Ag Land Management Crop Insurance

Ag Land Management Crop Insurance
Crop Protection Options 4/7/08 Version Adopted for use by ASFMRA

The explanations and examples in this presentation reflect the general concept of insuring crops. However, the information given does not cover every situation and is not intended to replace current professional advice. 4/7/08 Version Adopted for use by ASFMRA

Causes of Insurable Losses
4/7/08 Version Adopted for use by ASFMRA

3 Elements of Crop Protection Federal Crop Insurance Program -Public/private partnership Crop Hail Insurance -Private sector Named Peril/APH Plan “Add-ons” 4/7/08 Version Adopted for use by ASFMRA

Crop hail insurance Fully private – unsubsidized, no expense to taxpayers A risk management tool dating back to late 1800’s Covers additional perils such as fire, vandalism and storage Variety of policy forms 4/7/08 Version Adopted for use by ASFMRA

Federal Crop Insurance Created in 1938 -Minor participation prior to 1981 -Low coverage available -No direct government subsidy -No private sector involvement -Poor ag safety net -Producers relied on disaster assistance 4/7/08 Version Adopted for use by ASFMRA

Crop Insurance Act of 1980 Introduced public/private partnership Created foundation of program we have today Companies deliver program efficiently Multiple Peril Crop Insurance introduced (MPCI) Direct premium subsidy and higher coverage levels 4/7/08 Version Adopted for use by ASFMRA

Crop Insurance Reform Act of 1994 Mandatory participation in the crop insurance program Catastrophic (CAT) coverage was created. Compensated farmers for losses exceeding 50% of an average yield paid at 60% of the price Premium for CAT was completely subsidized Subsidies for higher coverage levels were increased 4/7/08 Version Adopted for use by ASFMRA

Agricultural Risk Protection Act ARPA 2000 Increased premium subsidy – higher levels of coverage Significant increased participation 4/7/08 Version Adopted for use by ASFMRA

Crop Insurance Program Models Yield Guarantee products a. Individual (APH, GYC, Peanuts, DOL-Citrus fruit) b. Group (GRP) c. Fixed Yield” (Hybrid Corn & Hybrid Sorghum Seed) Revenue Guarantee products a. Individual (AGR, CRC, IP, RA) b. Group (GRIP) c. Fixed Revenue( Individual Fresh market vegetables) 4/7/08 Version Adopted for use by ASFMRA

Types of multiple peril crop insurance Farm Level APH Plan (includes CAT coverage) Crop Revenue Coverage (CRC) Income Protection (IP) Revenue Assurance (RA) County Level Group Risk Protection (GRP) Group Risk Income Protection (GRIP) 4/7/08 Version Adopted for use by ASFMRA

Actual Production History (APH) Coverage Insurance yield is based on the farmer’s own yield history Provides coverage of 50,55,60,65,70 and 85% of the APH (only 75% in some cases) Allows up to 100% of the market price 4/7/08 Version Adopted for use by ASFMRA

Actual Production History (APH) Coverage Losses Covered Adverse Weather (frost, heat, drought, hail, freeze, etc.) Fire, limited to natural causes Insects and Disease Wildlife Earthquake/Volcanic Eruption Failure of Irrigation Water Supply 4/7/08 Version Adopted for use by ASFMRA

Actual Production History (APH) Coverage Not Covered Negligence, wrongdoing Poor management and farming practices Failure or breakdown of irrigation equipment or facilities Fire from man made causes, combines, trucks, etc 4/7/08 Version Adopted for use by ASFMRA

Actual Production History (APH) Coverage Calculations: Yield guarantee = APH • coverage level Premium/acre = yield guarantee • premium rate • price election Note: CAT program costs $100/crop/county for a 50% yield guarantee and a 55% price election. APH Plan has a $30/crop administrative fee. 4/7/08 Version Adopted for use by ASFMRA

Actual Production History (APH) Coverage If actual yield is less than the yield guarantee Indemnity payment = (yield guarantee – actual production) • price election If actual yield is equal to or greater than the yield guarantee: Indemnity payment = 0 4/7/08 Version Adopted for use by ASFMRA

“Catastrophic” Yield Coverage 50 % yield coverage Losses are paid at 55% of MPCI indemnity price Optional units are not permitted $100 / crop / county 4/7/08 Version Adopted for use by ASFMRA

How much coverage can I buy There are two decisions that determine the amount of protection obtained from APH Plan the level of yield coverage chosen (50%-85%) the level of price election chosen (55%-100%) 4/7/08 Version Adopted for use by ASFMRA

Unit structure Unit structure is an insurance coverage election which enables the farmer to combine crops or coverage purpose and is determined by crop and by county. It is possible to be hailed out on one unit and receive a loss payment, while other units on the same farm produce a record crop 4/7/08 Version Adopted for use by ASFMRA

