Ag Land Management Crop Insurance

4/7/08 Version 1.001.08 Adopted for use by ASFMRA

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Ag Land ManagementCrop Insurance

Crop Protection Options


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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.

Causes of Insurable Losses


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3 Elements of Crop Protection

• Federal Crop Insurance Program

-Public/private partnership

• Crop Hail Insurance-Private sector

• Named Peril/APH Plan “Add-ons”

-Private sector


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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


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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


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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


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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


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Agricultural Risk Protection Act ARPA 2000

Increased premium subsidy – higher levels of coverage

Significant increased participation


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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)


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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)


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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


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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


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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


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Calculations:Yield guarantee = APH • coverage levelPremium/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.


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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


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“Catastrophic” Yield Coverage

• 50 % yield coverage

• Losses are paid at 55% of MPCI indemnity price

• Optional units are not permitted

• $100 / crop / county


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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%)


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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


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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.


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Ag Land ManagementCrop InsuranceCRC & 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.


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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


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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


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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


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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


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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


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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


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Disadvantages– Indemnity depends on NASS county average yield– Your yields do not determine a loss– Payment delay–Based on NASS yields


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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


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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


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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


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Summary

• High input costs makes insurance protection essential• Many and ever changing options• Consult a professional advisor• Compare options based on risk reward

Production Risk

• Weather• Disease• Insects• Weeds• Genetics


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Production Risk

• Stable enterprises• Diversification – enterprises• Diversification – leases• Input selection• Scouting• Crop insurance


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Price/Market Risk

• Commodity prices• Market availability• Input prices


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Price/Market Risk

• Marketing strategies – contracts, hedging, options• Timing• Volume discounts• Cash discounts• Expand market


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Financial Risk

• Interest rates• Ability to borrow capital• Ability to repay debt


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Financial Risk

• Fixed interest rates• Credit reserves• Equity• Record keeping• Budgeting


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Legal/Regulatory Risk

• Liability• Nuisance• Use of hazardous/restrictive use materials


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Legal/Regulatory Risk

• Liability insurance• Business structure• Proper management practices


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Personal Risk

• Health/death/disability• Loss of key employees• Family disputes/divorce


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Personal Risk

• Health/life/disability insurance• Backup management plans• Communication


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Ag Land Management Crop Insurance

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