Are You Getting the Right Crop Insurance Coverage On Your Farm?

By Betsy Jensen

Crop insurance is a major expense on any farm, but are you sure you’re getting the right product and coverage, and using the insurance for the maximum benefit on your farm? 

If you’re not sure, then you’re not alone. There are so many different insurance options available, it’s difficult to determine just which product is best for your farm.  Making matters more confusing is the fact that the correct answer for soybeans could be the wrong answer for wheat, and some products are only available for certain crops. 

One key is a good agent: someone who is up-to-speed on the alternatives, and can show you how each product will work on your farm.  Producers need to do their homework too.

“There’s no hidden tricks to selecting coverage. It comes down to finding the most coverage for your dollar on your own farm, and you’re not going to know what coverage the different products will give you until you’ve got information together in terms of what price elections are and the cost of the different products.  At that point you can start to compare alternatives,” says Matthew Diersen, risk and business management specialist at South Dakota State University.

Before comparing revenue products such as Crop Revenue Coverage or Revenue Assurance, evaluate your cost of production. “With the different products, if you don’t know your cost of production, you’re guessing when it comes to making a choice,” says Diersen.  “It is a very necessary step to take.  Because you’re dealing with covering revenue, you need to know what your costs are so you know what you’re protecting.”

Producers are generally astute at recognizing which product is best for their farms, after they’ve analyzed their alternatives.  Diersen points out that there was limited use of RA on soybean acreage in South Dakota this year.  “Producers bought more multi-peril on soybeans, because it was a better buy,” he says.

Diersen has developed a Risk Calculator spreadsheet designed to combine different risk management strategies to see how they affect crop revenue.  It can be found free online at http://www.abs.sdstate.edu/agecon/.

Jerry Freitag at St. Hilaire (MN) Ag Insurance, Inc, agrees that multi-peril was the best coverage option for soybeans last spring, because of the higher price guarantee. However, he believes wheat producers should have looked at CRC, or RA with the harvest option.

Freitag believes that too many broad statements were made last spring about which of the two most popular revenue insurance products—CRC or RA—was best. For example, some championed RA with the harvest option as the best alternative, and in some cases it was, but in not in every case.  “You must figure on an individual basis.  What’s it going to cost?  What’s the premium?” he says. The two options need to be compared on a farm-by-farm basis, since the best alternative could change depending on your APH.

Get Maximum Benefit by Forward Selling
If you decide to purchase CRC or RA with the harvest option, you need to take one more step in making the product work: Forward Contracting.  The following quote is from the Agricultural Risk Protection Act of 2000: “USDA researchers have verified that producers who combine crop insurance with forward marketing consistently earn more for their crop than producers who use only one or the other.”  The bottom line:  Crop insurance is supposed to be combined with forward contracting, or else you are not maximizing your crop insurance.

Freitag says that if you’re going to use CRC or RA without forward sales, “you might as well go with the cheapest out there (MPCI).  Why go through all the work and money?” If you use CRC or RA without any forward sales, you are buying a lot of coverage, but not using either revenue product to their maximum potential.

Ron and Paul Novacek who farm near East Grand Forks, MN chose to use both CRC and forward sales.  Paul participates in a marketing group, and through it, he started to realize the value in forward contracting, because of the seasonal rise in prices during the spring. “I was looking for a plan to turn the crop into cash sooner and with the carrying charge and seasonal strength in the spring, it just made sense to forward contract,” says Paul. The brothers bought CRC insurance with the intention of forward contracting their crop in the spring.

The Novaceks have used forward contracts as a marketing tool in the past, but having CRC allowed them to be more aggressive and contract their guaranteed production. Paul says he still felt there was a chance prices could go higher in the spring, but he was hopeful his farm could produce more bushels than just his 65% guarantee on the APH, and he could sell those bushels at potentially higher prices.  If prices rallied and he didn’t have any extra bushels, then the CRC insurance would pay for the difference between the spring and fall price.

Paul says he will likely take the CRC insurance again next year, and one reason is because it’s made his summer a little easier.  A good portion of the wheat crop has been marketed, the lender knows a check will be coming this fall, and the Novaceks can focus on production—which is what most farmers like to do anyway. 

Crop insurance can be incredibly complicated, and even the agents admit that.  To help, the Minnesota Department of Agriculture has started a new risk management certification program for people involved in agri-business.  The certification gives them background in risk management, including commodity marketing and crop insurance.  The two are becoming more related, and it’s important to make sure you understand how you can use all the tools available to minimize the risks you take in operating a farm.

Crop Insurance Info OnlineInsurance Program Alternatives and Program Provisions -- This is a good backgrounder on crop insurance alternatives, including CRC and RA -- http://www.cffm.umn.edu/Pubs/fcic2001.pdf

2001 Crop Insurance Fact Sheets -- Also, a  link to background on the 2000 Agricultural Risk Management Act -- www.smallgrains.org

USDA Risk Management Agency -- http://www.rma.usda.gov

More online risk management links can be found here.