The PC Professional
Chapter 5
Commodity/Crop Insurance
Farmers in the United States and elsewhere in the world face risks the average person seldom considers. A dry summer may only be inconvenient to many people who are told they cannot water their lawns, but for farmers, it can mean crop failure. For farmers, their farms are not only their business, but it is also their livelihood.
Because farming is a business, insurance is often purchased to offset business risks. Because of the unpredictable nature of farming, primarily due to weather, insurance is often sought out. An uninsured bad year can lead straight to bankruptcy.
History
Just as many types of risks have been insured for a long time, there is also history for crop insurance. In the 1880s, a group of tobacco farmers formed the first crop insurance company in Connecticut. It offered protection against losses from hail and continued doing so for the next fifty years.
In 1935, the dust storms began in America. Farming had not, at that time, practiced ways of reducing soil loss. After a year of record-breaking heat, dry soil from plowed fields moved across the lands, piling up like snowdrifts. Without rain to wet the soil, keeping it in place, it became the dustbowl we heard about in our history classes. Crops and cattle (along with other animals) died.
On February 19, 1937, the Federal government announced the first national Crop Insurance program to help agriculture recover from the combined events of the dust bowl and the Great Depression. In 1938, the Federal Crop Insurance Corporation, called FCIC, was created to carry out the program.
At first, the program was more of an experiment than a permanently conceived program. Since there was no previous experience to draw from, there were boundaries that were followed. The crop insurance activities were limited to major crops in the primary crop-producing areas. Because of the high costs and low participation rates among farmers, crop insurance remained mostly an experiment for the next forty-plus years. Then the Federal Crop Insurance ACT of 1980 was passed.
The Federal Crop Insurance Act of 1980 changed an experiment into federal legislation. The 1980 Act expanded the crop insurance program to cover many more crops and regions of the United States. It encouraged expansion to replace the free disaster coverage, which was compensation to farmers for prevented planting losses and yield losses, offered under Farm Bills created in the 1960s and 1970s. The free coverage competed with the experimental crop insurance program. The 1980 Act authorized a subsidy equal to 30 percent of the crop insurance premium, limited to the dollar amount at 65 percent coverage. The government hoped this would encourage participation in the expanded crop insurance program.
More farmers took part in the program after the passage of the 1980 Act, but it did not achieve the amount of participation Congress had hoped for. As a result, after a major drought in 1988, ad hoc disaster assistance was authorized to provide relief to farmers in need. Ad hoc is an adjective used to describe things that are created quickly, usually for a single use.
A second ad hoc disaster assistance was authorized in 1989 and a third one enacted in 1992, both to give farmers the option of claiming disaster losses on a farm-by-farm basis for any year between 1990 and 1992. Weather in other years continued to cause losses, with Congress passing additional ad hoc disaster bills. There was dissatisfaction with the continual disaster bills since they were competing with the crop insurance program. This led to the passage of the Federal Crop Insurance Reform Act of 1994.
The 1994 Act required participation in the crop insurance program for farms that were eligible for deficiency payments under price support programs, some types of loans, and other benefits. Since participation was mandatory, catastrophic (CAT) coverage was created. CAT coverage compensated farmers for losses that exceeded 50 percent of an average yield paid at 60 percent of the price established for the crop for that year. CAT coverage premiums were completely subsidized by the government.
In 1996 Congress repealed the mandatory participation requirement, but farmers who accept other benefits are required to purchase crop insurance or waive their eligibility for any disaster benefits that might otherwise be available.
In the same year, 1996, the Risk Management Agency (RMA) was created to administer FCIC programs and other non-insurance-related risk management and education programs that help support U.S. agriculture. Participation has increased greatly since 1994 when the Act was passed.
In the year 2000, Congress enacted legislation that expanded the role the private sector plays. RMA can enter contracts or create partnerships for research and development of new and innovative insurance products. Private companies and organizations can submit unsolicited proposals for insurance products to the Board for approval, for example. If approved, the insurance products could receive reimbursement for research, development, and operating costs, in addition to any approved premium subsidies and reinsurance.
After three years, the private company or organization may elect to retain ownership of the insurance product and charge a fee, which is approved by the Board, to other insurance providers who sell the product or elect to transfer ownership of it to RMA.
Crop Insurance Contracts
A crop insurance contract is a commitment between insured farmers and their insurance providers. Both farmers and insurers have the right to cancel or terminate the contract at the end of each crop year. If it is not canceled, then the insurance contract automatically renews each year.
