Let’s examine how a crop-insurance coverage decision made a $628,492 difference to one farmer. It illustrates the high stakes of insurance decisions. For this enterprise, it made the difference between choosing $5/acre coverage, leading him to a $523,972 loss, and paying $87/acre and profiting by $104,520.

This year was a critical one for crop insurance decisions, to put it mildly.

Last spring, it looked like the U.S. would produce a large crop. U.S. farmers planted more acres than ever. Back then we were thinking about how low prices might go with this large crop. At the time we recommended that farmers buy crop insurance at high levels to protect their revenue. $5.68 corn looked good then.

Things changed, and those who bought at high levels benefitted even with a completely different scenario.

What is your mindset when you put together a plan for crop insurance? Some view crop insurance premiums as an irritating expense that cut into the bottom line. Some see crop insurance as a risk management tool, critical to doing business.

Many more farmers bought policies this year than during the drought of 1988 when this kind of crop insurance was relatively new. Interestingly, there’s a big disparity among those with strong coverage and those who get crop insurance on the cheap. Here’s a perfect example:

One of our agents worked with a new client this year who’d typically only bought crop insurance at 55% and he was ready to do that again this year. Because our agent knew that this farmer had recently bought land and was much more highly leveraged, the agent recommended higher coverage. Most young farmers should also buy high coverage for this same reason. Choosing a low level of crop insurance assumes you have the cash to cover the difference. It’s like insuring a car with just liability insurance; you wouldn’t do that unless you could afford to fix the car or buy a new one because you have the cash.

So the farmer now has land payments and interest expenses that he has to cover even if he doesn’t raise a crop. Instead of 55%, this year he purchased 85% coverage and added a hail policy covering green snap, and a Total Weather Insurance (http://bit.ly/P79nMl)policy, because of new land purchases he wanted the extra protection. He was used to paying less than $5/acre for the old policy. The new policies cost more than $87/acre. He’s not very worried about that now, because this protection allowed him to profit this year, with very little crop to harvest. His ag finance specialist did the math on where he is now ($104,520 profit this year after all expenses, including inputs, interest and depreciation) vs. where he would have been with his usual 55% coverage (-$523,972). 

We saw this scenario over and over throughout the season. Those farmers who have the working capital from a few good years will be OK. Other will have to sell land in order to stay afloat. That wasn’t in the business plan.

Sometimes it can be an agent who leads farmers to buy less insurance. This past year the government offered the trend adjustment as a way for farmers to catch up their yields in their APH (actual production history). The idea is that corn yields in particular have changed a lot over the past 10 years. So if you’re only able to insure 85% of your 10-year average, you’re really insuring a lot less than 85% of your crop. And if you’re in a corn/soybean rotation, your corn yield data goes back 20 years. So this year the government offered a tool that helped catch up to more current yields by offering a by-county formula that led to higher APH yields. In turn, some agents lowered coverage levels to save on premium. This time, saving on premium was definitely not a good idea.

A new insurance client of ours was getting that song and dance from his previous agent. The agent said it would be a good idea to save on premium and cut back from 85% to 80% coverage. We pushed back. In the end this client was so happy with the result that he called to let us know that he’s so glad our agent kept communicating with him and pushing him for better coverage. You don’t get a lot of calls like that – “thanks for pushing me to spend more.” This client is also ready to sign up for insurance for next year. He sees the difference in the business tool that crop insurance can be, especially when paired with marketing.

Another trap that some farmers fell into this year was the Harvest Price Exclusion. Again, this was an opportunity to save money by locking in on the spring price, which was $5.68 for corn. By the time you read this article, you’ll know how big of a difference that makes.

The bottom line is really that crop insurance is a business tool. You need to think of it that way. And when you’re vetting a crop insurance agent, find out how much he or she really knows. Ask about how their clients did this year; get a referral. Make sure they know what they’re talking about. After all, it’s your business they’re impacting.