Part I of our managing risk series examines various crop insurance options - and farmers who've used them. Part II, in our February issue, will tell how to write a workable business plan.
There's good news and bad news about improving your risk management with crop insurance. The good news is that crop insurance offers several choices of policies that can protect yield or revenue for your operation. The bad news is that the dizzying array of products and choices will require study on your part and will demand that you work with an insurance agent to tailor a program to your farm.
In general terms, buying crop insurance isn't too different from buying a pickup. You can choose a basic, stripped down model or you can customize a truck with an extended cab, extra doors, four-wheel drive and a satellite dish. And, you can add after-market options such as toppers, bed liners or a particular brand of stereo.
The same principle applies to insurance to protect either yield or revenue, say risk management agency experts and ag economists. You can buy any of the standard federal products that themselves offer wide differences in coverage. Then add other protection options available from private insurance companies.
Within a few pages we can't give you all the information about each policy. However, the following policy profiles should whet your appetite for discussions with extension specialists or insurance agents who can explain more.
Check policies to see how they package your acres into insurable units. Some may have all your acres of corn or soybeans lumped under a single policy; others may let you insure each crop separately (see story below). Also, see if a policy offers coverage for late planting, prevented planting, replanting and replacement bushels. Some policies may be more attractive because of their influence on how many records you need to keep.
As you'd expect, premiums vary with the county of the insured crop, your yields and the yield and price selections. But just like buying a pickup or anything else, you only get what you pay for and the cheapest policy may not give you the best protection.
Yield Policies Yield policies include the Multiple Peril Crop Insurance, which incorporates a policy that covers catastrophic losses (CAT). These insure yields on individual farms. There's also a Group Risk Plan that insures county yield averages.
* Multiple Peril Crop Insurance (MPCI) Also called APH for Actual Production History, this policy pays when your yield falls below a guaranteed or insured level. With this policy you make two decisions, selecting the yield you want to insure, normally ranging from 50% to 75% of the APH but as high as 85% in some counties. You insure based on your average yield for a minimum of the four most recent years you grew the crop up to 10 consecutive years. The other choice is the indemnity price or the price of the bushels that you'll be paid for. That can range from 55% to 100% of the price the USDA's Risk Management Agency (RMA) sets annually.
Say your APH for corn is 132 bu and the RMA indemnity price is $2.10. You decide you want to insure 75% of your yield at 100% of the RMA price. Drought cuts your yield to 50 bu/acre. Your crop insurance policy pays you $102.90/acre for 49 bu at $2.10. That's the difference between your actual yield and your insured yield of 99 bu (132 x 75%) multiplied by the price selection of $2.10, regardless of the price of corn at harvest.
* Catastrophic (CAT) You don't have to make choices with the CAT policy. It provides basic coverage of 50% APH at 55% of the price selection.
Again, assume your farm has an APH of 132 bu; you buy a CAT policy and drought cuts yields to 50 bu. The policy would pay $18.56/acre. That's the difference between your actual yield and the insured yield of 66 bu (132 x 50%) multiplied by the price selection of $1.16 ($2.10 x 55%).
* Group Risk Plan (GRP) This policy pays you when countywide yields, not your yield in particular, drop below a yield guarantee. This policy works well if your yields follow but aren't identical to the county trend. Your yields could be better than the county guarantee and the policy will still pay you based on the county averages. Or, your yield can be well below the county average in a given year and you won't receive a payment.
Here you select a yield-per-acre coverage level and a dollar amount of protection per acre. The yield coverage level options range from 70% to 90% of the expected county yield. This becomes the trigger yield. You select between 60% and 100% of the maximum protection per acre that RMA sets for the county to establish a dollar amount of protection per acre.
Say the expected county yield is 130 bu/acre and the maximum protection per acre for the county is $405. You select a coverage level of 80%, which establishes a trigger yield of 104 bu/acre (130 x80%). You also select 90% of the maximum protection per acre or $365 ($405 x 90). To figure your payment if the county yield averages 80 bu/acre, you multiply a payment calculation factor of 0.2308 [(104-80)/104] by your $365/acre protection. This provides a GRP indemnity of $84/acre ($365 x 0.2308).
