Crop insurance helps manage risk
Powell – “One cannot make a reasonable decision about crop insurance, whether to purchase crop insurance or not to purchase crop insurance, if they don’t understand the basic mechanisms and terminology that are used,” explained Gary Brester, agricultural economist at Montana State University.
Crop insurance can be a very viable tool for producers when it comes to protecting their yields and expected price for their crops.
“In terms of production risk management, the principles of crop insurance matter a great deal,” commented Brester. “The idea of insurance is that we transfer risk from those who don’t want it to those who do.”
“Of course producers have to pay to transfer that risk because no one is going to take risk off of a producer’s hands without some sort of payment and return on their investment,” continued Brester.
The cost of transferring risk to someone else is called a premium.
However, producers aren’t able to give away all of their risk.
The smaller portion of risk that is not covered by insurance that producers are still responsible for is called a deductible.
“Deductibles help us avoid small things that we can take care of on our own,” stated Brester. “As a result, deductibles are not a part of any type of insurance product.”
For lower deductibles, a higher premium is paid because insurance companies would likely have to pay out more in the event of a claim.
When insurance companies have to cover a claim that exceeds a producer’s deductible for a loss, it is called an indemnity.
Risk Management Agency (RMA) offers crop insurance for the majority of crops grown in the U.S. and provides insurance for a good portion of the livestock industry, as well, explained Brester.
Brester added that even though RMA offerings are available, producers could still decide to self-insure.
“Many agricultural producers self-insure when they have deep enough pockets to hold them over when a hail storm or catastrophe occurs,” mentioned Brester. “Those producers are able to get by without paying an insurance premium.”
“We all would be better off in the long-run if we never bought insurance, as long as we could survive those catastrophic events,” described Brester. “When producers pay insurance premiums, they expect to get most of their money back over a long period of time.”
“Insurance is always going to cost more than what will be received back as indemnities, but it helps to manage risk,” said Brester.
“If producers have crop insurance on their fields, they have to have an actual production historic (APH) on every one of their insurable units,” said Brester.
An APH is a proven yield history of producer’s fields for the past four to 10 years. The years included in an APH must be consecutive and start with the most recent crop year.
Generally, producers want a higher APH because they are more likely to get an indemnity from higher crop yields in the past.
Producers who have an incomplete APH with less than four years of history production use a transition yield (T-Yield). T-Yields are specific to a certain area.
“If producers are unable to supply any proven production information, then they are allowed to use a value that is 65 percent of the county’s average T-Yield for their APH for a certain year,” explained Brester.
“This value is pretty low for an APH, and the real incentive is to have records,” explained Brester.
If producers only have one proven year of production, they can use 80 percent of the T-Yield for the other three years for their APH.
For two years of production records, producers can utilize 90 percent of the T-Yield for the remaining two years, and with three years of records, producers can use the entire T-Yield amount for their missing year of production records.
New producers that have no proven years of production can utilize the entire T-Yield amount for each of their four required years for their APH.
As the new producers become more established, they will replace the T-Yield amount with one of their own production records.
Yield and revenue protection
Yield protection insurance is another form of crop insurance producers can use. To have yield protection, a producer must establish an APH and choose a coverage level between 50 to 85 percent of their APH.
Revenue protection on crops for producers is a bit more expensive than yield protection, and the producer can insure their crop using optional, basic or enterprise units, with the producer establishing an APH for each unit.
The coverage level for revenue protection is the same as yield protection, with 50 to 85 percent of producer’s APH being covered.
“Revenue protection provides more coverage for producers because it accounts for the possibility of additional perils,” said Brester.
Brester spoke at the Northwest College in Powell for a five-part series called Comprehensive Marketing Planning. The series began on Jan. 30 and ended on Feb. 27.
Insurance protection plans
Single-peril crop insurance products are an insurance option for producers. This type of insurance specifically covers events like flood or hail.
“If a hail storm occurs, the producer is insured up to the deductible for that loss,” commented Gary Brester, agricultural economist at Montana State University. “However, if producers have a wind storm that knocks the grain apart and it lands on the ground, that would not be covered by a single-peril hail insurance product.”
Single-peril offerings are generally offered by state government or through a crop insurance agency.
Multiple-peril insurance offerings are available to producers through Risk Management Agency (RMA), and they can insure several varieties of crops.
Brester explained that while crop insurance agents are providing a service to producers by selling them crop insurance, in the background, all crop insurance is funded through RMA.
Area insurance plans are another option for producers, and they are not as expensive as individual plans because area plans are less likely to pay off.
Some of the options to consider for area plans are yield protection plans, revenue protection plans and revenue protection with a harvest exclusion component.
Different areas within the same county can be insured under different contacts and this is called insurable units.
Insurable units consist of optional, basic and enterprise insurance plans, and there is about a 10 percent difference in cost between the three plans, respectively.
“It’s really important to make these decisions wisely in terms of whether a producer uses a basic, enterprise or optional unit,” warned Brester. “Optional units are the most expensive aggregation, basic units are a little less expensive, and enterprise units are the least expensive.”