Changes favor revenue coverage When it comes to risk management, few methods are as straightforward as crop insurance. A premium is paid and a risk, such as yield loss, is covered. It doesn't get more simple than that.
However, about five years ago a new spin was put on crop insurance when revenue insurance products debuted. Now, changes in the 2001 crop insurance program promise to turn this spin into a cyclone.
In fact, Risk Management Agency spokesperson Eric Edgington advises, "If it's been awhile since you sat down with your insurance agent, this may be the year to do so."
Not surprisingly, insurance agents agree with Edgington's observation, but for the right reasons. "The changes are awesome for farmers," says Ruth Gerdes, a crop insurance specialist for the Auburn Agency and a 1,200-acre corn and soybean farmer.
The Agricultural Risk Protection Act of 2000 (ARPA) makes revenue insurance much more affordable, and a new coverage option helps producers suffering from multiple-year losses retain reasonable amounts of insurance protection. With the changes, all federally backed insurance plans, including revenue insurance plans, will receive the same percentage premium subsidy. In the past, the subsidy only applied to the yield portion of a revenue insurance plan. The higher premium subsidies will be available to protect 2001 crops.
According to Kevin Skalla, vice president of Signal Bank, Red Wing, MN, the subsidy changes were a necessity. "Many farmers didn't participate before because the level of loss needed to collect was too high," says Skalla. "Now they can get higher levels of coverage for the same dollar amount of premium."
Even before the increased subsidy levels were put in place, revenue insurance had gained in popularity in recent years. Because these policies pay when revenue, not just yields, falters. They have been especially effective in the depressed price environment of recent years. In addition, because these policies protect revenue (price and production), it only makes sense to consider them as part of a marketing plan.
In fact, in some cases, revenue policies have become a way for farmers to price ahead. Because these policies protect against declining prices, there is the temptation to make them the primary vehicle for pricing a crop. However, if this is the only vehicle used in a marketing strategy, then a farmer may be missing other opportunities, say risk management experts.
"There's such a multitude of strategies available that you absolutely need to look at all options," points out Bill Ramsey, partner with Risk Management Group in Kirkwood, IL. He stresses that it comes down to a farmer's risk tolerance. For one farmer that may mean insurance and cash sales and for another the strategy may be 75% revenue policy and a combination of cash and futures/options strategies to forward price the balance of the crop.
Gerdes agrees and says revenue-based products solidify the ability for farmers to manage risk. "These products make a farmer more comfortable by guaranteeing a certain revenue per acre, which opens up a world of marketing to him, whether options, futures or cash," she says.
In fact, the real benefit of this insurance comes when it is used with a marketing strategy, Gerdes stresses. "The real opportunity for profitability comes in combining the two (insurance and marketing)."
She cites one example where a customer was happy when he came in to pay the bill for his insurance, even though he didn't collect a dime on the revenue policy.
If the farmer hadn't bought revenue insurance, she explains, he wouldn't have laid out the marketing strategy he did. "He used a solid marketing strategy - not risky but solid - because he knew the CRC policy would protect his position."
Joanie Grimes, an agent with the ICAP agency in Washington Courthouse, OH, adds another point. In 2001, the increased subsidy may encourage farmers to take advantage of additional marketing opportunities simply because more of their crop is covered.
They may have only early marketed 50% of the crops before. Now with the opportunity to carry additional crop coverage, they can market a higher percentage of their production before harvest. That can give them them more flexibility, points out Grimes.
Now they may be able to afford coverage on 75% of their crop, she continues, which gives them more flexibility on a significant amount of their crop.
It comes down to breaking down each alternative and determining which is the right strategy for each farmer, Ramsey concludes. Revenue insurance may or may not be the ticket, depending on a farm's yield profile, the farmer's risk tolerance and the market environment. The key, however, is that there are many viable strategies and resources available, such as the increased government subsidy, to help a farmer balance risk and turn a profit.
- The basics of revenue insurance.
- Changes lessen multiple-year losses
- Are you making the most from the LDP program?
- Farm program pitfalls to avoid.