PRODUCTION RISK Risk Faced by Small Scale Producers March, 2008

1. PRODUCTION RISKRisk Faced by Small Scale ProducersMarch, 2008 Dr. Laurence Crane National Crop Insurance Services www.ag-risk.org

2. Today’s Discussion • Risk profile of Rhode Island farmers • Special concerns of small farmers • Risk management priorities • Discussion of production risks • Control or minimize • Reduce variability • Transfer to someone else • Brief overview of crop insurance

3. Special Concerns of Small Farms Limited WORKFORCE • Rely on family members for labor and management • Major business disruption if: • Disability • Disagreement • Divorce • Death • Stress and fatigue add to risks

4. Special Concerns of Small Farms Limited TIME to study and make decisions • Good record keeping takes time • Following the market takes time • Comparing options takes time • Attending meetings/workshops takes time • Decision-making takes time

5. Special Concerns of Small Farms Limited FINANCIAL RESOURCES • No savings cushion in case of emergency • Small, inadequate, or no line of credit • Risk reducing purchases are not possible • Delayed purchases may increase risk • “It takes money to make money”…and • “It takes money to save money”

6. Special Concerns of Small Farms Difficulty TRANSFERRING the farm • Overlapping decision making • Overlapping income requirements • Competing goals • Farm purchase vs retirement income • Expansion purchases vs reducing debt

7. Special Concerns of Small Farms Lack of HEALTH insurance • Disability and life insurance are both important • No or inadequate health coverage • Long-term care • Can become very expensive • Drain on limited time

8. Special Concerns of Small Farms Older EQUIPMENT and FACITITIES • Increased breakdowns • Cost of repairs • Lost opportunities and product quality • Safety risks are increased

9. Risk Management Priorities Minimize safety risks—nothing is more important than safety!! • Take the time to do things right • Don’t move faster than you can think • Wear protective gear • Properly store chemicals, fuel, pesticides, etc. • Maintain equipment • Adopt a stress management plan • Teach your children (and others) about safety • Age appropriate tasks • Friends and visitors

10. Risk Management Priorities Use good agricultural practices • Follow industry and university standards • IPM, nutrient management, rotational grazing, herd health, chemical & fertilizer application rates, etc. • Record and maintain adequate records • Documentation required for some chemicals • Limit legal liabilities in some cases • Required for insurance purposes • Improves management skills and decisions

11. Risk Management Priorities Support your neighbors • Develop a strong network of friends • Share labor, equipment, knowledge • Reduces costs • Increases satisfaction • Make emergency plans in case of illness, etc. • Write down procedures so someone else can follow • Create study group/club

12. Risk Management Priorities Property, liability, and health insurance • Review policies and know their terms • Pay attention to “exclusions” • Evaluate coverage levels and deductibles • Shop around and compare • Get a good agent who gives you the service you need • Pay attention to your liability exposures

13. Risk Management Priorities Attention to business management • Analyze in writing the impact of decisions • What, how, why, expectations, results • Maintain orderly records • Keep and file receipts • Keep and file ownership manuals and paperwork • Create “memory aids” • Document, Document, Document

14. Production RiskWhat is it? • Any production related activity or event that is uncertain • Variability in production caused by weather, disease, pests, genetic variation, machinery failure, timing, etc.

15. Variability in crop yields Animal weaning weights Product quality Animal rate of gain Death loss Machinery breakdown Excessive rain or drought Production RiskExamples

16. Production RiskPrimary Sources • Adverse weather • Disease and pests • Input availability and quality • Technological advances • Mechanical failure • Agricultural industrialization

17. Why U.S. Crops Fail

18. Production RiskPrimary Responses • Control or minimize risk through management practices • Reduce production variability • Diversification • Flexibility • Vertical Integration • Apply technology • Contingency planning • Transfer risk to someone else • Contracting • Insurance

