Personalized Risk Management Plans

1. Personalized Risk Management Plans Steve Richards Program Director, NY FarmNet and NY FarmLink

2. Risk Management Checklist • Was initially created to address those areas that might be sensitive (family or HR type issues). • Also addresses those issue which producers have very little patience for (Crop Insurance, for example). • 3 trainings for FarmNet consultants have been held to train them to be proficient and consistent in filling out the checklist. • There are NY FarmNet/NY FarmLink workbooks to back up almost every area of risk. They are free to farmers who complete the checklist.

3. Risk Management Checklist • Accompanied by a consultant trained in the 5 areas of risk. • The consultant reviews the risks with the farm business. • In the farmer’s opinion, what are the risks on his/her farm. • Works with consultant to identify strategies to mitigate risks. • The last page is a review of what the farmer will do in the next year to reduce risks to their operation. • 50 performed in 2004. 50 more in 2005.

4. Human Resource Risk Some Key Risk Management Strategies: • Buy-sell agreements between business partners • Life Insurance on key family members/employees • Disability Insurance and/or paying the minimum SE tax to obtain disability benefits. • Power of attorney for finances for the key members of the business. • Health Insurance, Medicare, Medicaid, State and Federal Programs. • Business transfer and succession • Estate planning • Good communication and HR practices

5. Legal Risk Management Some Key Risk Management Strategies: • Review liability/casualty insurance policies • Changing business structure to a structure with liability protection (LLC, Corps) • Update current legal agreements. • Get all contracts in writing. • Periodic review with attorney and insurance agent. • Environmental liability and certification, neighbor relations.

6. Financial Risk Management Some Key Risk Management Strategies: • Record Keeping • Communications with lender and accountant • Meeting cash flow requirements • Examining industry trends and planning accordingly. • Cost control through better management practices • Investing off the farm to balance portfolio • Increasing profit growth

7. Production Risk Management Some Key Risk Management Strategies: • Crop Insurance! • Yield based vs. Revenue based • Crop production practices

8. Marketing Risk Management Some Key Risk Management Strategies: • Price risk management, contracting • Marketing plans/clubs • Futures, options, etc. • Direct marketing and the skill of marketing.

9. Results • There is always an area of risk that can be mitigated easily, quickly, and cheaply. • Every farm has different risk exposure • Example: Crop Insurance vs. Health Insurance • At least 2 different consulting firms are using this checklist with their clients. • RMA has mentioned that in the future there may be a producer discount on crop insurance if they have completed one of these plans

10. Workbook #1: Do I Need Crop Insurance? Steve Richards Program Director NY FarmNet NY FarmLink

11. Do I Need Crop Insurance? Chapters in Workbook: • What is your risk exposure? • How large of a loss can you afford? • What are your crop insurance options? • Comparing Yield based, Revenue based, and Catastrophic coverages. • Should you buy crop insurance or self-insure?

12. What is Your Risk Exposure? • What kinds of losses are likely on your farm? • Look through your records • What has been the variability in the yields you have had (per crop and total) • What has been the variability in the income from your farm operation? • What % loss is probable? • 10%, 20%, 30%, 100%??

13. What is the value of your Probable Loss? Example

14. What Makes Your Business More Vulnerable to Risk? • Stage in Business Life Cycle: • Start up vs. Established • Recent Losses • Had a loss last year? Can you afford 2 in a row? • Undergoing business or family changes • Changes in family living costs • Transferring business from one generation to next

15. How Large of a Loss Can You Afford to Absorb? • Absorb through Equity: Have sufficient assets (i.e. cash or ability to borrow money) in reserve to cover loss • Cash Flow: have sufficient cash flow during the year to cover the loss. • Combination: by adding up reserves and “excess” cash flow, you can arrive at your MAXIMUM ABSORBABLE LOSS

16. What is Your Maximum Absorbable Loss? Example

17. Crop Insurance Options:Crop Insurance Acronyms • AGR-- Adjusted Gross Revenue • APH--Actual Production History • CAT--Catastrophic Risk Protection • CCC--Commodity Credit Corporation • CIH--Crop Insurance Handbook • FSA--Farm Service Agency • FCIC--Federal Crop Insurance Corporation

18. Crop Insurance Options: Crop Insurance Acronyms • LAM--Loss Adjustment Manual • MPCI--Multiple Peril Crop Insurance • NAP – Non Insured Crop Disaster Assistance Program • PHTS--Policyholder Tracking System • RMA--Risk Management Agency • Units: parcels of land that are insured separately from other parcels (units) of land. • USDA--United States Department of Agriculture

19. Crop Insurance Options: Crop Insurance Dates • Sales Closing Date: Last date to purchase a policy • Cancellation Date: Last date to cancel policy • Production Reporting Date: Date to report yields and plantings for previous crop year. • Acreage Reporting Date: the date to report containing all acreage of insured crop in a county. • Final Planting Date: The date by which the insured crop must be planted in order to receive full coverage.