The insured farmer agrees to insure all eligible acreage of his crop planted in a specified county. This choice is made county by county, as well as crop by crop. All eligible acreage must be insured to reduce the potential for adverse selection against the insurance provider. Adverse selection exists any time the insured person has more or better knowledge of the relative risks than the insurance company does.
The insurance company indemnifies the insured farmer against losses that occur during the insured crop year. Generally, the insurance covers loss of yield exceeding a deductible amount. Losses must be due to unavoidable perils beyond the farmer’s control and be specifically covered by the insurance policy.
During the last few years, policies that combine yield and price have been available. These cover loss in value due to changes in the market price during the insured period, in addition to the perils covered by the standard loss of yield coverage.
Crop insurance policies usually indemnify the insured person for other adverse events, such as the inability to plant a crop, or excessive loss of quality due to bad weather. The nature and scope of the coverage vary depending on the crop and the insurer.
Crop insurance contracts that are developed by FCIC are published in the Code of Federal Regulations, or CFR. Policies may also be developed by commercial, private sector insurance providers. If they are approved by FCIC, privately developed insurance contracts may replace or supplement the policies developed by FCIC. However, these policies are not published as regulations, but instead by a notice of availability in the CFR publication.
FCIC’s mission is to encourage the sale of crop insurance through private insurance agents and brokers. The desire is to encourage the purchase of this insurance to the maximum extent possible. FCIC also provides reinsurance to approved commercial insurers that insure agricultural commodities using FCIC-approved acceptable plans. Multiple Peril Crop Insurance authorized under the Federal Crop Insurance Act has been available since 1998 from the private sector.
Agriculture insurance typically covers four primary categories, which are:
1. crop insurance for damaged or lost crops,
2. property and casualty insurance for liability, such as injured employees or coverage for physical property, although livestock is typically not included here,
3. livestock insurance, and
4. specialized insurance for certain types of farming with unique perils and challenges.
Many of our states have specialized insurance companies that work cooperatively with them to cover perils that are unique to the area. Farmers in some states may need coverage for hail, for example, where another area of the U.S. faces a greater peril from drought.
Utilizing crop and farm insurance makes sense considering the perils farmers face. Government subsidies may be offered to farmers to offset some of their insurance premiums and increased coverage levels may also be available for some crops.
There may also be insurance cooperatives in some areas of the United States that address specific concerns of the region. Because these cooperatives may be able to offer lower premiums for the same coverage, they are an asset for local farmers.
Buying crop and farm insurance makes sense for many reasons. Government subsidies may be offered to farmers to offset a portion of their insurance premiums. Increased coverage levels may also be available for some crops. Protection for input costs and harvest values may be available.
There is another very important reason to purchase crop insurance: it may serve as collateral for operating loans. Most banks and financial institutions who loan to farmers want assurance that there is insurance in place in case crop failure occurs. This is the bank’s protection so that loans may be repaid even if the crop fails. Buying crop insurance policies is one way to manage the risk of crop failures or substantially low yields. Crop insurance agents and other agri-business specialists assist farmers in developing a successful insurance management plan.
Risk Management Terms
Like all industries, farmers and farm operations require knowledge of terms related to the industry. The following terms were taken from the USDA Risk Management Glossary.
Actual Production History (APH): Actual Production History is the most common plan of insurance under the Multiple Peril Crop Insurance, or MPCI, umbrella. It is the basis for determining the guarantee under either multi-peril crop insurance or revenue insurance policies. The APH is calculated as a 4- to 10-year simple average of the actual yield on the insured land. If the individual does not have records of actual yields, a “transitional yield” based on average yields in the county is used.
Actuarial Soundness: This is an insurance term that describes a situation where indemnities paid, on average, are equal to total premiums collected.
Agriculture Improvement Act of 2018: This law was signed on December 20, 2018, and is often referred to as the 2018 Farm Law. It remains in effect until 2023, although some provisions extend beyond that date. The Act makes a few major changes in agricultural and food policy. It continued all major conservation programs. The 2018 Farm Act increases spending by $1.8 billion, which is less than 1 percent above the level projected from the previous farm act.
Agricultural Risk Protection Act of 2000 (ARPA): This law provided $8.2 billion for insurance premium subsidies and $5.2 billion for market loss assistance payments for producers. Among its other effects, ARPA also modified the crop insurance premium subsidy structure, authorized pilot programs for new forms of insurance, expanded insurance fraud detection and enforcement, and dropped the area yield loss trigger in the NAP program.
