Taming the Bulls and Bears

Q&A on Selecting Crop Insurance for 2002

By Betsy Jensen,
Ag Commodity Instructor, Northland Community and Technical College,
bjensen@nctc.mnscu.edu

Purchasing crop insurance can be one of the most important decisions you make for your farming operation each year. Understanding which coverage options work best for the crop mix on your farm can be challenging, however. For instance, Crop Revenue Coverage has been available for several years for several crops, yet I would venture to say a fair number of farmers still don’t fully understand it.

With the March 15 crop insurance sales deadline right around the corner, I recently visited with Howard Olson, vice president of insurance with AgCountry Farm Credit Services in Fargo, N.D., for some risk management enlightenment.

Jensen: If people are given too many options, they might become overwhelmed and choose nothing at all. Could that be a problem with all the crop insurance options?

Olson: It could be a problem.  There aren’t too many policy options, but farmers need a good agent who understands the options and what they mean.  For each crop it only boils down to a couple different options.

Jensen: Do farmers need to look at all the different policies?

Olson: Looking at crop insurance from a risk management standpoint, the group risk plan (GRP) and income protection (IP) are not very good risk management tools.  For most farmers who are looking for a good risk management plan that will work with their marketing plan, it boils down to Crop Revenue Coverage (CRC) or Revenue Assurance (RA). I don’t see the GRP as any part of a good risk management plan because it does little or nothing to help you market your production, and IP only covers you if prices drop. If you purchase RA, it should always include the harvest price option. It might cost a few dollars on the premium, but you may gain thousands on a claim.

Jensen: What are the most common policies and coverage amounts in the Northern Plains?

Olson: We serve southeastern North Dakota and west central Minnesota. In our area, nearly all wheat producers choose a revenue product like RA or CRC.  In 2001, most of those policies were RA instead of CRC because premiums were less.  Soybean producers chose Multi-Peril (MPCI) because the price per bushel was higher, but that might not have been the right decision.  If you had a total disaster, MPCI would have been better but CRC will be better than MPCI in most cases because of coverage for the change in price. Corn producers are split half and half between CRC and MPCI but more are switching to CRC.  For the past few years, corn prices have dropped 20% from spring to fall so it doesn’t take much of a crop problem to generate a claim. Before Congress increased the subsidy, most producers choose 65% coverage, but now 70% to 75% coverage is the standard because of the increased subsidized coverage.

Jensen: Can we expect any changes to the prevented planting policies for 2002?

Olson: No. Adjusters will be asking more questions and closely reviewing claims but there are no prevented planting changes to the policy this year.  There are some other changes to the rest of the policy that may affect some farmers.

Jensen: Do the farm bill proposals hold any new options for crop insurance?

Olson: It doesn’t look like a new farm bill will change crop insurance, but there are some provisions from the Ag Risk Protection Act of 2000 that still need to be implemented.  Those changes were supposed to happen in 2002, were delayed.  There will be changes to prevented planting in 2003, but nothing for 2002.

Jensen: What is some advice for finding an agent?

Olson: Any licensed agent can sell crop insurance, there is no special certification, so you should work with someone who specializes in crop insurance. It’s become almost as complicated as taxes, and you need to have a specialist. We find too many farmers leaving money on the table because they’re working with someone who works only part-time with crop insurance. It’s so much to keep up with.

Jensen: Other than their agent, where can farmers go to find more information about the different policies?

Olson: There are several good websites such as the Risk Management Agency site www.rma.usda.gov or www.ag-risk.org. Most insurance companies also have their own websites with good information.

Jensen: Any advice for farmers looking to purchase crop insurance for 2002?

Olson: Take a real close look at CRC for soybeans versus MPCI. Just because the MPCI price is higher, doesn’t mean it’s the better alternative, considering how soybean prices have dropped each year. I would emphasize 70% to 75% CRC or RA on corn because prices have dropped 20% for the past few years. Wheat producers should consider a revenue product at 70%-75% coverage level. Look at both CRC and RA. The premium per acre was lower on RA last year and it appears it will be this year also, but be sure to compare it to CRC. Wheat prices have also dropped the last few years from spring to fall, not as much as corn, but enough to cause claims that wouldn’t otherwise be with MPCI.

I would also try to work with your agent to improve that APH.  A few more bushels can make a big difference in the protection with very little change in premium. Remember that revenue products were specifically designed to be used with a marketing plan. To get the most out of your insurance dollar, you need to combine some revenue product with forward sales. CRC and RA are taking the delivery risk out of the forward contracts, so use them to take advantage of opportunities in the grain markets.  This is not only good risk management, but also opportunity management.