Revenue Insurance Revenue insurance policies come in two flavors. Policies for individual revenue are the Income Protection, the Crop Revenue Coverage and the Revenue Assurance. A Group Risk Income Plan policy offers coverage pegged to countywide revenue.
Revenue products pay when gross revenue falls below a revenue guarantee. These policies use APH yields and base corn and soybean prices from the Chicago Board of Trade (CBOT). These don't require you to sell at harvest. You can make forward sales or store for sales later. The major differences are in how you can insure units and whether you have more revenue protection if prices rise at harvest.
* Group Risk Income Plan (GRIP)
This policy pays you when the county's revenue, based on harvest prices and yields, falls below a per-acre revenue guarantee. It protects against low revenue across the county, not against individual farm losses. If your yields don't track with the county's, or if you can't afford a large loss in one year, consider other programs based on yield histories. You might consider supplementing this with hail and fire coverage for individual tracts.
You don't need APH or actual production records to determine a payoff. However, there is only one policy per farm.
You choose the coverage level from 70% to 90% of the expected county revenue and a protection per acre from 60% to 100% of the maximum protection per acre.
Say the expected county corn yield is 120 bu/acre and the CBOT average settlement price for the December corn futures contract during the last five business days before March 15 is $2.40. You choose a coverage level of 90%, which provides a trigger revenue of $259 (120 bu x 90% x $2.40). The policy pays an indemnity if the county revenue for the crop year falls below that amount. The maximum protection per acre is set at $432 and you choose 100% of that amount.
If the county yield averages 80 bu/acre and the average CBOT settlement price in November for December corn is $2.10, the county revenue would be $168 (80 x $2.10). The policy would pay an indemnity of $152/acre. That's figured by multiplying a payment calculation factor of 0.3514 [(259-168)/259] times your policy protection of $432.
* Income Protection (IP)
This policy pays when gross revenue drops below a revenue guarantee that is the APH yield multiplied by a base price multiplied by a coverage level. You pick the coverage level from 50% to 75%. Your APH is already established and the base price is figured as the average of settlement prices during February for December corn futures or November soybean futures. These are released in March before crop insurance deadlines and are estimates of futures prices at harvest.
Gross revenue, the number used to figure indemnity payments, is the actual yield multiplied by the harvest price. The harvest price is the average of settlement prices during November for December corn contracts and October settlement prices for November soybean contracts.
Say your APH is 120 bu, the base price is $2.40 and you select 75% coverage. Your policy will pay off if your revenue is less than $216 (120 x $2.40 x 75%) by any combination of lower yields or lower prices. If yield drops to 100 bu/acre and the base price dips to $2.25, you won't see a payment. However, for 100 bu with a base price of $1.75, the policy would pay $41/acre.
You need to recognize that the IP policy offers only enterprise units, which put all farmland of one crop in a county under a single policy for claims calculation.
* Crop Revenue Coverage (CRC)
This policy is similar to IP but provides flexible protection if prices rise, paying on the higher of either the base or harvest price. However, CRC has a $1.50 and $3 cap on price rises for corn and soybeans, respectively. CRC uses the same method of setting base and harvest prices as IP. Coverage levels range from 50% to 75% and are higher in some counties. The policy uses base, optional and enterprise units. Say your APH is 150 bu, the base price is $2.40 and you select 75% coverage. That's a revenue guarantee of $270/acre. At harvest, prices are $2 but your yields are 150 bu. The policy pays nothing. If the harvest price is $2.40 and your yields are 100 bu, the policy pays $30/acre. If the harvest price rises to $4, the policy figures any indemnity based on $3.90. That's the $1.50 cap on an increase from base to harvest.
* Revenue Assurance (RA)
These policies provide two options (Base Price and Harvest Price) for establishing the final price for which you'll be paid for losses. Each pays when gross revenue falls below the guaranteed revenue.
Both calculate base and harvest prices in the same manner as IP and CRC. However, the RA-Base Price option policy has no provision for paying at higher harvest prices. The RA-Harvest Price option pays at higher harvest prices and, unlike CRC, has no price cap. Both cover basic, optional, enterprise and whole farm units. ?