Adjusted Gross Revenue-Lite (AGR-Lite): AGR-Lite is whole-farm revenue insurance that covers almost all the commodities produced on a farm. It is individualized revenue insurance based on individual producer yields, quality, and marketing history that equals gross income.
Buy-Up Coverage: This refers to crop insurance coverage that exceeds the CAT (catastrophic) level. Coverage is available up to 75 percent of the expected yield or expected revenue (which is yield times price). In some areas, coverage up to 85 percent is available for some crops. The insured pays part of the premium, but government premium subsidy rates are now over 50 percent for most levels of coverage.
CAT Coverage. CAT is short for “catastrophic,” and refers to crop insurance coverage at the lowest, or catastrophic level. CAT coverage is set at the 50/55 level, which means that the yield must fall below 50 percent of the average yield before a loss is paid. These losses are paid at a rate of 55 percent of the highest price election. The insured pays an administrative fee to become eligible to receive CAT coverage, but the government pays the entire premium.
Crop Revenue Coverage (CRC): CRC is the most widely available revenue protection policy. This policy guarantees an amount of revenue (based on the actual production history (APH) x commodity price), called the final guarantee.
Crop Revenue Insurance: Crop revenue insurance pays indemnities based on gross revenue shortfalls instead of just yield or price shortfalls. Types of crop revenue insurance include Crop Revenue Coverage (CRC), Revenue Assurance (RA), and Income Protection (IP). These programs are subsidized and reinsured by the USDA’s Risk Management Agency.
Crop Yield Insurance: Also known as Actual Production History (APH) yield, crop yield insurance pays indemnities to producers when yields fall below the producer’s insured yield level due to most natural causes. Crop yield insurance is subsidized by the USDA’s Risk Management Agency.
Disaster Payments: These are direct payments to farmers on an emergency basis when crop yields are abnormally low due to adverse growing conditions. During the 1970s, there was a “standing” disaster payments program, with payments made without the declaration of a disaster area. Regular payments ceased after 1981, but since then ad hoc disaster payments have been specially approved by the U.S. Congress on a number of occasions.
Dollar Plan of Insurance: The Dollar Plan of Insurance lets the insured select one of several dollar amounts of insurance per acre prior to planting. For vegetable crops, fresh market corn, fresh market tomatoes (Florida only), and peppers are insurable under the Dollar Plan of Insurance.
Enterprise Diversification: Diversification is a way to generate income from different crops and/or livestock activities that are not closely related in price so that low income from some activities would likely be offset by higher income from others.
Fixed Dollar Plan of Insurance: The Fixed Dollar Plan of Insurance provides protection against declining revenues due to damage that causes a loss of yield and there is no price increase in the market. The pilot Chile Pepper program is based on the Fixed Dollar Plan of Insurance and is available in multiple places.
Forward Contract: This is an agreement between two parties (such as the farmer and someone who buys his or her products) that calls for delivery of, and payment for, a specified quality and quantity of a commodity (such as a particular crop) at a specified future date. The price may be agreed upon in advance or determined by formula at the time of delivery or another point in time.
Forward Pricing: This is when an individual agrees on a price or a pricing formula for a commodity that will be delivered later. “Forward pricing” is used broadly here to refer to both hedging with futures or options, and forward contracting.
Futures Contract: This is an agreement to buy or sell a commodity of a standardized amount and quality during a specific month in the future, under terms established by the futures exchange, at a price established in the trading pit at the commodity futures exchange.
Futures Options Contract: This is a contract that gives the holder the right, though not the obligation, to buy or sell a futures contract at a specific price within a specified period of time, regardless of the market price of the futures contract when the option is exercised. Options provide protection against adverse price movements.
Group Risk Income Protection (GRIP): GRIP is based on the experience of the county rather than on individual farms, so APH is not required for this program. A GRIP policy includes coverage against the potential loss of revenue resulting from a significant reduction in your county’s yield or the commodity price of a specific crop.
Group Risk Plan (GRP): Like GRIP, GRP coverage is based on the experience of the county rather than on individual farms, so APH is not required for this program. GRP protects an individual in the event that his or her county’s average per-acre yield or payment falls below the trigger yield.
