand how crop insurance works in real-world scenarios, let’s look at three different scenarios at harvest time. But first, we must define “harvest price.” This price is in contrast to the “projected price.” As was mentioned before, the “projected price” is established at SCD. The “harvest price” is established around harvest time and it varies by the crop being insured. Again, the “harvest price” is established based on an average of the CBT over a period of time.
3 Scenarios at Harvest Time
Here are a few different scenarios around harvest time and how crop insurance might respond:
1. “Projected Price” and “Harvest Price” Are Equal
In the first scenario, we have a situation where the “projected price” and the “harvest price” are the same. So, if the producer harvests 50 bushels per acre, the value of their crop is 50 X $6.00 or $300.00.
Their revenue guarantee is $420.00 and they have a deficit of $120.00. So, they are paid $120.00 per acre. This is identical to the Yield Protection Plan because the price per bushel of the crop did not change from the sales period to harvest. However, it is important to note that this scenario is highly unlikely.
2. “Harvest Price” is Lower Than the “Projected Price”
The second scenario is a situation where the “harvest price” is lower than the “projected price.” Let’s assume that the “harvest price” is $4.00, $2.00 lower than the “projected price.” If the producer again harvests 50 bushels, then to calculate the value of their crop we multiply 50 X $4.00, the “harvest price.” Their harvested crop is worth $200.00. Their revenue guarantee was $420.00 and they have a deficit of $220.00.
We mentioned before that their “trigger yield” was 70 bushel; 100 bushels (APH) X 70%, (level of coverage.) What is important to understand is that when the “harvest price” is lower than the “projected price,” the “trigger yield” will go up.
The easy way to calculate the “trigger yield” is to think, “How many bushels of $4.00 production do I need to make a value of $420.00?” (Revenue Guarantee). In our example, $420.00 / $4.00 equals 105 bushel. Now, the “trigger yield” has increased to 105 bushels. So, as soon as the production drops below 105 bushels, we have a revenue loss even though our initial trigger yield was 70 bushels.
You do not need to have a production loss to have a revenue loss. Just a note to consider: If you have a poor year with your crop, you are better off if nationally the production is good so that the CBT price is lower at harvest. This will give you a larger indemnity payment (loss) to buy replacement bushels at a lower cost.
3. “Harvest Price” is Higher Than the “Projected Price”
Option three is when the “harvest price” is higher than the “projected price.” In this case, the producer’s revenue guarantee increases to reflect the higher “harvest price” at no additional premium.
To illustrate, initially, our revenue guarantee is $420.00, 70 X $6.00. If the “harvest price” is set at $7.00, then the revenue guarantee will increase to $490.00, 70 X $7.00. If the producer harvests 50 bushels, then the value of the crop will be $350.00, 50 X $7.00. The revenue guarantee increased to $490.00, so there is a deficit of $140.00 per acre. In this scenario, you must have a production loss to have a revenue loss.
The Revenue Protection, RP, is a better risk management tool because it protects the market value of your crop based on the CBT and not just the number of bushels produced. In the volatile and unpredictable market we have been experiencing the last few years, RP provides security to be able to execute a marketing plan with greater confidence. It will provide the revenue to buy out a sales contract or purchase replacement bushels to fulfill the contract.
Get the Crop Insurance Coverage You Need With Ruhl
Crop Insurance protects farmers and their businesses. Having a safety net just in case something goes wrong allows farmers to concentrate on what matters: growing their crops. Contact us today at 717-665-2283 or 800-537-6889 for more information about crop insurance!
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Disclaimer: Information and claims presented in this content are meant for informative, illustrative purposes and should not be considered legally binding.