19. 1. Control or MinimizeExamples • Use irrigation to offset drought • Increase herbicide use to control weeds • Increase pesticide use to control pests • Be more timely in performing functions • Monitor more closely to detect problems before they become serious • Practice preventative maintenance

20. 2. Reduce VariabilityDiversification Types • Additional Enterprises • Different Mix of Enterprises • Differentiated Product • Specific attribute produce • Value-added product • Non-farm income and investments

21. Product form and specifications Market location and availability Yield variability Price variability Price discovery Credit availability Size/scale restrictions and requirements Product volume constraints Special management skills Production practices/technology 2. Reduce VariabilityDiversification Issues

22. 2. Reduce VariabilityFlexibility • Flexibility is the ability to adjust to uncertainty and has three components: • Time flexibility • Cost flexibility • Product flexibility • Flexibility easier to obtain in marketing and financing, than in production

23. 2. Reduce VariabilityVertical Integration • Includes all of the ways that output from one stage of production is transferred to another • Accomplished by the mix of enterprises the farm is engaged in • More common in livestock and specialty crop industries than in field crops

24. 2. Reduce VariabilityVertical Integration—Examples • Corn and hay raised and fed to dairy cows is integrationacross crop and livestock production • Backgrounding feeders from a cow-calf operation is integration within the cattle industry • Joining a cooperative is integration across functions

25. 2. Reduce VariabilityVertical Integration—Issues • Record keeping very important • Production contracts can reduce risk, but may also reduce production control • Benefits are greatest in industries with complex production/marketing interrelationships • Management skill is required

26. 2. Reduce VariabilityApply Technology • Includes high tech and biotechnology • Can improve management and production efficiency • The need to specialize increases as technical knowledge increases • Need to compare benefits to costs • May reduce production risk but increase overall farm risk

27. 2. Reduce VariabilityApply Technology—Examples • Computerize record keeping and analysis • Plant Roundup Ready soybeans • Plant seedless watermelons • Drip irrigation systems • Minimum or no-till practices • Mechanical butterbean harvesting

28. Positives Reduce cost Enhance yield Enhance quality Enhance Price Provide market access Save time Provide management information Negatives Increased costs Increase risk Increased management Applicability based on size and scale Consumer rejection Environmental risk Reduced flexibility 2. Reduce VariabilityApply Technology

29. 2. Reduce VariabilityContingency Planning • Whole farm business planning • Budgeting • Enterprise, partial, whole-farm • Transition planning • Feasibility • Start-up costs • Additional credit needs • Cash flow requirements

30. 3. Transfer RiskMethods • Production contracts can be used to transfer specific risks associated with production to someone else • Insurance can be used to transfer certain risks to others

31. 3. Transfer RiskWhat is a Contract? • A written or oral agreement between two or more parties involving an enforceable commitment to do or refrain from doing something • In agriculture, contracts usually specify: • Production and/or marketing conditions, • Price, • Quantities to be produced, and, • Services to be provided

32. Crop Insurance Overview

33. Why Would Farmers Want Insurance? • Protection against losses due to natural disasters • Facilitates business planning • Loan security • Forward market crops with assurance

34. Insurance Principles • Insurance is the pooling/combining of enough small unpredictable risks so that over time the losses for the combined group become statistically predictable. • Basic purpose of insurance is to provide protection against economic loss arising from adverse events.

35. Insurance Principles To be insurable, risks must meet this criteria: • Loss would result in economic hardship. • Sufficient number/quality of units must be exposed to the same peril. • Occurrences must be accidental/unintentional. • Definite in time/place and measurable with reasonable accuracy.

