1. Crop Insurance Basics Trent Milacek NW Area Ag Econ Specialist
Rodney Jones
Oklahoma Farm Credit Ag Finance Chair

2. Most Common Products (For Oklahoma and Surrounding Area Producers)
Revenue Protection (RP)
Losses calculated based on the combination of yield times price so a loss can be the result of either
Yield Protection (YP)
Losses calculated based on a yield shortfall
NAP
Basically for commodities for which “traditional” crop insurance products are not available

3. Sounds Simple: However!!!!
For RP and YP producers can choose coverage level (50% to 85%)
85% not available for all crops in all locations
Common choices are 60% to 75%
Premiums are lower to begin with, and also subsidized at a higher level for the lower coverage level choices (farmer cost is much lower for lower coverage levels, but you are not getting as much coverage)
All else equal, premiums are higher for RP than for YP (you are purchasing more insurance)

4. Sounds Simple: However!!!!
For RP producers can choose to have the loss calculation based on the planting time price projection, or the higher of the planting time price projection or the harvest time actual price (HPO)
All else equal, the HPO adds to the cost of the insurance (because you are buying more coverage)

5. Sounds Simple: However!!!!
Producers can choose to have loss calculations based on Basic Units (each geographical section for each crop is it’s own insurance unit), or based on Enterprise Units (all fields planted to the same crop are averaged for loss calculations
All else equal, enterprise unit coverage premiums are lower, and are subsidized at a significantly higher level, so farmer paid premiums are much lower (but the type of loss being covered is much different)

6. Optional Units Enterprise Units
OU Coverage
Subsidy
50%
67%
55%
64%
60%
65%
59%
70%
75%
80%
48%
85%
38%
EU Coverage
Subsidy
50%
80%
55%
60%
65%
70%
75%
77%
68%
85%
53%

7. Sounds Simple: However!!!!
Farm program selection choice (made several years ago) impacts crop insurance choices
Supplemental Coverage Option (SCO) is a product that basically takes underlying RP or YP coverage level up to 86%
Based on county loss calculations rather than individual
Relatively inexpensive premiums, and highly subsidized, so it is an inexpensive way to achieve a higher level of insurance coverage
Not available for crops on base acres that are enrolled in ARC
So a lot of wheat in Oklahoma is not eligible for SCO

8. The Choice Is Very Complex
Producers must choose from the possible product, coverage-level, unit structure choices (100’s if not 1,000’s) and pick an appropriate insurance product
Deadlines are approaching
August 31 for Canola (Planting time price tracking now)
September 30 for Wheat, Oats, Barley, Rye
March 15 for Spring Planted Crops
As conditions change (prices, production plans, etc.) it may be appropriate to consider doing something different than you did last year

9. Laying the Groundwork
Identify what type of producer you are. Grain, Cattle, or Both?
Are base acres enrolled in either ARC or PLC?
Do you have a significant amount of acres that are not covered by base acres?
Do you plant crops that are different than the enrolled base acres?
What is your risk exposure? Do you have a high debt-to-equity ratio?
Variable cost of production.

10. Determining Your Coverage Requirement
This decision will vary from producer to producer.
Highly dependent on fixed and variable costs of your operation.
High fixed costs would include high machinery payments and high cash rents.
High variable costs could arise from low soil fertility, significant weed pressure, excessive cultivation, etc.

11. Making the Crop Insurance Decision

12. 2016 Wheat Budget Variable Costs
Revenue (32bu. X $4.00/bu.)
$128.00
Wheat Seed (1.5bu. X $10/bu.)
$15.00
Machinery/Fuel
$10.00
Herbicide/Pesticide
Fungicide
Crop Insurance (70% RP-OU)
$9.00
Labor
$5.00
Custom Hire
Fertilizer
$30.00
Harvest
$36.00
Land (Cash Lease)
$45.00
Total Variable Costs
$175.00
Returns over Variable Costs
($47.00)
Revenue from $4.00/bu. is $128.00
Conservative variable costs equal $175.00
“Profit” equals ($47.00)/acre.

13. How Much Coverage Do You Need
Budgets are showing a loss at average production and prices
What’s your debt – equity position, how much can you afford to lose if you have a “bad” crop (or if prices tumble)
Variable costs vs fixed costs

14. Revenue Insurance
Prices are set at different times of the year based on the typical marketing of that crop.
Projected Price Tracking: August 15th - Sept. 14th
Harvest Price Tracking: Harvest month
Allows a producer to lock in a revenue instead of a yield to reduce price risk.

15. Revenue Insurance – Do You Need the Harvest Price Option?
What is the upside price risk??
Some producers elect to exclude HPO when planting time prices are high
The logic – small risk of prices going higher by harvest, reduces the premium a little bit
Is the planting time price revenue guarantee enough for you? How will you feel if you don’t purchase the HPO, and then prices go up and you have a loss?

