Crop Insurance Provides Peace of Mind for Growers

It’s long hours, hard work, ongoing expenses, and the exact opposite of instant gratification. No doubt, farming demands great investment and nurturing patience for the anticipated reward.

When all goes as planned, the end justifies the means, but throughout the process, factors beyond a farmer’s control can greatly impact what happens in the field and in the marketplace, hence the importance of crop insurance.

Gary Souza, a Northern California farmer of rice and walnuts, once worked as a U.S. Department of Agriculture Farm Service Agemcy director with experience administering the Catastrophic Assistance Program (CAP). Today, he said, the ability to manage his business risk by insuring against the unexpected provides much-needed peace of mind.

Drought sobean crop insurance

USDA Undersecretary for Farm and Foreign Agricultural Services Michael Scuse (left) and Trent Smith, Cass County, Mo., FSA committee member and farmer, discuss the impact of this year’s drought on Missouri’s soybean crop. USDA photo

“Crop insurance has established a safety net and this gives growers the opportunity to have an insurance floor in case there’s a major disaster,” he said.

Souza experienced just such a disaster in April 2008 when a record freeze dropped temperatures into the low 20s and claimed nearly his entire walnut crop. Threats to his rice crops have been excessive heat and drought at bloom.

“We run the gamut here in California – the main threats are drought, heat, excessive moisture, and frost,” Souza said. “We either have too much water or not enough water.”

Southern Louisiana farmer Ricky Klump raises rice and soybeans on 1,000 acres of Acadia Parish farmland. Excessive rain is his biggest concern, so the region’s network of drainage ditches comprises his first line of defense against crop flooding. Keeping these arteries clear of debris and silt is a top priority, but when tropical weather dumps voluminous amounts of water on his region, the U.S. Army Corps of Engineers’ lock system can’t always remove the water fast enough.

“When the water comes off the fields, you do whatever you can to keep the silt out, but when you get these massive rains, there’s not much you can do,” Klump said.

Damage from a hurricane’s excessive water and choking silt caused one of the two crop insurance claims Klump has filed during his 37 years of farming. His other claim was prompted by an invasion of stinkbugs, a known crop-wrecker.

In Central Florida, Bill Roe of longtime citrus grower W.G. Roe & Sons also knows the potentially disastrous work of insects. Recently, the Asian citrus psyllid has become a serious concern for U.S. citrus growers, as this invasive bug spreads Huanglongbing (HLB), aka “citrus greening disease.” One of the world’s most serious citrus maladies, this bacterial disease destroys the production and economic value of fruit; produces bitter, inedible, misshapen fruit; and is fatal to citrus trees.

asian citrus psyllid

Asian citrus psyllid nymphs on a lemon tree. This invasive bug spreads “citrus greening disease,” one of the world’s most serious citrus bacterial diseases for which there is no cure. Photo by Mike Lewis, CISR, UC Riverside

Roe and fellow Florida farmer Jerry Mixon of SunnyRidge (now owned by Dole Food Company) complement their citrus production with blueberries – a delicate crop that takes a costly beating during hail events. The blueberries, along with the state’s citrus crops, are also susceptible to freeze damage, while hurricane season keeps the state’s growers on edge every time one of those tropical systems brings high winds and potential flooding toward the Atlantic or Gulf coasts.

“Back in 2004, when we had those three hurricanes [Charley, Frances, and Jeanne] come through Central Florida, we definitely had some issues related to crop yields and plant loss – especially in citrus,” Mixon said.

How to Protect

When it comes to insuring their businesses from the many unexpected perils that could befall them, farmers consider potential loss of crops, loss of expected revenue, or some combination of both. William Edwards, extension economist at Iowa State University, breaks down the insurance options through the institution’s online Ag Decision Maker website this way:

Yield Protection (YP) crop insurance: This broad-based crop insurance program regulated by the USDA’s Risk Management Agency (RMA) and subsidized by the Federal Crop Insurance Corporation (FCIC) covers most crops for unavoidable production losses caused by drought, excessive moisture, hail, wind, frost/freeze, tornado, lightning, flood, insect infestation, plant disease, excessive temperature during pollination, wildlife damage, fire, and earthquakes.

YP does not cover losses resulting from poor farming practices, low commodity prices, theft, and specified perils that are excluded in some policies. There are specific restrictions on some crops based on acceptable farming practices.

