The 411 on Crop Insurance with Jeana Harms

With crop insurance decision season upon us, it had us wondering about the basics of crop insurance. We thought it would be worthwhile piecing together some of the basics on crop insurance and how our current form of crop insurance came about, defining some key terms that are important for farmers to understand, and we’ve sprinkled in a few tips from a crop insurance agent, Jeana Harms. 

A Brief History of Crop Insurance:

There is a much longer history on crop insurance, but here are a few highlights.

  • Crop Insurance in its current form came into play in 1996 when congress repealed a mandatory participation requirement in crop insurance
  • The Risk Management Agency (RMA) was also created 
  • The RMA was created to administer, oversee, and set guidelines for the federal crop insurance programs. 
  • The federal crop insurance program is designed to experience a loss ratio objective of “not greater than 1” before the subsidy is factored in. Simply put, the goal of the program is for premiums paid by farmers and indemnity payments paid to farmers to be equal over time.
  • The program is considered a public/private partnership as there are private approved insurance providers (AIPs) that administer the program to farmers. 
  • By 2013 more than 290 million acres were insured by federal crop insurance, representing nearly 90% of planted cropland in the US.

Types of policies:

There are a number of insurance policies available via the RMA to farmers, but here are some of the most common amongst corn, soybean, and wheat farmers.

  • Revenue Protection
  • Yield Protection
  • Area Risk Protection
  • Margin Protection (limited crops)
  • Whole Farm Revenue Protection

Today more than 75% of government policies written today are revenue protection policies, so we will focus more exclusively on this type of insurance product. 

How are premiums calculated?

The USDA sets premiums using a Monte Carlo Simulation (a fancy type of simulation that projects the probability of lots of outcomes based on a set of variables). The simulation takes into account yield variability and price volatility. Yield variability takes into account the farm yield relative to county yields and historic county yield variability. Price volatility in the model is based on implied volatility in the options market from CME. Crop insurance premiums (before subsidy) are calculated to cover only the liability associated with crop loss payments and do not include the administration of the program.

How are insurance yields and insurance prices set?

To know what quantity of bushels are able to be protected the RMA uses what is called actual production history or APH to set your farm’s baseline yield. APH is the average of a minimum of 4 continuous years and a maximum of 10 years. The yield data is based on proven yields that are reported to the government each year. 

Insurance prices are set in the spring and fall for corn, soybeans, and wheat using average closing prices for a given crop. For example, the corn spring insurance price is set using the average daily closing price for December corn throughout the month of February (soybeans look at the November futures price for this same time period). This means the price is established by March 1st of each year.

“Considering the current volatility of the market, it’s more important than ever to have accurate information when choosing your spring policy.  The increase in commodity prices, along with Revenue Protection Insurance, create an opportunity to lock in coverage at or near your breakeven,” says Jeana Harms, Partner at Agri-Risk Solutions

Fall pricing is done in a similar fashion during a different month. Harvest prices for insurance are set using December futures for corn (November for soybeans) averaged during the month of October, which again means by November 1st of each year we have the harvest insurance price established. Farmers are allowed to take the higher of the two prices when factoring in an indemnity payment unless harvest price exclusion options are selected.

How is my crop insurance indemnity calculated?

  1. Your crop insurance guarantee on a per acre basis is therefore calculated as:
APH x Insurance Price x Insurance coverage level 

So, if our corn APH is 200 bushels per acre with a spring insurance price of $5 and a fall insurance price of $5.25 and we chose 80% revenue protection our protection level would be as follows:

200 X 5.25 (higher of two insurance prices) X .80 = $800/acre 

2. Your indemnity payment will be paid in order to get you to your crop insurance guarantee, so if your actual yields are 150 bushels per acre with an insurance price of $5 your indemnity payment calculation looks like this:

Insurance guarantee - (actual yield X fall insurance price) = Indemnity Payment
EX: 800 - (150 X 5) = 50/acre indemnity payment 

Jeana’s tip: Nail down your breakeven per acre!

 With soaring input and commodity prices, this number can fluctuate greatly depending on various conditions.  Having an up-to-date understanding of your breakeven is a critical factor for determining your coverage needs.

What are insurance units and why do they matter?

Insurance units are simply the size of pies that you are choosing to combine for an indemnity payment. There are largely 3 options, Optional units, Basic Units, and Enterprise Units.

  • Optional Units: These are the smallest available units to a farmer to insure, they are often done in Sections, but are usually viewed as field level units. These are the most expensive units to insure.
  • Basic Units: These insurance units are split by agreement type (rent, own, crop share) within a given county. For example all of the rented corn acres in one county would classify as one basic unit, while the corn crop share acres would classify as a separate unit in that county. There is often a 10% discount for using this insurance unit type over optional units.
  • Enterprise Units: This form of insurance unit creates one insurance unit for each crop within a county regardless if they are owned, rented, etc.
  • Whole Farm Units build off of enterprise units and allow a farmer to combine multiple crops into the same unit. This type of insurance selection is often the cheapest for farmers, because the risk of an adverse event has to impact the entire operation in a big way and not just a single field.

Jeana’s tip: Consider what you have in covered bushels!

Revenue Protection Insurance acts as a hedge that allows you to lock in bushels at the local elevator. With Revenue Protection, in the event the harvest price is higher and you’re unable to deliver on your contract, you can be assured knowing that there will be an insurance payment to cover the costs to get out of your contract.

Important Crop Insurance Dates:

March 1st: Projected insurance price discovery is completed
March 15th: Closing date for crop insurance sales
July 15th: Planted acreage reporting is due
September 30th: Margin protection decisions are due
November 1st: Harvest Price discovery is completed

Jeana’s tip: Make an appointment! 

Plan a meeting with your crop insurance agent to discuss what kind of coverage is available for you.  No two farming operations are the same, but by following these tips and doing your homework, your agent can custom tailor your policy to fit your operation.

Farmers Risk is one system that can track these details in a simple, user-friendly, web platform that ties your marketing picture together. It enables you to make decisions based on your operation’s profit per acre rather than making marketing decisions without the knowledge of how it truly impacts your bottom line in every possible scenario. As a farmer, you need to know how your grain marketing plan performs in every possible situation. This tool allows you to see the complete picture. Most importantly, find something that works for your farm.

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