20. Myths About Crop Insurance • It Doesn’t Pay: For every dollar paid in premiums, the Federal Crop Insurance Program has paid out $3.93. (premiums are subsidized). • It Costs Too Much: For the level of coverage purchased, the price is lower than most other insurances (car, etc.) • My Crops aren’t covered: There is at least minimum coverage for every crop. There may not be higher levels of coverage, depending on what crop you are growing.

21. Myths About Crop Insurance • You have to have a total loss to collect: Losses that qualify for coverage range from 10% to 50%, depending upon which policy is chosen. • You have to use the county average: Not if you have adequate production records. • There is too much paperwork: The crop insurance agent will help you with much of the paperwork.

22. Types of Crop Insurance • Catastrophic Coverage Policies: Includes (CAT) and (NAP) policies. • Crop Yield Coverage Policies: Multiple Peril Crop Insurance (MPCI) type of policies. The plans pay out a certain % of yield at a certain % of price. • Income Coverage Policies: Adjusted Gross Revenue (AGR), Indexed Income Protection (IIP), and Crop Revenue Coverage (CRC) type of policies. The plan pays out at a certain % of insured income at a certain % of the loss.

23. Typical Policies

24. Mechanics of Crop Insurance • Crop insurance comes in two numbers: one is based on the insurable amount (either yield or revenue) and the other is the payout (less a deductible percentage). • Examples: • Cat 50/55 • MPCI “Buy-up” 75/100 • AGR-Lite 80/90

25. Mechanics of Crop Insurance • Example: You buy a policy that has 80/90 written on it: • 80: coverage level • The first number is the “trigger”, after which the policy begins to pay. • So, in order for this policy to start covering, you must have had at least a 20% loss. • 90: Payout level • The second number is the payout level, less any deductible percentage. • In this case, any loss over 20% would be compensated by this policy at .90 per dollar.

26. Which Policy To Choose? • What crops do you grow? • Where are you located? • What kind of loss are you more likely to experience? • Yield losses? MPCI type products • Yield and Price Losses? IIP and CRC type products • Revenue Losses? AGR and AGR-Lite products • Catastrophic coverage? • Available for all crops • Small administrative fee ($100 per crop) • Small coverage level as well (50/55)

27. Comparing Insurance Products • Choosing a coverage level • You have calculated your probable loss • You have calculated your absorbable loss • You want to pick a coverage level that is above your maximum absorbable loss! • In the example $29,277 represented a over a 30% loss, so our farmer would want to pick a coverage level no less than 70%. • The only trick is to convert dollars into yield or visa vesa. The workbook will help you.

28. Deciding if You Should Buy Crop Insurance • Likely frequency of crop losses • This is tricky, its betting on the weather. • Likely frequency of crop losses that would be covered by insurance, • In our example, this is a loss greater than 30%.

29. Should you Buy Insurance or Self Insure? • What is the maximum premium you should be willing to pay? • Basically, you compare the years it would take to recover from a loss with and without insurance (with insurance payouts being reduced by premium payments). • When the value of the insurance is greater than the premium, you should be willing to purchase the insurance, right?

30. Appendix: How to File a Claim! • Other than dashed expectations of what was thought to have been covered, most other mistakes occur in reporting losses. • Contact your crop insurance agent within 72 hours of initial discovery of damage. • Do not destroy or harvest your crop until you have spoken to your insurance agent and an adjuster has given you permission to do so.

31. Workbook Results • The workbook has been used for 4 presentations so far in New York. • Over 200 copies of the workbook have been distributed to producers. • A copy has been given to each FSA office in New York. • Was included in the 2005 Risk Management Notebook.

32. Workbook #2: Using Crop InsuranceProfiles of 13 Farms Steve Richards Program Director, NY FarmNet/NY FarmLink

33. Profiles Booklet • Farmer to Farmer learning • Selected stories of experiences with crop insurance • Variety of commodities, farm sizes, and marketing practices. • Introduction: Dispelling myths about crop insurance, summarizing available products. • Appendix: Crop insurance terms and acronyms, grower responsibilities, and sources for additional information.

34. Profiles Booklet Examples • Mary and Frank Heyer • Diversified vegetable/NAP • Roy and Connie Ike • Field Crops/MPCI-APH • Wilhugh Farm • AGR and MPCI-APH on forages

35. Profiles Booklet Results • Farmers really like the booklet. • The workbook has been distributed with all of the Risk Management 2005 notebooks. • A copy of the workbook is in each FSA office. • At least 150 copies distributed to producers so far in 2004/2005.