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Mind the Gap

March 2, 2011
crops rain ins
Customizable Total Weather Insurance policies protect against a range of weather perils, including frequent rains that delay harvest.  
 
 

A new program that offers multiperil weather insurance is being hailed as the next step in protecting farmers against weather-related crop loss.

Adverse weather conditions are responsible for more than 90% of crop loss, according to USDA, and even small fluctuations in the weather can affect potential yields.

"In the evolution of weather contracts, we made a giant step with one of our weather insurance providers. This is being labeled as Total Weather Insurance [TWI]," says Derrik Hobbs, an agent with Silveus Insurance Group in Warsaw, Ind.

In November, WeatherBill Inc. announced the first portfolio of insurance products designed to protect agribusinesses from the financial impact of extreme weather. TWI policies are optimized for corn and soybean production in 17 states: Illinois, Indiana, Iowa, Kansas, Michigan, Minnesota, Missouri, Nebraska, North Carolina, North Dakota, Ohio, South Carolina, South Dakota, Tennessee, Texas, Virginia and Wisconsin.

According to WeatherBill, optimized coverage means that the metrics are already in place for the crops in those states but producers can also customize coverage for different crops and geographies.

For more than 70 years, producers have had access to some form of weather insurance. Since 1938, USDA has regulated the government-subsidized Multiple Peril Crop Insurance (MPCI) for a variety of crops, including most row crops, when the Federal Crop Insurance Corporation was created. Under the program, most farmers can insure up to 85% of their proven yields, based on average production history (APH). However, the program leaves a percentage of the crop uninsured.

Guard Against the Elements. The policies were originally rolled out as a tool to protect against one specific weather event at a time, Hobbs says.

If a producer needed coverage for multiple events, multiple policies were required, creating confusion and "unjustifiably high cost." Now, an insurance agent can sit down with a producer and design a single policy that protects his operation from multiple weather events.

"Financially, these policies are constructed to compensate producers for the gap between their expected revenue and the amount of revenue protected by their multi-peril crop insurance," Hobbs says.

That gap could be even larger if a producer’s proven yield is lower than his potential yield because of previous years’ bad weather, poor field management or no crop history in that field, Hobbs says. Even without the above challenges, APH yields are often lower than potential yields because higher-yielding varieties and hybrids have only been on the market for a few years.

For example, a farmer has a proven 140-bu.-per-acre crop insurance yield on corn and buys 80% revenue protection. In addition, he buys a high-yielding hybrid. If he’s hoping to yield 200 bu. per acre at $5 per bushel, he has $1,000 in anticipated revenue, but he’s guaranteed only $560.

"That’s a massive gap," says David Friedberg, CEO of WeatherBill. TWI seeks to fill this gap.

"Farmers take a risk every year by planting. We think it’s important to help them take the gamble out of the business, to help make it more predictable and more sustainable," Friedberg says.

TWI incorporates historical yield and loss data, weather history and long-term and short-term weather forecasts for the grower’s specific crop and location. This enables WeatherBill to customize insurance plans to reflect farmers’ individual weather-related risks for their corn
and soybean crops.

"For every particular crop and county combination, we’ve created a weather insurance product that matches conditions that have caused losses for farmers in that county," Friedberg says.

Plans protect from a range of weather perils, including:

  • drought throughout the growing season;
  • excessive rainfall during planting;
  • cold weather during the season;
  • heat stress during pollination;
  • a killing freeze before harvest; and
  • frequent rains that delay harvest.
     

TWI policies allow growers to create a plan that reflects the crops they want to cover, the desired yield (even if it exceeds the established APH) and current forecasts to lock in their projected profits. Unlike traditional crop insurance programs, no verification is required. Payments are automatically sent when the weather conditions the grower specified occur as measured by independent sources, such as the National Weather Service.

"Weather insurance is somewhat new to the agriculture sector," says Jamie Wasemiller, operations manager and analyst with the Chicago-based Gulke Group Inc. "It’s gotten more involved and more important given expensive genetics and high-yielding hybrids."

Wasemiller offered weather plans this past year, but says he’s seeing a sharp increase in interest in TWI policies this year, thanks in part to a partnership between WeatherBill and ADM Crop Risk Services. Contracts and premiums can be locked in until March 15. Policies can be canceled before that date for any reason. At present, Hobbs says, Silveus agents are designing policies for producers that cost 12% to 25% of every $1 protected.

In addition to talking to a qualified agent, producers can get more information, including a free personalized Weather Risk Report, from www.weatherbill.com.

The report provides an analysis of how TWI would have protected a producer in previous years based on historical USDA crop production and weather data for his area. It also will combine this data with the farmer’s potential yield, which is based on hybrid or variety planted and historical yields. Finally, the report also identifies a grower’s expected range of profit-per-acre for the 2011 crop year.

"I think it’s a fantastic risk management tool," Hobbs says. "Row crop farmers are extremely interested. We also have seen sharp interest in weather policies from the specialty crop space. There’s a whole part of agriculture that doesn’t have the crop insurance options that the average corn, bean and wheat producer has access to."


How Total Weather Insurance Works

Jamie Wasemiller, operations manager and analyst with the Chicago-based Gulke Group Inc., says two key benefits of the new insurance are customizable contracts and not needing to prove loss to receive payments.

Producers pick the time period or periods they want covered, temperature and/or precipitation levels and the coverage desired. They can also choose which weather station they want to use to record data. According to WeatherBill, Total Weather Insurance (TWI):

  • is based on advanced agronomy, historical yield and loss data, weather history and long-range and short-term forecasts for the grower’s specific crop and location;
  • enables growers to customize plans;
  • bases premiums on historical measurements and forecasts;
  • offers coverage that can begin as early as 10 days from date of purchase (premiums increase as the season progresses and short-term forecasts become more accurate);
  • uses real-time weather data from the National Weather Service, the National Oceanic and Atmospheric Administration and regional weather stations to determine temperature and precipitation during the growing season;
  • issues payment when weather conditions specified in the policy occur (as verified by one of the sources listed above);
  • automatically sends payments and requires no proof of loss; and
  • collects premiums, minus any payouts, in November after harvest.
     

When considering a TWI policy, Wasemiller suggests, producers and agents should keep these factors in mind:

  • The historical information: Look at the numbers and how often the policy would have paid off.
  • How reported weather compares to your field conditions: "If you know your field is 3° lower than the weather, factor that into the contract."
  • Premiums compared with coverage: Wasemiller advises keeping premiums to about 15% of the dollar coverage purchased. "If you want to do more than that, sit down and talk with your adviser. These products can be expensive, but it shouldn’t be just a yes or a no. You need to factor in if this is a true hedge," he says.
  • Use of the enterprise unit discount: With the discount, there is the possibility that producers will have poor yields in some fields but receive no insurance indemnity because of overall production. "I would consider purchasing weather insurance to cover the worst ground within that enterprise unit," Wasemiller says.
  • Overall risk management strategy: Producers need to have a good idea of how much money they are going to use for marketing their grain through insurance and any other risk management tools.

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FEATURED IN: Top Producer - March 2011

 
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