Helping Growers Understand Crop Insurance Basics

1. Helping Growers Understand Crop Insurance Basics Ed Staehr Senior Extension Associate NY FarmNet/FarmLink Programs 1 Adapted from Do I Need Crop Insurance – EB 2004-03, Richards, S.

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4. Why Consider Crop Insurance? • New Farm Bill Law • Changed Risk Management Planning • Supplemental Revenue Assistance Payment (SURE) • Permanent Crop Disaster Program. • To be eligible producers must sign up for crop insurance (at least CAT coverage) or NAP on all crops produced. • Producers who choose higher crop insurance levels of coverage and price elects get higher SURE guarantees.  • Details can be obtained from your Local Farm Service Agency office. 4

5. Insurable Crops in New York State 5

6. Crop Insurance – A Tool to Preserve Cash Flow in Low Yield Years 6

7. Steps to Evaluate Whether to Purchase Crop Insurance • Step 1- Evaluate Risk Exposure • Step 2 – Determine Probable Loss • Step 3 – Evaluate Vulnerability to Risk • Step 4 – Calculate Maximum Affordable Loss 7

8. Step 1 - Evaluate Risk Exposure • What kinds of losses are likely on your farm? • Examine business records. • Determine yield variability for each crop. • Calculate variability in farm income. • What % loss is likely? • 10%, 20%, 30%, 100%?? 8

9. Step 2 – Determine Probable Loss Example Loss 9

10. Step 3 – Evaluate Vulnerability to Risk • Stage in Business Life Cycle: • Start up vs. Established • Recent Losses • Can your farm afford two consecutive years of losses? • Undergoing business or family changes • Changes in family living expenses • Transferring business from one generation to next 10

11. Step 4 – Calculate Maximum Affordable Loss • 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 determine your farm’s MAXIMUM AFFORDABLE LOSS 11

12. Quantifying Maximum Loss Example 12

13. Understanding Crop Insurance Terminology • 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 13

14. Terminology Continued • 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 14

15. Closing Date Terminology • 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. 15

16. Important Fruit Dates in NYS • Sales Closing, Policy Change Date – November 20, 2008. • Production Report Date – January 31, 2008 • Acreage Report Date – January 31, 2008 • Billing Date – September 15, 2009 16

17. Insurance Fact vs. Fiction • It Doesn’t Pay: For every dollar paid in premiums, the Federal Crop Insurance Program has paid out more than $3 for every $1 of premium. (Premiums are subsidized.) • It is too expensive: For the level of coverage purchased, the price is lower than most other insurance types such as auto or homeowners’. • Crops that I grow aren’t covered: There is minimum coverage for every crop. There may not be higher levels of coverage, depending on which crops you grow. 17

18. Does Crop Insurance Pay? 18

19. Losses Paid and Premiums • Crop Year Losses Paid Producer Premiums • 2007 $15,046,780 $7,194,889 • 2006 $20,193,384 $6,196,106 • 2005 $12,673,667 $5,435,156 • 2004 $19,912,188 $5,136,868 • 2003 $15,622,947 $3,855,125 • 2002 $19,679,218 $2,918,920 • 2001 $6,937,105 $2,737,213 • 2000 $10,229,429 $2,167,398 • 1999 $3,668,790 $1,683,246 Producer • 1998 $3,118,263 $808,410 Benefit • Totals: $127,081,771 $38,136,331 3.00% 19

20. Other Insurance Myths • 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 sufficient production records. • There is too much paperwork: The crop insurance agent will help you with much of the paperwork. 20

21. Policy Types • 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. 21

22. Policy Examples 22

23. Comparing Yield and Revenue Policies 23

24. Crop Insurance Basics • 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 24

25. 80/90 Insurance Example • 80: coverage level • The first number is the “trigger”, after which the policy begins to pay. • For this policy to start covering, your farm must have experienced 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. 25

26. Deciding Which Policy to Purchase • What crops are grown? • Where is the farm located? • What kind of loss is most likely on your farm? • 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 ($300 per crop) • Small coverage level as well (50/55) 26

27. Determining a Coverage Level • Choosing a correct 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 key is converting dollars into yield or vice versa.. 27

28. Filing a Claim • Most 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. 28

29. Integrating Crop Insurance with Other Risk Management Tools • Types of Risk on Farms • Human Resource • Legal • Financial • Production • Marketing/Price 29

30. Managing HR Risk Example HR Risk Management Strategies: • Develop buy-sell agreements. • Purchase life insurance on management team. • Purchase disability insurance/pay SE tax. • Designate a power of attorney. • Evaluate Health Insurance, Medicare, Medicaid, State and Federal Programs. • Develop a business transfer and succession plan. • Develop an estate plan. • Improve communication and HR practices. 30

31. Managing Legal Risk Example Legal Risk Management Strategies: • Review liability/casualty insurance policies. • Adopt a business structure that offers liability protection (with attorney assistance). • Update current legal agreements. • Get all contracts in writing. • Review legal risk with an attorney and insurance agent. • Improve neighbor relations. 31

32. Managing Financial Risk Example Financial Risk Management Strategies: • Keep accurate records. • Routinely communicate with your lender and accountant. • Plan to meet cash flow requirements. • Examine industry benchmarks. • Improve cost control. • Evaluate alternative investments. • Evaluate measures to improve profitability. 32

33. Managing Production Risk Example Production Risk Management Strategies: • Purchase Crop Insurance! • Yield based vs. Revenue based • Improve Crop Production Practices • Soil testing • Hybrid/variety selection • Nutrient management planning 33

34. Managing Marketing/Price Risk • Forward contract crops. • Develop a marketing plan. • Utilize futures/options. • Market crops/products directly. 34

35. Roles of Crop Insurance in a Risk Management Plan • Gateway to Disaster Payments of new Farm Bill • Can Improve Crop Marketing Revenue • Crop insurance + good crop marketing plan results in more benefits than the sum of the individual parts • Can Provide Increased Credit Worthiness • Can Provide Peace Of Mind • Can Preserve Equity • Can Provide Safety-Net at Targeted Cash-Flow Level 35