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Crop Insurance

Multi-Peril Crop Insurance is a valuable risk management tool to guard against unforeseen loss due to several different scenarios in a growing season. Crop Insurance is a federal program, administered by the Risk Management Agency, (RMA). The RMA establishes and approves all programs for all types of crops throughout the United States.

The Agency sets the rates and establishes the levels of coverages for any crops which have an insurance program. Therefore, the Crop Insurance product is the same between all Authorized Insurance Providers, (AIP), who write Multi-Peril Crop Insurance. The advantages of choosing one Authorized Insurance Provider or Agency over the next are seen in terms of enhanced service and leading technological advancements, such as precision farming integration.

The name Multi-Peril speaks to the kind of coverage that is provided. It protects against many different risks or causes of loss. These include loss due to drought, excess moisture, freeze, hail, flood, insect damage, wildlife damage, and disease.

For many crops, there is also a quality consideration, such as low test weight in small and coarse grains, toxins present, USDA grade in fruits, or necrosis in potatoes to name a few. In more recent years, a Multi-Peril Crop Insurance product has been developed to protect against “market movement of price” for certain crops. Also, some options are made available to compensate for advances in crop genetics and farming practices.

Yield Protection (YP)– Basic Multi-Peril Crop Insurance

The most basic form of Multi-Peril Crop Insurance is “Yield Protection.” This policy protects a farmer against a loss strictly due to a yield below their “guarantee.” The guarantee is calculated from historical data based on the particular farmer’s operation.

It can include up to 10 years of production history and it does not need to be consecutive years. (Example: If they rotate their entire operation between corn and beans each year, then their database for each crop could extend back over 20 years of farming history.)

The Actual Production History (APH), is then used to determine the guarantee the farmer will have for their crop in any given year. They have the option to choose the percentage level of his APH that they wish to insure. The level can be from 50% to 85% depending on the type of crop. This must be done by the sales closing date. This date varies by region, from mid to late winter, across the country.

Using Corn as an example:

  • APH for 10 years of history equals 150 bushel/acre
  • Farmer chooses 70% coverage level; equals 105 bushel/acre guarantee
  • Price per bushel is established using the Chicago Board pricing (based on a specific trading month for the commodity)
  • Assume price per bushel is $4.25

So, the farmer puts a floor in their corn operation at 105 bushel per acre at a value of $4.25 per bushel or a dollar value per acre of $442.25. If they have a 100% crop failure, they would be paid $442.25 for each acre of corn insured. (If their production is somewhere below 105 bushel/acre, then they are paid for that deficit.)

Example: Production is 80 bushel. They are 25 bushel below their 105 guarantee so they are paid for 25 bushel at $4.25 or $106.25 per acre of insured corn.

Yield protection is available for nearly every crop that has a Multi-Peril program established.

Revenue Protection (RP)—Multi-Peril Crop Insurance For Production and Market Change

Revenue Protection follows the same basic formula as the Yield Protection with the added value of covering the changing value of the crop. With Revenue Protection, the farmer is actually insuring the dollar value of the crop and not the number of harvested bushels.

Revenue Protection is not available on all crops, so the farmer needs to check to see what crops have this option. When the policy levels are established at the sales closing date, and the farmer chooses Revenue Protection (RP), they are fixing a dollar value on their crop.

Using the same illustration from above, we can add RP protection to the calculation.

  • APH for 10 years of history equals 150 bushel.
  • Farmer chooses 70% coverage; equals 105 bushel.
  • To insure a Dollar Value on the crop, a projected value needs to be determined. This is determined from the Chicago Board (CB) based on a month of trading in the future. The month varies by commodity/month; i.e., corn/December, Soybeans/November, Wheat/Mid August to mid-September. Assume the projected CB price for December corn (at the time of the policy was purchased) is $4.25 per bushel.
  • 70% level of coverage equals 105 bu X $4.25/bu =$446.25 of guaranteed revenue per acre. This is the revenue floor for their corn production.

3 Different Scenarios at Harvest Time

There are 3 different scenarios that can play out at harvest time.

1. The CB Harvest Price is the Same as the Projected Price

The CB harvest price is exactly the same as the projected CB price when the policy was purchased. That means that it will take exactly 105 bushel of corn to equal a value of $446.25. (105 bu X $4.25/bu = $446.25.) So the farmer has a revenue claim if their production falls below the 70% level.

2. The CB Harvest Price is Lower Than the Projected Price

The CB harvest price is lower than the projected price. If the CB Harvest price is $3.50/bu then it will take more additonal bushels of corn to have reached a value of $446.25. ($446.25/$3.50 = 127.5 bu) So, it takes 127.5 bu of $3.50 corn to equal $446.25.

The trigger yield for a claim in this scenario has increased to 127.5 bu., from 105 bu. It is possible that a farmer who does not experience a production loss could still have a revenue claim and be eligible for an indemnity payment.

3. The CB Harvest Price is Higher Than the Projected Price

The CB harvest price is higher than the projected price. In this situation, the Revenue Guarantee will increase at no additional premium cost. (If the CB price at harvest is $5.00/bu then the revenue guarantee will increase to $525.00/acre, 105 Bu X $5.00 = $525).

In this case, you must have a production loss to trigger a claim. But, if you have a production loss you will be paid at the higher value per bushel, for each bushel below your trigger yield.

Revenue Protection certainly provides a better safety net for the crop producer because you are protecting against yield loss as well as negative movement in the market.

Other Options for a Multi-Peril Crop Insurance Policy

Some other options that are available which can be added to the Multi-Peril Crop Policy would be:

1. Yield Adjustment (YA)

With a Yield Adjustment option, the farmer may elect to substitute 60% of the applicable county T-yield for the actual yields that are less than 60% of the applicable T-yield to mitigate the effect of a catastrophic year(s).

2. Yield Exclusion (YE)

The Yield Exclusion option allows for the exclusion of an actual yield for any crop year where RMA determines the county per planted acre yield for that crop year was at least 50 percent below the simple average per planted acre yield for the crop in that county over the previous 10 consecutive crop years.

3. Trend Adjustment (TA)

The Trend Adjustment option uses your actual yield history and then calculates the impact of new technologies and genetics on your production.

There are differences between Yield Protection and Revenue Protection. These options need to be discussed with your agent to determine the cost/benefit.

Frequently Asked Questions

  • Must I insure all my acreage of a particular crop?

    You must insure all the acreage of a particular crop within a given county. If you farm across county lines, you would not have to insure that crop in the adjoining county.

  • If I have good ground and marginal ground, how can I maximize my protection?

    Insurable units on a crop insurance policy follow Farm Serial Numbers, (FSN). If the ground is on two different FSNs, then you can have each farm appraised separately, provided you have chosen “Optional Units” on your policy. You also need to keep separate production history for each FSN.

  • How can I keep I keep my premium cost-effective?

    By insuring your crop operation using the option of “Enterprise Units”, you take advantage of a premium discount of nearly 40%.

  • I have low production history, is there a way to improve my production guarantee?

    The options referenced above, YA, YE, and TA, may be able to be used to increase your production history and hence improve your guarantee.

  • Can I integrate Precision Farming Data with my crop insurance reporting requirements?

    Yes. There are specific protocols that need to be followed, but it does improve accuracy and often saves premium as well as time.