Crop Revenue Coverage Guarantees a minimum revenue by providing protection from -low yield -low price -or any combination of yield and price with revenue below the insured level Protection automatically increases if market price increases between planting and harvest without any increase in premiums. 4/7/08 Version Adopted for use by ASFMRA

CRC & RA-HPO Terms APH yield: same as APH Plan Final guarantee: APH yield x coverage level percentage x the higher of either the projected harvest price or the actual harvest price Calculated revenue: the producer's actual production value (harvested or appraised) times the actual harvest price (this is not the local market price) Indemnities: due when the producer's calculated revenue is less than the final guarantee. 4/7/08 Version Adopted for use by ASFMRA

CRC & RA-HPO Features Harvest guarantee APH yield per acre x selected coverage percentage x actual harvest price Minimum guarantee APH yield x coverage percentage x projected harvest price Final guarantee higher of minimum guarantee or the harvest guarantee Indemnity payment Final guarantee less actual production value 4/7/08 Version Adopted for use by ASFMRA

CRC & RA-HPO Benefits Cash value protection allows for aggressive marketing strategies Provides upside and downside price protection Alternative to APH Plan Same subsidy as APH Plan 4/7/08 Version Adopted for use by ASFMRA

CRC & RA-HPO Benefits Base and Harvest Price established by using the national commodity exchanges Uses producers own Actual Production History in establishing guarantees on a unit basis Protects against perils of price and yield‑ no yield loss needed for indemnity 4/7/08 Version Adopted for use by ASFMRA

Group Risk Plan (GRP) Coverage is based on expected county yields and actual county yields (Individual’s yield not relevant) “Trigger level” based on % of expected county yield Ranges from 70 to 90% of exp. yield 4/7/08 Version Adopted for use by ASFMRA

Group Risk Plan (GRP) Indemnity Indemnity is paid only if county yield is below trigger yield Producer could have a disaster and county be near normal Producer could do well and get an indemnity if county is low 4/7/08 Version Adopted for use by ASFMRA

Group Risk Plan (GRP) GRP might be your choice IF: Your yields follow county yields You don’t want to provide production records The cost of insuring your crops with APH exceeds perceived risks 4/7/08 Version Adopted for use by ASFMRA

Group Risk Plan (GRP) Disadvantages Indemnity depends on NASS county average yield Your yields do not determine a loss Payment delay–Based on NASS yields 4/7/08 Version Adopted for use by ASFMRA

Group Risk Income Protection (GRIP) Based off the GRP concept Pays if actual county revenue drops below trigger revenue (% of projected county revenue) Projected and Actual County Revenue based on prices of Futures prior to Sales Closing and at harvest Harvest Revenue Option the higher of either the Projected or Actual County Revenue 4/7/08 Version Adopted for use by ASFMRA

Insurance Protection Benefits Insures your assets Guaranteed income in the event of a crop loss Premium subsidized by government Uses your own farm yield history to establish guarantees Loan collateral improves borrowing power Protects your investment Preserves your savings Invests in the future of your farm Cash Flow Protection 4/7/08 Version Adopted for use by ASFMRA

Insurance Protection Benefits Ensures a minimum level of cash flow Provides collateral for operating loans Allows more flexibility in marketing plans Adds confidence when following planned strategies Provides stability for long-term business plans and family security USDA shares in the premium costs 4/7/08 Version Adopted for use by ASFMRA

Summary High input costs makes insurance protection essential Many and ever changing options Consult a professional advisor Compare options based on risk reward 4/7/08 Version Adopted for use by ASFMRA

Version 1.001.08 Adopted for use by ASFMRA
Production Risk Weather Disease Insects Weeds Genetics 4/7/08 Version Adopted for use by ASFMRA

Production Risk Stable enterprises Diversification – enterprises Diversification – leases Input selection Scouting Crop insurance 4/7/08 Version Adopted for use by ASFMRA

Price/Market Risk Commodity prices Market availability Input prices 4/7/08 Version Adopted for use by ASFMRA

Price/Market Risk Marketing strategies – contracts, hedging, options Timing Volume discounts Cash discounts Expand market 4/7/08 Version Adopted for use by ASFMRA

Financial Risk Interest rates Ability to borrow capital Ability to repay debt 4/7/08 Version Adopted for use by ASFMRA

Financial Risk Fixed interest rates Credit reserves Equity Record keeping Budgeting 4/7/08 Version Adopted for use by ASFMRA

Legal/Regulatory Risk
Liability Nuisance Use of hazardous/restrictive use materials 4/7/08 Version Adopted for use by ASFMRA

Legal/Regulatory Risk
Liability insurance Business structure Proper management practices 4/7/08 Version Adopted for use by ASFMRA

Personal Risk Health/death/disability Loss of key employees Family disputes/divorce 4/7/08 Version Adopted for use by ASFMRA

Personal Risk Health/life/disability insurance Backup management plans Communication 4/7/08 Version Adopted for use by ASFMRA

Ag Land Management Crop Insurance

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