Guarantee: Also called “yield guarantee” or “insurance guarantee,” this is a promise of payment. In this context, it means the amount of money an individual will be paid in the event of a loss, according to the terms of the crop insurance contract.
Hedging: Hedging uses futures or options contracts to reduce the risk of adverse price changes prior to an anticipated cash sale or purchase of a commodity.
Income Protection (IP): IP is a revenue product that, based on the APH, protects the person against a loss of income when prices and/or yields fall. While IP is similar to CRC, it does not have the increasing price function of CRC.
Indemnity: This is the compensation or money received for qualifying losses paid under an insurance policy. The indemnity compensates for losses that exceed the deductible, up to the level of the insurance guarantee.
Leverage: Financial leverage refers to the use of borrowed funds to help finance a farm business. Higher levels of debt, relative to net worth, are generally considered riskier. The optimal amount of leverage depends on several factors, including farm profitability, the cost of credit, tolerance for risk, and the degree of uncertainty in income.
Liquidity: Liquidity refers to the ability to generate cash quickly and efficiently to meet financial obligations. Liquidity can be enhanced by holding cash, stored commodities, or other assets that can be converted to cash on short notice without incurring a major loss.
Loan Deficiency Payments (LDPs): These payments protect producers of several major commodities against revenue losses due to low prices.
Marketing Contract: This is a contract between the farmer and a processor or handler that establishes a marketing outlet and a price (or a formula for determining the price) for a commodity before harvest or before the commodity is ready to be marketed.
Multiple Peril Crop Insurance (MPCI): MPCI was established in the 1930s to cover yield losses from most natural causes. MPCI operated on a somewhat limited basis through the early 1980s, when a private/public partnership was established. At that point, insurance availability was greatly expanded, and premium subsidies increased in hopes of replacing the disaster payment program. Major reforms legislated in 1994, introduction of a low-cost CAT (catastrophic) coverage level, increased premium subsidies, and a requirement that participants in other farm programs obtain crop insurance - increased participation to over 200 million acres, covering the majority of acres of major field crops planted in the United States.
Non-Insured Crop Disaster Assistance Program (NAP): Crop insurance is not available for all commodities. NAP provides financial assistance to producers of many of these commodities if they experience a qualifying yield loss.
Premium: The amount of money an individual pays for risk protection. Option buyers pay a premium to option sellers for an options contract. Similarly, the person who buys an insurance policy pays a premium in order to obtain coverage.
Production Contract: An agreement between the farmer and the processor that usually details the production inputs supplied by both parties, the quality and quantity of a particular commodity that is to be delivered, and compensation that will be paid. In return for giving up control over decision making, the farmer is often compensated with a price premium or lower market risk.
Revenue Assurance (RA): Revenue Assurance provides coverage to protect the farmer against loss of revenue caused by low prices, low yields, or a combination of both.
Reinsurance: A method of transferring some of an insurer’s risk to other parties. In the case of Federal crop insurance, USDA’s Risk Management Agency shares the risk of loss with private insurance companies that deliver policies to producers. Private reinsurance also exists. In this case, a private reinsurer assumes responsibility for a share of the risk, in return for a share of the premiums.
Revenue Insurance: Revenue insurance, a cousin to MPCI, was introduced after the 1994 reforms and has become the most popular form of insurance in some areas. Whereas crop insurance covers only yield losses, revenue insurance pays when gross revenue (yield times price) falls below a specified level. These programs are subsidized and reinsured by the Risk Management Agency.
Risk: Uncertainty about outcomes that are not equally desirable. Risk is an important aspect of the farming business. The uncertainties of weather, yields, prices, government policies, global markets, and other factors can cause wide swings in farm income. Risk management involves choosing among alternatives that reduce the financial effects of such uncertainties.
Subsidy: Money given by the government to help producers function.
Trigger Yield: Under GRP, farmers receive payments any time the actual county yield drops below the trigger yield that the farmer chooses. The trigger yield can be 90, 85, 80, 75, or 70 percent of the expected county yield, which is based on the county's yield history since 1962. Expected county yields are adjusted for upward trends.
Uncertainty: Lack of sure knowledge or predictability.
Yield: The amount of something, especially a crop, produced by cultivation or labor.
Besides terms, it is also necessary to know certain abbreviations that are commonly used:
· APH Actual Production History
· AGR Adjusted Gross Revenue
· A&O Administrative and Operating reimbursement
· ARPA Agriculture Risk Protection Act
· ARC Agriculture Risk Coverage, sometimes CO is added at the end for county.
