Are you looking at crop insurance the right way

Jason Alexander, Vice President, Crop Insurance

Crop insurance has evolved into a fundamental component of a complete farm risk management plan, but insurance is just one piece of the puzzle. Farm programs, financing, forward contracting and income diversification also factor in. When deployed holistically, these tools create a valuable safety net. But all the components can get confusing if you don’t have the right expertise at your side. Coordinated well, crop insurance can be the pillar of a solid farm risk management framework.

Adapting to change and constantly learning is key. This wisdom holds true now more than ever. For example, after several years of strong crop prices, farmers were seeing prices trend down as they made their five-year elections for either Price Loss Coverage (PLC) or Agriculture Risk Coverage (ARC). Farm Credit partnered with FSA and universities at educational meetings to help farmers proactively inform themselves on program details. Just as we saw that ARC was the popular choice across our four states (Indiana, Ohio, Kentucky and Tennessee), USDA data also showed that the vast majority of farmers chose ARC. Nationally, 96 percent of soybean farms and 91 percent of corn farms elected ARC-County. The educational efforts proved successful as most farmers realized that ARC was their best choice.

Inputs and income

The high price of crop inputs must be weighed against yield targets and expected income. Forward-price contracts are a useful tool, but they also add additional complexity to your risk management plan. If a farmer is using forward-price contracts and a disaster causes production to fall off, then that farmer would have to explore other options, such as making a settlement, based on their contractual obligations while the price of the commodity likely will have increased because of the disaster and a short crop. So with revenue protection insurance, the farmer can take advantage of what is happening in the market without as much risk from having a short crop, and can meet contractual obligations by either buying the grain or making a financial settlement based on insurance.

Enlist a team of experts

The risk management matrix can get complicated quickly. We suggest bringing a diverse team of experts to the table who understand the larger agricultural business climate as well as the unique strengths and challenges facing your farm.

Risk management team

  • Loan officer
  • Grain marketer
  • Crop insurance specialist
  • Outside insurance provider

With a team of experts at the table, you can adequately walk through what’s happening with your crop, your insurance, how much repayment capacity you have, your balance sheet, profitability and what kind of insurance claim you can expect under different scenarios. This kind of visibility is crucial in maintaining operational profitability and a core risk management strategy that will maintain operational liquidity not only during times of plenty, but also during times of challenge.

Read more here and download the Farm Credit Mid-America Insights Report.