36. Apples Corn Fresh Market Corn Cranberries Nursery Peaches Potatoes An additional 100+ other crops insurable as part of Adjusted Gross Revenue Lite plan Crops Insurable in Rhode Island

37. Crops Insurable in Rhode Island *AGR is a plan of insurance and not a crop. Under AGR many crops (including livestock) are insurable that are not insurable under any other plan of insurance. 90 (APH) Actual Production History 44 (CRC) Crop Revenue Coverage 50 (DO) Dollar Amount of Insurance 86 (GYC) Grower Yield Certification 61 (AGR-L) Adjusted Gross Revenue Light 63 (AGR) Adjusted Gross Revenue (P) Pilot program

38. Why a Government Program? • Weather tends to impact a large area • Losses are correlated, insurance works best when losses are not correlated • Without federal subsidies premiums would be too high for most farmers to participate • Without federal reinsurance, federal capital requirements would be too high for most companies to participate

39. Basic Components of the Program Farmers Insurance Sales Agents (Most agents work for more than one company) Responsible for Sales and Premium Collection of the Farmer-paid Portion Private Insurance Companies Responsible for Reinsurance and Delivery of the Program Contribute to Policy Development Federal Crop Insurance Corporation (FCIC) (Managed by USDA/RMA) Responsible for Policy Development, Rating, Reinsurance, and Administrative Expense Support (as negotiated and contracted by the Standard Reinsurance Agreement)

40. What Does the Federal Government Do? • Subsidize insurance • Pay delivery reimbursement • Pay premium subsidy • Offer reinsurance • Set rates • Establish insurance policy provisions • Regulate the insurance companies

41. Risk Management Agency • Administers Federal Crop Insurance Act for Board of Directors of FCIC • Headquartered in DC, major presence in Kansas City • 10 Regional Service Offices (Rhode Island in the Raleigh, NC Region) • 6 Area Compliance Offices (Rhode Island is in the Eastern Regional Compliance Office headquartered in Raleigh, NC)

42. Crop Insurance2002 Subsidy Schedule

43. Multiple Peril Crop InsuranceLimited Resource Farmer Fee Waiver • Limited resource farmers may be exempt from paying the administrative fee for CAT or additional coverage. • Producer must sign waiver when applying for insurance.

44. Revised Waiver Statements for Limited Resource Farmer I certify that I: • Am a person with direct or indirect gross farm sales not more than $100,000 in each of the previous two years (to be increased starting in fiscal year 2004…); and a total household income at or below the national poverty level… or less than 50 percent of county median household income in each of the previous two years…; or • Was insured prior to the 2005 crop year, or for the 2005 crop year, and administrative fees were waived… because I qualified as a limited resource farmer under the… definition in effect at the time, and that I remain qualified…

45. Determining Limited Resource Farmer Status • The Limited Resource Self Determination Tool may be used to determine if an insured qualifies as a limited resource farmer. • See http://www.lrftool.sc.egov.usda.gov/ for the actual dollar amount adjusted for inflation. • (Example:) Washington County Rhode Island 2008: • Gross farm sales < $116,800 • Total Household Income < $31,301 • (Example:) Kent County Rhode Island 2008: • Gross farm sales < $116,800 • Total Household Income < $28,067

46. http://www.lrftool.sc.egov.usda.gov/

47. What Does the Company Do? • Insures farmer • Processes all paperwork • Contracts agents and loss adjusters • Ensures all claims are fairly and promptly paid • Accepts risk on the insurance policies • Interacts with RMA/Agents/Farmers

48. Crop Insurance ProvidersIn Rhode Island in 2008 1. ARMtech Insurance Services 800-335-0120 www.armt.com 2. Rain and Hail L.L.C. 800-776-4045 www.rainhail.com 3. Rural Community Insurance Services 800-451-3836 www.rcis.com

49. How Does A Farmer Get Insurance? • Crop insurance is a contractual agreement between the farmer and an insurance company brokered by an insurance agent • Contacts an insurance agent who has a contractual relationship with an insurance company to sell crop insurance

50. Agent Delivery System • All crop insurance is sold by private insurance agents who: • Are the company representative with the insured. • May represent multiple companies. • Are responsible to educate producer about products. • Are compensated by a percentage of premium. • Agent training requirements: • State licensing requirements by insurance department including annual continuing education hours. • Additional RMA requirements to sell Federal products. • Competency testing every three years.