Crop Insurance as a Risk Management Tool
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Crop Insurance as a Risk Management Tool John Fitzpatrick, NE Senior Marketing Agent, Crop Growers, LLP
Transcript of Crop Insurance as a Risk Management Tool
Crop Insurance as a Risk
Management Tool
John Fitzpatrick, NE Senior Marketing Agent,
Crop Growers, LLP
❖ 3 Northeast Farm Credit ACA stakeholders
❖ Serve 2,300 producers in a 9 state area
❖ 20 non-commission agents
❖ Operations center in Homer, NY
Agenda
❖ NYS Crop Insurance performance
❖ Insurable crops
❖ Beginning Farmer Program Benefits
❖ New Producer Benefits
❖ Loss Scenarios
❖ Developing a Risk Management Plan
New York State Crop Insurance Performance
Providing Value to Producers
Crop Year Losses Paid Producer Premiums
❖2016 $66,252,693 $16,566,521
❖2015 $40,760,105 $14,408,814
❖2014 $49,772,997 $15,430,597
❖2013 $39,066,432 $13,310,274
❖2012 $67,340,835 $11,520,389
❖2011 $46,254,021 $10,682,078
❖2010 $25,575,386 $8,647,997
❖2009 $29,633,880 $8,497,514
❖2008 $15,195,858 $8,635,068
❖2007 $15,004,072 $7,193,919
Totals: $394,856,279 $114,893,171
Insured Crops Dutchess/Columbia
Fall Crops:
Barley (Winter)
Wheat (Winter –
Columbia only)
Fruit Crops:
Apples
Peaches
Other Programs:
PRF - Pasture, Rangeland, Forage
LGM - Livestock Gross Margin – Dairy
WFRP - Whole Farm Revenue Protection
**for WFRP – must have at least 3 years
of tax returns**
Spring Crops:
Barley (spring)
Corn
Oats
Soybeans
Sweet Corn
Important DatesMarch 15 - Corn, Spring Barley, Soybeans, Sweet Corn, Oats, WFRP - Sales Closing. Deadline to obtain a policy for these programs.
September 30 - Winter Wheat, Winter Barley -Sales Closing. Deadline to obtain policy for these programs.
November 15 – PRF Sales Closing.
November 20 Apples/Peaches - Sales Closing.
Monthly – LGM – last business Friday of month.
Coverage Levels and Subsidy
Coverage Level
50% 55% 60% 65% 70% 75% 80% 85%
Subsidy 67%
to
80%
64%
to
80%
64%
to
80%
59%
to
80%
59%
to
80%
55%
to
77%
48%
to
68%
38%
to
53%
In general, premiums are subsidized by the Federal Government from 80%
(lowest coverage level) down to 38% (highest coverage level). This depends
on the type of policy obtained and other factors.
**To be eligible for subsidy, a producer must be in compliance with the
Conservation Compliance requirements of USDA**
Beginning Farmer - <5 years of
crop or livestock production
❖ Exemption from paying admin fees
❖ Additional 10% points of subsidy
❖ Allowed to use production history of farming operation that you were involved with.
❖Qualifications:-- Must not have had insurable interest in any
crop or livestock for more than 5 years.
New Producer
Program Benefits
❖Applies to production of a crop in a county.
❖If you have produced the insured crop in the county for 2 years or less, then you are considered a New Producer of that crop.
❖Receives 100% of the county Transitional yield for years that the crop was not grown.
❖Example – 2017 was first year corn was grown –had 130 bu/acre. Need 4 year average – it will be 1 year of 130 bu/acre and 3 years of 122 bu/acre (Transitional Yield for Columbia)
So….how does it work?
Based on:
❖Spring/Fall/Fruit Crops - average production
history (APH) from 4 up to 10 years.
❖For WFRP – 4 to 5 year history of Revenue.
❖PRF, LGM, and Sweet Corn – established value.
❖ Insures a % of the average (from 50% to 85%).
❖ The % that is insured is called a “guarantee”.
❖ If the actual for the year falls below the
guarantee, an insurance indemnity will make up
the difference.
So….how does it work?
Quick Example
❖150bu/acre - 10 year avg production of Grain
Corn on a particular farm.
❖75% - coverage level chosen by producer.
❖ 112.5bu/acre - Guarantee (150bu/acre X 75%).
If production for the crop year falls below the
guarantee, the policy will pay the difference.
So….how does it work?
Quick Example - Continued
❖100bu/acre - 2017 production.
❖112.5bu/acre – guarantee from previous slide.
❖Production fell below the guarantee by 12.5
bu/acre.