· ARMS Agricultural Resource Management Survey
· API Apiculture Pilot Insurance program
· AIP Approved Insurance Provider
· AYP Area Yield Protection
· BU Basic Unit
· BFR Beginning Farmer and Rancher Benefits
· CAT Catastrophic risk protection
· CCC Commodity Credit Corporation
· CEPP Commodity Exchange Price Provisions
· CPA Contract Price Addendum
· CIH Crop Insurance Handbook
· CRC Crop Revenue Coverage
· ERS Economic Research Service
· DAS Data Acceptance System
· DSSH Document and Supplemental Standards Handbook FCIC-24040
· EPLPPS Eligible Plant List and Plant Price Schedule
· EU Enterprise Unit
· EP Enterprise Unit by Practice
· FSA Farm Service Agency
· FCIC Federal Crop Insurance Corporation
· GRIP Group Risk Income Protection
· GRP Group Risk Plan
· IP Income Protection
· IRS Internal Revenue Service
· LRP Livestock Risk Protection
· LDP Loan Deficiency Payments
· LAM Loss Adjustment Manual
· MPCI Multiple Peril Crop Insurance
· NCFI Net Cash Farm Income
· NAP Noninsured Crop Disaster Assistance Program
· NASS National Agriculture Statistical Service
· NOAA National Oceanic and Atmospheric Administration
· OU Optional Unit
· PRF Pasture, Rangeland, Forage pilot program
· PIVR Plant Inventory Value Report
· PHTS Policyholder Tracking System
· PLC Price Loss Coverage
· RA Revenue Assurance
· RP Revenue Protection
· RMA Risk Management Agency
· STAX Stacked Income Protection Plan
· SRA Standard Reinsurance Agreement
· SBI Substantial Benefit Interest
· SCO Supplemental Coverage Option
· SBI Substantial Beneficial Interest
· USDA United States Department of Agriculture
· WU Whole Farm Unit
· WFRP Whole-Farm Revenue Protection
· YP Yield Protection
When considering crop insurance policies, farmers must always carefully consider how the plan will work in conjunction with their other risk management strategies. The goal is always to achieve the best possible outcome each crop year.
The Basics
As it relates to crop insurance, our government has entered a partnership with private crop insurance providers to offer crop insurance on an equal opportunity basis to agricultural farmers. Approved insurance providers use independent licensed agents to sell their products.
Each year, approved providers enter contracts called the Standard Reinsurance Agreement (SRA) with the Federal Crop Insurance Corporation (FCIC) to administer the Crop Insurance program by marketing, underwriting, and adjusting claims for these crop policies. The independent insurers are responsible for transmitting data regarding the policies to the federal government, as well as making sure their insurance staff is trained and monitored.
Premium rates of the crop policies are established by the Federal Crop Insurance Corporation, as well as policy terms and conditions. Whatever the price is in any given year, premiums are constant throughout the industry. Since the price will be approximately the same regardless of the insurer selling the product, companies end up competing in other ways, such as with their expert knowledge, customer service, and so forth.
The Crop Insurance Agent
A top priority of every crop insurance company is securing and maintaining a professional sales force. Crop is a line of insurance that requires specialized knowledge, so agents that enter this field must understand farming and ranching more than most people. It is not unusual for crop agents to have come from a farming background. The success and profitability of any crop insurance company can partially be attributed to the agents they contract with.
Strong interpersonal skills are required to excel as a crop insurance agent. Being an insurance agent is primarily a sales job, of course, and salesmanship depends upon understanding and working well with other people. However, sales also mean having strong communication skills, personal values, and a willingness to do what is best for the client. Sales skills can be taught, and most people can learn the mechanics of selling, but there is more to it than just selling a product. The agent must be able to talk to a variety of people, using a blend of appropriate conversation and information, which may be more art than science. The ability to relate to farmers is especially important, which might be why many crop agents come from a farming background. Insurance producers must provide farmers with the information they need to make a buying decision in a manner that is understandable. This is critical to success for both the agent and farmer.