Insurable Units: Divide And Conquer
One key to gaining the most yield or revenue protection from crop insurance is understanding the four categories of insurable units.
Units are acres grouped under a type of policy. And, as you might expect, the more acres in a unit, the lower the policy's premium. However, you might want to manage risk by separating your higher- and lower-risk acres into smaller units, thereby tailoring coverage or qualifying for discounts.
Furthermore, you'll need to recognize the differences among the unit coverage policies offer or require. Multiple Peril Crop Insurance insures basic and optional units; Catastrophic covers only basic units. Income Protection and Group Risk Plan policies offer only enterprise units while Crop Revenue Coverage insures basic, optional and enterprise units. Revenue Assurance covers basic, optional, enterprise and whole-farm units.
Here's how risk management experts and ag economists explain the various units.
Basic: The ownership of the insured commodity defines the basic unit. You can designate a basic unit for all tracts you own or cash rent within a county and identify one unit for all the land you share rent with each landlord.
Say that in one county you own 500 acres, cash-rent 500 acres and crop share 200- and 300-acre farms with two landlords. You can have three basic units, one for each share-rented farm and one for the combined owned and cash-rented ground. Each different crop is a different unit.
Also, tracts in different counties must be insured as separate units. You need to keep records on each unit.
However, insuring all your acres as basic units carries a 10% discount.
Optional: If you have four farms in four township sections, you could insure them as separate optional units. You'll need to keep separate Actual Production History records and you don't receive the 10% discount from basic units. You can designate optional units when you're using different farming techniques, such as irrigated and non-irrigated corn.
Enterprise: This combines all acres of a crop within a county into a single unit of at least 50 acres, regardless of whether the acres are owned or rented. If you grow corn and soybeans in eight different tracts across the county, you could have two enterprise units, one for each crop.
However, because an enterprise unit will be noticeably larger than a basic unit, it's less likely that you'll have a yield low enough to trigger a payment.
Because of the lower risk of a payment, the premiums are cheaper.
Whole Farm: Combining corn and soybean acres in a county into a single unit gives another discount. F
Counting On County Coverage
A track record of consistent production - even through drought and flood - was one reason Nick Dawes began using a Group Risk Plan (GRP) policy for his 1,500 corn and bean acres.
Two years ago, Dawes' insurance agent helped him review his 12-year production history. It showed this Adel, IA, grower that he had never collected on any Multiple Peril Crop Insurance policies, including the drought of 1988 and the flood of 1993.
"Most of the time I'm over the county average by quite a bit," says Dawes, whose tiled and gently rolling ground lies within a six-mile radius in Dallas County, west of Des Moines. The county-based policy's lower premium was another incentive. For 1999, Dawes selected 90% coverage for both crops, which set his trigger yields at 124 and 40 bu for corn and beans, respectively. Also, he chose per-acre protection levels of $357 and $300. That coverage costs about $5/acre for corn and around $2.50/acre for soybeans.
Recognizing that a freak hailstorm could hurt his yield while the rest of the county went unscathed, Dawes bought a hail policy to complement the GRP coverage.
Dawes emphasizes that a GRP policy isn't for everyone, but that it does provide him with the risk management to handle a major disaster.
"You just hope you don't have to use it," he adds.
CRC Avoids Collateral Damage
Ron Davidson employs the Crop Revenue Coverage (CRC) policy to protect income on the 5,000 acres of corn and soybeans he grows in three northern Illinois counties.
"It gives us peace of mind and helps with the banker; we use it (crop insurance) as collateral on operating loans," explains the Creston, IL, farmer. The guaranteed income also frees him to pay more, not less, attention to marketing.
"If we see the upside potential, we can market behind it (crop insurance)," adds Davidson, who's used CRC since it was introduced in 1996.
In 1999, Davidson used CRC to establish income guarantees from $330 to $466/acre for corn and from $220 to $290/acre for soybeans. He achieved that with government and private policies on optional units. APH yields ranged from 145 to 175 bu/acre for corn and from 35 to 60 bu/acre for soybeans. The yield variations, coupled with the distance between farms, prompted Davidson to establish multiple insurable units.