16. Yield Protection YP-Protects against losses in yield, not revenue.
Suitable for individuals looking to lower insurance costs and those who believe prices will trend higher.
Know that yields above the guarantee do not always guarantee that variable costs of production are covered.

17. Crop Insurance Plan-Optional Units
Level
Actual
Price
Approved
Yield
Guar.
Yield/Acre
Guarantee
$/Acre
Base Premium
Premium
as % of
Subsidized
RP-OU 50
5.20 34
17.00
$88.40
$8.52
4.0
3.55 55
18.70
$97.24
$10.49
4.9
4.72 60
20.40
$106.08
$12.85
5.4
5.68 65
22.10
$114.92
$15.50
6.7
7.71 70
23.80
$123.76
$18.76
7.5
9.33 75
25.50
$132.60
$22.29
9.1
12.04 80
27.20
$141.44
$26.14
11.4
16.18 85
28.90
$150.28
$30.38
14.8
22.25

18. Crop Insurance Plan-Enterprise Units
Level
Actual
Price
Approved
Yield
Guar.
Yield/Acre
Guarantee
$/Acre
Base Premium
Premium
as % of
Subsidized
RP-EU 50
5.20 34
17.00
$88.40
$8.52
1.9
$1.70 55
18.70
$97.24
$10.49
2.2
$2.10 60
20.40
$106.08
$12.85
2.4
$2.57 65
22.10
$114.92
$15.50
2.7
$3.10 70
23.80
$123.76
$18.76
3.0
$3.75 75
25.50
$132.60
$22.29
3.9
$5.13 80
27.20
$141.44
$26.14
5.9
$8.36 85
28.90
$150.28
$30.38
9.5
$14.28

19. How Do You Feel About Enterprise Units?
Higher level of coverage for less farmer paid premium
But it’s not exactly the same coverage!!!!
Understand that you can have a complete disaster on one (or more) individual fields and still not collect a crop insurance indemnity payment if other fields do well
Do you think in terms of insuring the whole crop, or do you think in terms of insuring each individual field (section actually)

20. What About Using SCO?
Gain a higher level of coverage for a low farmer paid premium
Remember it’s not exactly the same coverage, you can have a farm loss but if no loss at the county level you don’t collect. On the other hand, you might have a good crop, but the county has a loss and so you collect
A good alternative in many cases, but not available to you if you have base acres of the specific crop you are planting enrolled in ARC

21. Overview of NAP
The Noninsured Crop Disaster Assistance Program provides financial assistance to producers of noninsurable crops.
This provides protection against natural disasters resulting in lower yields, crop losses and/or prevented crop planting.
Source: USDA 2014 Farm Bill Fact Sheet “The Noninsured Crop Disaster Assistance Program for 2015 and Subsequent Years”

22. What crops are eligible?
For a crop to be eligible for NAP coverage it must be a commercially produced agricultural commodity for which crop insurance is not available.
For assistance with determining the availability of crop insurance for a crop in question, producers are encouraged to contact a local crop insurance agent.
Source: USDA 2014 Farm Bill Fact Sheet “The Noninsured Crop Disaster Assistance Program for 2015 and Subsequent Years”

23. Eligible Crops Descriptions
Crops grown for food
Crops planted and grown for livestock consumption such as grain and forage crops including native forage
Crops grown for fiber, such as cotton or flax, (except trees)
Crops grown in a controlled environment (mushrooms and floriculture)
Specialty crops like honey and maple syrup
Industrial crops grown for feedstock
Source: USDA 2014 Farm Bill Fact Sheet “The Noninsured Crop Disaster Assistance Program for 2015 and Subsequent Years”

24. Coverage Levels
Standard NAP coverage includes a catastrophic level (CAT) coverage
Makes payments when losses exceed 50% of expected production at 55% of the average market price
Additional levels of NAP are available from % of production and up to 100% of the average market price with a separate premium
Source: USDA 2014 Farm Bill Fact Sheet “The Noninsured Crop Disaster Assistance Program for 2015 and Subsequent Years”

25. How do you apply for coverage?
Contact the county FSA office where the producer’s records are maintained
Producers must fill out form CCC-471 “Application for Coverage”
Service fees must be paid prior to coverage
Closing dates vary by crop
Source: USDA 2014 Farm Bill Fact Sheet “The Noninsured Crop Disaster Assistance Program for 2015 and Subsequent Years”

26. Conclusion
Low prices and low profitability offer an opportunity for good managers to excel.
The crop insurance product selection choice has become very complex
If you don’t need “high” levels of coverage (a rare instance in our opinion) there are several ways to obtain coverage at a low cost
If you need “higher” levels of coverage (common in the current environment) you need to carefully weigh the alternatives

27. Conclusion
Enterprise unit structure provides one way to get to higher levels of overall coverage and keep the farmer paid premiums down
But some do not like the additional risk that is involved
Lower levels of “underlying” crop insurance coverage combined with an SCO policy that brings the coverage (sort of) up to the 86% level is another way to keep overall farmer paid premiums down
But ARC crops are not eligible