One advantage of crop insurance is that it often can be used as collateral for operating loans. However, producers who have suffered crop losses in multiple years often find themselves with protection so low that they are unable to secure operating loans.
This is because, under current law, producers are required to report their actual yields and all such yields are used in computing a yield guarantee for the insured crop.
This situation has now been recognized and the law has been changed to effectively increase yield guarantees. According to the Risk Management Agency (RMA), preliminary analysis indicates that as many as 40-50% of insured producers in 1998 had losses in prior years that would qualify them for the option of excluding actual yields.
The changes allow growers to use a figure that is 60% of the transitional yields, which is based on average county yields in place of their actual yields.
For example, an approved production history (APH) is the average of a grower's yield for the latest 10 years. If a grower's actual soybean production in bushels per acre were 50, 50, 40, 45, 20, 10, 50, 45, 15 and 40, his APH would be 36.5 (sum of yields 10).
Assume this grower is in a county with a transitional yield of 45. Under the new rules, the grower can elect to use 60% of the county transitional yield to replace actual yields that were less than that amount. So, in the above example, the APH could be 50, 50, 40, 45, 27, 27, 50, 45, 27, and 40 for an average APH of 40.1. The numbers in bold show where 60% of the county's transitional yield was substituted for actual yield.
This new APH of 40.1 bu/acre is used to determine whether he would collect on a policy. At 75% yield coverage, the policy would pay off when the farmer's yield falls below 30 bu/acre. With the old method, it wouldn't have paid off until the yield fell below 27.4 bu/acre.