"We're paying $33-34/acre for insurance, but look at the coverage we're getting," he points out. "We may collect $125-130/acre on some fields."
While he may collect for the '99 crop, that's not the norm. He has collected only five times in 15 years. But those times were crucial. "We had it (Multiple Peril Crop Insurance) in 1983 and 1988, the drought years," he recalls. "It helped us out."
Weave Safety Net With Revenue Assurance
Joe and Bill Horan consider a Revenue Assurance (RA) policy as a type of safety net. Their farm, near Rockwell City, IA, utilizes RA whole-farm units.
Using 85% coverage and their Actual Production History (APH) yields last year, they locked in revenue of $240/acre on their whole-farm unit of corn and soybean acres.
"The estimated premium is $5.36. Before we plant a seed, we know we'll generate a minimum of $240/acre. I don't know of any other business in this country that has this type of safety net," Bill Horan says.
Horan explains their philosophy on the whole-farm unit. "You should not worry about gross dollars per field when all you're interested in is total gross for the farm. You don't insure individual rooms in a house, you insure the whole house."
And, he notes, whole-farm units are cheaper. Each move to optional and enterprise coverage doubles the premium, he says.
The Horans buy the base pricing RA policy that figures indemnity on prices established in the spring rather than the harvest price option. The latter option is more expensive and bases indemnity payments on the higher of either the spring or harvest price.
He favors the base price policy for two reasons. First, you don't need to worry about prices rising at harvest. That happens only two years out of eight or 25% of the time. Second, the base price gives Horan the nudge to be a better grain marketer. It's too easy to let the harvest price policy become your marketing program, he says. F
Covering The Bases With MPCI
Basic protection is the reason Kevin Schaffer is a 10-year veteran of Multiple Peril Crop Insurance (MPCI) or Actual Production History (APH) policies on his Fairbury, IL, farm.
"MPCI gives me a reason to sleep at night," he says. For 1999 he bought two different policies for his corn and soybean acres. He had a Crop Revenue Coverage policy on corn. But he went with an MPCI policy with 75% coverage on 300 acres of soybeans, which carry an APH yield in the upper 40s.
"Anything less than that (75%) and you'll have to have a real disaster to collect. The 75% gives a comfortable coverage," he explains.
"It's still expensive enough," he points out. "But it covers my costs if we have a bad year." F
Myth-Takes About Crop Insurance
Tales that too-often keep farmers from protecting their investment
Except for the futures market, there may be more myths about crop insurance than almost any other element in farming. To help you sort fact from fiction, here are some common crop insurance fables and replies gleaned from ag economists and crop insurance professionals.
Myth No. 1. "Crop insurance doesn't pay."
First, look at crop insurance as another expense, such as seed, fertilizer or chemicals. It's another cost of doing business. Also, put crop insurance in the same category as your other policies, such as health, collision, fire and life. Those policies don't "pay" each year either unless you have a major illness, wreck the car, burn down the house or die.
Myth No. 2. "It's too expensive."
The answer is "Compared to what?" Ag economists note that farmers may spend thousands on new equipment for a new production technique they think is right, yet balk at spending a few hundred dollars to protect that investment.
Myth No. 3. "I don't need insurance because I've never had a crop failure."
The odds say a farmer will have a complete crop failure one year out of 20. And, it takes 10 years of average profits to make up for that one crop failure. If your finances are solid enough that you are "self-insured" you may not need insurance. But if you need the bushels or the bucks from each crop each year to stay in business, insurance deserves another look.
Myth No. 4. "I can't verify yields unless I have records that will stand up to an audit by a four-star accounting firm."
Gene Gantz, a risk management consultant and former executive with government and private insurance agencies, says, "You can use 'soft' records to get started and improve them as you go along. You have to have something written down to prove yields. It can be a record of combine loads, but you need a basis to figure yields that makes sense."
Elaborate records aren't necessary. Another insurance agent had seen crop yields recorded in a seed-corn notebook used successfully to pass a federal audit.
Myth No. 5. "I need to have a total loss on all the corn I grow in the county to collect."
Different policies let you divide acres into smaller insurable units, giving you the option of making each farm independent.