Communication is always key to successful insurance sales. Agents not only need to work well with farmers but also must have the skills necessary to communicate effectively. If the farmer cannot understand the product being presented, he or she is unlikely to buy even though it might be exactly what is needed to be financially protected. Every insurer and underwriter can identify their best crop agents because they are the ones who are able to get along well with others and present products in a positive and effective manner. Personality is hard to teach, but anyone can be pleasant, and everyone can learn good social skills and practice patience and consideration for others. These characteristics often are the deciding factor in succeeding with other people. Basically, it comes down to being courteous, even when the agent is told “no.” Each farmer knows other farmers. Only a foolish crop agent would be rude to anyone, whether they buy a policy or not.
Professionalism Essential
Companies and farmers alike want to do business with individuals who act ethically and exhibit professional behavior. Agents and loss adjusters who have demonstrated an ability to do the right thing both personally and professionally are a credit to themselves, the companies they represent, and the crop insurance industry. These individuals will always be in demand professionally because everyone knows they are trustworthy. Insurance companies hope they find this type of representative because they know they will be honestly represented, minimizing potential legal liabilities. Farmers seek out honest agents with professional behavior because farmers want to work with individuals they can trust and who will provide the insurance protection they need. Additionally, farmers want to know that their private production records and other personal information will be kept confidential. That requires trust. Farmers and ranchers want to work only with agents who understand crop insurance and make a genuine effort to correctly and completely present the various available products.
The essence of ethical business behavior is personal integrity and moral character. There is no place in the crop insurance industry (or any insurance industry) for insurance agents who have no integrity or intent to follow not only the law but also the needs of his or her clients. It is vital that all types of agents adhere to the high ethical standards required by the industry.
A sales relationship is also a trust relationship. In some types of insurance sales, it is not necessary to be locally known, but in the crop insurance industry, farmers and ranchers often want to know the background of the crop agent standing on their doorstep. In many cases, the crop agent comes from a farming, ranching, or logging background so his or her family name may be known in the area. Individuals who are locally known have an easier time establishing themselves as a crop insurance agent, but that is certainly not a requirement for the job. What is required is the ability to build a relationship of trust.
Not everyone starts with an established name in the community, so it may take several years to build a solid reputation. Whether the crop agent’s name is locally known or not, it is important to be viewed as someone who is interested in the good of the community and the farmer in particular.
Knowing the Industry
As the number of people raised on farms declines, so does the pool of individuals who have personal experience in production agriculture. That means fewer crop agents will have a farming or ranching background. Being raised on a farm or having farm experience is not a prerequisite to entering the crop insurance field, of course. However, a thorough understanding of agricultural economics and the farming or ranching lifestyle is extremely beneficial.
Successful agents must have some understanding of agriculture, how farmers formulate decisions, and the specific areas that the agent needs to address with his or her recommendations. Agents must understand the big picture, including their role and the role of others who impact the farmer’s decisions. The agribusiness environment is complex, and decisions can impact the farmer’s future since they are interrelated. Farmers are increasingly better educated, not only in farm techniques but also in business practices. They utilize a team of people, including lenders, insurance agents, accountants, lawyers, and other specialists to provide coordinated, comprehensive solutions to management decisions. There is a significant role to play for crop insurance agents who view themselves as members of an agribusiness team and act accordingly.
Today’s crop agents must understand microeconomics and the business decisions farmers must make. Without this detailed knowledge, an agent is unable to provide the type and level of information needed to answer critical production questions and make important management decisions. The farmer’s decision-making process will change over time as the agriculture business changes and evolves. This is especially true considering the climate changes we are seeing that severely impact farming and ranching. Farmers must also get the USDA to change as climate changes, allowing farmers to buy the insurance protection they need to continue feeding our nation.
Continual Education Required
It is imperative that agents thoroughly understand all the products they sell, no matter what insurance line they are in. A strong commitment to education and lifelong learning to stay current is vital for agriculture and crop insurance. Few vocations require more vigilance in personal study and effort to stay current than crop insurance does.
Nothing in crop insurance is as certain as change. Changes occur for many reasons, but global warming is a primary reason. Climate change will require new farming methods, present new threats to crops, and a legislative body that can address the changes and threats farmers face.
A commitment to education and life-long learning goes hand-in-hand with strong communication skills. Strong communication skills are necessary since agents have an important message to convey with products that farmers need. Education includes not only understanding crop insurance, agriculture, economics, and marketing, but also ways to communicate knowledge to others.
Multiple Plans of Coverage
Insurance agents sell insurance products related to crops and other agriculture activities. Farmers need not only crop insurance but also various types of property and liability insurance to cover property loss and potential liability issues. There are multiple plans of coverage for more than 100 types of crops and commodities. With so many types of insurance involved, it is an ever-changing program. Crop agents must be willing to continually learn the needs of the farmers and ranchers.
