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Coverage Considerations

January 7, 2013
By: Katie Humphreys, Farm Journal Managing Editor
 
 

What to expect when you sign up for crop insurance

Amid other lessons, the titanic drought of 2012 gave farmers an education in crop insurance—and a reminder that it’s as vital a tool in a marketing plan as options or calls.

As of Dec. 10, crop insurance companies have paid more than $8.7 billion to farmers for losses in 2012, according to USDA’s Risk Management Agency (RMA). Art Barnaby, Kansas State University risk management Extension specialist, says that number could reach $15 to $16 billion by mid-2013 when claims are paid in full.

Contrary to what farmers think, the magnitude of claims in 2012 won’t impact crop insurance premium rates in 2013, says Keith Coble, Giles Distinguished Professor, Department of Agricultural Economics at Mississippi State University. Premium rates for 2013 were set before complete 2012 yield and loss information was known. Looking to 2014, when 2012 losses will catch up to premium rates, increases likely won’t be as large as anticipated because of the weather indexing process used to set premium rates, Coble adds. "In locations where 2012 was an unusual weather year, losses will not receive as much weight as more typical years," he explains.

Consider the following five points when nailing down crop insurance coverage for 2013:

1 Premium rate changes. This year marks the second year of premium rate changes for RMA following an independent study and peer review process (see maps at right). The revised premium rates incorporate: 

  • Integration of weather data, so losses from rare weather events receive an appropriate weight in the overall process used to set rates.
  • Refinements of premium loads for prevented planting and replant payments. Previously, these loads were determined at a state and regional level. Now they are determined based on weather districts within each state, reducing the degree that excess losses in one part of the state unduly influence premium rates in another part.
  • More weight on loss experience from recent years, which better reflects current agronomics and the crop insurance program.


2 Yield trend factors. In its second year, trend-adjusted actual production history (APH) is being expanded for most of the U.S. for yield protection or revenue protection policies. Basically, a trend adjustment factor is estimated for each crop and county. This factor is equal to the estimated annual increase in yield and is based on county average yields determined by the National Agricultural Statistics Service. Each yield reported in the individual insurance unit’s APH is adjusted upward by the trend adjustment factor times the number of years since the yield was recorded.

3 Hit to yield average. A significant yield hit in 2012 will reduce APH in some cases—and a lower APH means a lower per-acre revenue guarantee, Coble says.

"On an individual farm, a lower APH will automatically increase premium rates, unless there is a larger rate reduction set by RMA," Barnaby adds. "However, premium dollars per acre will increase or decrease depending on the increase or decrease in the spring base price."

When insuring a field with limited APH, a major crop loss has a much greater effect since the low-yield year is a large part of the average, explains Nathan Kohls, crop insurance agent at the Citizens State Bank in Moundridge, Kan. "Trend adjustment has only a limited effect until the yield database has more than five years of history."

In most cases, though, trend adjustment will roughly offset the decrease in APH, keeping the APH near 2011 levels, he adds.

4 Enterprise units. "While enterprise units have been available since the ’08 farm bill and are popular in some areas, there are still producers who need to look at enterprise units more carefully," Coble says. An enterprise unit combines all of the acres of a particular crop within a county. "Almost always, switching to enterprise units will lower costs such that a higher coverage level can be taken," Coble adds.

5 Shallow loss programs. Both the Senate and House versions of the farm bill contain shallow loss programs, which are in part a replacement for the direct payment program.

The Agriculture Risk Coverage option in the Senate bill, which is delivered through the Farm Service Agency, and the Revenue Loss Cover age option in the House bill cover a fixed range of loss that uses prices and yields not tied to crop insurance.

The Supplemental Coverage Option, offered through the RMA, and Stacked Income Protection Plan for cotton cover countywide losses that are between the coverage level chosen by the individual farm and 90%. Both variable coverage approaches are included in the Senate and House bills.

"The future of farm policy for the producer revolves around crop insurance programs," Coble says. "If some of these programs in the House and Senate bills are implemented, there’s going to be some real issues for producers in terms of the choices they have. Because the farm bill is still in limbo, though, we don’t know what’s going to happen. Either way, it’s going to be complicated."

Remember, the deadline to sign up for crop insurance for most major crops is Feb. 28 in the South and March 15 farther north.

Synchronize Crop Insurance and Marketing

The details of the next farm bill are yet to be determined. As it currently stands, though, the direction seems to be moving away from the old support program and toward crop insurance to help manage risk. This policy shift will force producers to first decide whether to use crop insurance or self insure. The key decision is what level of crop insurance to buy. Options include:

  • Take a relatively high level of crop insurance and then use futures and options strategies to protect the insurance premium.

Advantage: Once the initial decision is made, your focus can shift to production.
Disadvantage: Writing a big check with no way to offset that cost.

  • Use a minimum level of crop insurance and futures and options strategies to optimize profitability. This requires a greater level of decision making that might or might not reduce the need to write a big check.

Advantage: Greater flexibility.
Disadvantage: Constant decisions must be made throughout the year.

The objective is to develop an integrated risk management plan that gives flexibility to improve profitability with the least cash-flow risk possible.

p32 Coverage Considerations Charts

 

 

For an interactive series of maps detailing indemnity payments on the county level as well as videos and more tips on maximizing insurance coverage, visit www.FarmJournal.com/crop_insurance

You can e-mail Katie Humphreys at khumphreys@farmjournal.com.

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FEATURED IN: Farm Journal - January 2013

 
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