A farmer’s insurance yield is based on the actual production history (APH) – the average yield obtained on the insured unit for four to 10 consecutive crop years. Farmers can insure most crops at 50 to 85 percent of their APH yield, in increments of 5 percent. The yield guarantee per acre is equal to one’s YP insurance yield multiplied by the chosen level of coverage.

To help maintain parity, the downward limit of an APH is cupped, while the upward limit is capped. Setting these low and high ends prevent anomalies and extreme years from throwing off the farmer’s average. This keeps the situation fair for both parties by not penalizing a farmer for having a great year, or padding him for a poor year.

“For example, I’m a 4,000-pound-plus walnut farmer and in 2008, I think I ended up raising about 230 pounds,” Souza said. “I had about a 95 percent loss and when they entered that year into my average, they cupped it so they didn’t plug in a 230-pound crop when my average was over 4,000.”

(Mixon noted that tree crop farmers can insure their trees as well as the crops they produce. Doing so covers the replacement of trees completely destroyed by weather events, disease, etc.)

Revenue Protection (RP) crop insurance: Because income from crop production can be low even when yields are not, RP guarantees a certain level of revenue rather than just production. It protects farmers from declines in both crop prices and yields. The guarantee is based on market prices and the farm’s actual yield.

Essentially, yield coverage for RP is the same as for traditional YP insurance, with the production portion of the revenue guarantee based on the farmer’s APH. RP insurance protects from the combined effects of yield and price risk and reduces year-to-year income variability. Revenue Protection uses Chicago Board of Trade (CBOT) futures market prices and the farmer’s APH yields to compute the revenue coverage and guarantee.

Price Fluctuations

Of the crop yield and crop revenue insurance categories, Roe observed, “The two are inextricably tied together because without yield, you don’t get much revenue.”

That being said, world markets driven by socioeconomic factors and geopolitical events can bear significant influence on the prices U.S. farmers get for their crops. As Roe explained, citrus is a long-cycle commodity – a tree crop with almost a 20-year curve. Therefore, high production in other areas around the world like Brazil can be the dominant factor in the value of his crops.

Souza described it as simple Economics 101 – supply and demand. As he explained, California produces a medium-grain japonica rice derived from Japan, about half of which is part of a trade agreement between the United States and mostly Pacific Rim countries.

“What causes the demand for California rice to fluctuate is the demand overseas,” Souza said. “Our domestic markets are pretty stable and pretty constant, but our domestic markets only fuel about half of the rice that we grow. The other half is exported, so the export needs of the other countries greatly determine our price here.”

Much of Souza’s walnut crop also ends up in overseas markets. China’s growing economy, he said, has given consumers more disposable income and thereby increased the interest in this heart-healthy food item – especially the higher quality U.S. nuts. Demand for American-grown walnuts has grown tremendously in the past five years so prices have increased accordingly. However, Souza and other walnut growers know that one unforeseen event in this overseas market could send prices into a nosedive.

Considerations and Qualifications

Although certainly an integral element of a farmer’s risk management plan, crop insurance remains an individual decision. Yield Protection and Revenue Protection policies can vary greatly based on myriad factors such as farm size, history of production, age of plants (tree crops), and number of plants per acre.

“Crop insurance is similar to your car or health insurance [in terms of premium options],” Mixon said. “You have the buy-up programs where you can pay a little more money, but in the event something happens, you’re covered for more.

“You have the basic catastrophic insurance. It’s a vanilla package where if you pay the minimum you get this, and if you anticipate [the risk of] losing more, you can buy the buy-up program for both tree loss and crop insurance. The same is true for blueberries – you can buy the minimum, but as an owner, you can decide ‘I think it’s worth the extra money to pay in case something happens.’”

Souza added this: “If a grower knows his bottom line cost of production, which all growers should know, you can establish your insurance level based on ‘this is what it cost me to grow it.’ You can tweak your individual insurance needs to your cost of production, because cost of production varies between operations. You can select a higher level of price coverage if your costs are higher, or you could select a lower level of price coverage if your costs are lower.”

Each farming operation faces its own set of dynamics and fiscal considerations. Therefore, Roe advises weighing the benefits against the costs. Farms that are heavily leveraged might determine that they can’t afford not to have it. Conversely, if a farmer is not heavily leveraged, Roe said that self-insuring against natural disasters through proper drainage, frost protection, etc., might be the way to go. In any case, America’s farmers have the option of protecting their businesses with policies that ensure a fair return for those long days, hard labor, and nurturing patience.