Like other types of insurance, crop agents receive a commission, which is outlined in their annual contract with the insurer. Agents operate the same as those selling other types of products.
Policy information varies by crop, state, and sometimes even by counties, so agents must constantly be aware of their products and any changes that occur. Crop policies are made up of several parts and various documents. Some documents address the commonalities while others address the differences. Information changes each year and sometimes even each month. Agents must know and understand the changes that take place to be an effective insurance representative. Agents are responsible for understanding the crops involved and the insurance plans that address them.
It is more accurate to refer to commodities rather than crops when discussing crop insurance since many types of insurance address agriculture or farm animals, not crops. Even though the insurance may not be for crops, as we know them in the typical sense, crop insurance seems the predominant name. More than 100 commodities are insured, including perennials (orchards, for example), livestock, apiculture (beekeeping), clams, oysters, rangeland, and pastures.
Some types of crops/agriculture may be insured under more than one type of policy. Wheat insurance, for example, includes Yield Protection (YP), Revenue Protection (RP), Area Yield Protection (AYP), and others. On the other hand, some types of crops can only be insured under one type of policy. Wine grapes, for example, can only be insured under a Yield Based policy.
There are three basic types of crop insurance:
1. yield-based coverage,
2. revenue-based coverage, and
3. named-peril plans.
Yield-based plans, as the name implies, covers the crop yield. If the fields do not yield the quantity they normally would, an insurance payment is received. Yield based plans may be based either on the farm’s individual yield history (but only if enough data exists to qualify for such a plan), or they may be based on the county’s group average yield expectations.
Revenue insurance plans insure the farmer for expected revenue, as opposed to yield from the fields. This is a higher level of coverage, as it usually includes insurance against two factors: low yield and low market prices. Farmers generally have a variety of options, even in this category. In most cases, he or she can buy this type of insurance based on their individual farm history or based on the history of farm production in the county.
Named-peril plans cover certain perils that are specified within the policy. An example of this type of insurance is crop-hail plans. For specific farming areas, these kinds of named-perils plans may be a good value. The crop is insured against a specific kind of damage or loss, and the farmer can choose to be insured to a variety of levels, with and without deductibles.
This kind of insurance can be a good choice if the individual farms a single crop. In this case, there may be only certain perils that concern the farmer and he or she can often find a policy for that specific peril.
Livestock Insurance
The raising and farming of livestock can be just as risky as crops. The same kinds of challenges exist, including changes in market prices, the possibility of reduced yields (as in dairy farming), and sickness or death of farm animals.
Livestock insurance can provide coverage to reduce the risk of loss. Much of the decisions to purchase or not purchase livestock insurance depends upon the farmer’s tolerance for risk. The more coverage purchased, the higher the cost. If the farmer is willing to assume some of the risk, he or she can save premium dollars.
Premium cost can also be reduced by choosing higher deductibles, which brings down the cost of the policy. The degree of savings will depend upon the amount of the deductible chosen. Policy cost may also be lowered by accepting less insurance coverage (versus full coverage).
Feeder Cattle
There are different types of livestock insurance and obviously, it is important to choose the right policy for the situation. Livestock Risk Protection Insurance Plan for Feeder Cattle (LRP-Feeder Cattle) is, as the name implies, for feeder cattle versus dairy or other types of livestock. This type of coverage is designed to insure against declining market prices. There are different coverage levels and insurance periods that should match the time the feeder cattle would normally be marketed.
Feeder Cattle insurance coverage may be purchased throughout the year from Risk Management Agency-approved livestock insurance agents. Premium rates, coverage prices, and actual ending values are posted online each day. It is a constantly changing business.
It is possible to choose coverage prices from 70 percent to 100 percent of the expected ending value. At the end of the insurance period, if the ending value is below the coverage price, the insured will be paid an indemnity for the difference between the coverage price and the actual ending value. Actual ending values are based on weighted average prices from the Chicago Mercantile Exchange Group Feeder Cattle Index.
Individuals interested in buying coverage submit a one-time application for LRP-Feeder Cattle coverage. After the application is accepted, the individual can buy specific coverage endorsements throughout the year for up to 1,000 head of feeder cattle that are expected to weigh up to 900 pounds at the end of the insured period. The annual limit is 2,000 head of cattle per producer per year.