❖ Claim is therefore 12.5 bu/acre @ $3.96/bu =
$50.00/acre.
❖ Cost per acre in Columbia County for this
coverage would be $16.30/acre.
Scenario #1
Need to replace lost production
❖Dairy Operation grows 100 acres of corn silage
spread out over 5 farms – expects 1,840 ton
which is 10 year average.
❖ Needs to produce 1,700 tons to meet forage
needs of the animals.
❖ Chose the 75% coverage level and Optional Units
(each farm # insured separately)
❖ 2017 production due to excessive rain is only
1,350 ton. Therefore, producer needs to purchase
350 tons of silage.
Scenario #1
with Crop Insurance
❖ 3 farms fell below their guarantees resulting in a
claim of $7,500.
❖ Producer buys 350 tons of silage at $50.00/ton
($17,500)
❖ $17,500 less the claim of $7,500 results in a
$10,000 net outlay of silage purchase.
❖ Working Capital is reduced to $8,400 as follows:
❖$20,000 beginning WC less $10,000 net silage
purchase less $1,600 insurance premium.
Scenario #1
without Crop Insurance
❖ 3 farms fell below 75% of the average but no
coverage was in place.
❖ Producer buys 350 tons of silage at $50.00/ton
($17,500).
❖ Producer is forced to use most of the available
working capital to replace the lost silage.
❖ Working capital reduced to $2,500 as follows:
❖ $20,000 beginning WC less $17,500 silage cost =
$2,500 remaining WC.
Scenario #2
Protecting your input costs❖ Soybean producer with 100 acres chose revenue
policy (option covers CBOT price) at 80% coverage.
❖ Average production on the 100 acres is 5,000
bushels (50 bu/acre).
❖ Expected revenue is $50,000 (5K bu @
$10.00/bu (CBOT November price)).
❖ Guarantee of $40,000 = expected input costs.
(Revenue based on CBOT prices ONLY!!)
❖ Actual prod. of 4,000 bushels and CBOT actual
price of $8.00 = actual revenue of $32,000.
Scenario #2
with Crop Insurance
REVENUE QUANTITY PRICE TOTAL
GUARANTEE 4,000 BU $10.00 $40,000
INPUT COSTS 100 ACRES $400.00 $40,000
ACTUAL PRODAND PRICE (CBOT)
4,000 BU $8.00 $32,000
CLAIM PAYMENT 4,000 BU $2.00 $8,000
REALIZED LOSS $900(REPRESENTS
PREMIUM COST)
If Working Capital (WC) were $10,000, then it would be reduced to $9,100
in this scenario.
Scenario #2
without Crop InsuranceREVENUE QUANTITY PRICE TOTAL
GUARANTEE 0 0 $0.00
INPUT COSTS 100 ACRES $400.00 $40,000
ACTUAL PRODAND PRICE (CBOT)
40,000 BU $8.00 $32,000
CLAIM PAYMENT 0 0 0
REALIZED LOSS $8,000
If Working Capital (WC) were $10,000, then it would be reduced to $2,000 in this
scenario.
Scenario #3
Protect against revenue loss (WFRP)
❖Fresh Market Vegetable grower sells fresh produce
at various markets.
❖5 year average revenue is $100,000.
❖Producer obtained a WFRP policy for $100,000 at
80% coverage level ($80,000 guarantee).
❖2017 Revenue = $60,000 (poor weather resulted
in poor crop AND poor turnout at markets)
❖Expected revenue was $100,000 (same as 5 year
average). Therefore, a $40,000 loss of revenue.
Scenario #3
with Crop InsuranceREVENUE TOTAL
EXPECTEDTOTAL
$100,000
GUARANTEE AT80% COVERAGE LEVEL
$80,000
ACTUALREVENUE
$60,000
ACTUALCLAIM PAYMENT
$18,300($20,000 CLAIM
LESS $1,700 PREM.)
REALIZED LOSS $21,700
Crop Insurance helped to minimize the loss in this scenario
Scenario #3
without Crop InsuranceREVENUE TOTAL
EXPECTEDTOTAL
$100,000
ACTUALREVENUE
$60,000
GUARANTEE $0.00
ACTUALCLAIM PAYMENT
$0.00
REALIZED LOSS $40,000
Likely a large reduction in Working Capital and the inability to grow the business as planned.
Developing A
Risk Management Plan
❖ Evaluate your farms risk exposure
❖ Understand your cost of production
❖ Develop a relationship with a crop insurance
agent that is committed to your success
❖ Keep accurate records by crop!!!!!!!!!!!!!!
❖ Learn about the available products
❖ Develop a plan and stay the course…
❖ Thank you!
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