The length of insurance coverage available for each specific coverage endorsement is 13, 17, 21, 26, 30, 34,39, 43, 47, or 52 weeks. Insurance coverage is available for calves, steers, heifers, predominantly Brahman cattle, and predominantly dairy cattle. There are also two weight ranges to choose from.
Fed Cattle Risk Protection
Like feeder cattle, an application must be submitted to obtain a policy. After the application is accepted the insured may buy specific coverage endorsements for up to 2,000 head of heifers and steers weighing between 1,000 and 1,400 pounds, that are marketed for slaughter near the end of the insurance period. The annual limit for fed cattle insurance is 4,000 head per producer for each crop year, going from July 1 to June 30. All cattle must be in a state approved for LRP-Fed Cattle at the time the insurance is purchased.
Dairy Revenue Protection
Dairy Revenue Protection, referred to as Dairy-RP by the Risk Management Agency, is designed to insure against unexpected declines in the quarterly revenue from milk sales relative to a guaranteed coverage level. The expected revenues are based on futures prices for milk and dairy commodities and the amount of covered milk production that is elected by the dairy producer.
In finance, a futures contract is a standardized forward contract, a legal agreement to buy or sell something at a predetermined price at a specified time in the future, between parties not known to each other. The asset transacted is usually a commodity or financial instrument. This definition is included since “futures prices for milk” could be wrongly assumed to be a mistake in sentence structure.
The covered milk production is indexed to the state or region where the dairy producer is located. Dairy-RP is approved for sale in all counties in all fifty states.
There are two revenue pricing options for Dairy-RP. One is Class Pricing and the other is Component Pricing.
Under the Class Pricing option, a combination of Class III and Class IV is used for milk prices as a basis for determining coverage and indemnities. The Component Pricing option uses the component milk prices for butterfat, protein, and other solids as a basis for determining coverage and indemnities. With this option, the insured may select the butterfat test percentage and protein test percentage to establish your insured milk price.
It is possible to cover 70 percent to 95 percent of the expected quarterly revenue in five percent increments. A premium subsidy is available as well and is based on the coverage level selected.
Dairy-RP provides insurance only for the difference between the final revenue guarantee and actual milk revenue, times actual share, and protection factor, caused by natural occurrences in market prices and yields in the pooled production region. This dairy insurance does not insure against death of dairy cattle, other loss or destruction of dairy cattle, or any other loss or damage of any kind whatsoever.
Lamb Livestock Risk Protection
The Livestock Risk Protection Insurance Plan for Lambs (LRP-Lamb) is designed to insure against unexpected declines in market prices. Sheep producers may choose from a variety of coverage levels and insurance periods that match general feeding, production, and marketing practices. This type of coverage may be purchased throughout the year from RMA-approved livestock insurance agents.
Coverage prices range from 80 to 95 percent of the expected ending value. At the end of the insurance period, the insured may receive an indemnity payment for the difference between the coverage price and the actual ending value. The length of insurance coverage endorsement is 13, 26, or 39 weeks. This coverage is not available in all states.
Swine Livestock Risk Protection
The Swine Livestock Risk Protection Insurance Plan (LRP-Swine) is designed to insure against declining market prices. Pork producers may choose from a variety of coverage levels and insurance periods that match the time the insured’s hogs would normally be marketed.
Insurance coverage prices range from 70 percent to 100 percent of the expected ending value. At the end of the insurance period, if the actual ending value is below the coverage price, he or she may receive an indemnity payment for the difference between the coverage price and the actual ending value.
Natural Disasters and Crop Insurance
As we know, severe weather can destroy crops, prevent farmers from planting, and cause delays in harvesting, or prevent the harvesting entirely. Floods and hurricanes can put farmers out of business in some cases. Buying federal crop insurance for the effects of bad weather mitigates damages and allows farming operations to continue.
For insurance to do its job as it was intended, farmers and farming operations must take some actions prior to disasters. First, existing policies need to be continually reviewed to make sure proper insurance is in effect. Records of the farming operation need to be in order and secured in a safe location. Of course, all contact information for agents and insurers must also be current and securely located in a place where they can be accessed when necessary.
Once a disaster happens, insureds need to contact their crop insurance agent and follow up in writing, keeping a copy for his or her own files. It is the insured’s responsibility to make the initial contact, even though the crop agent is likely aware of the disaster happening. The crop insurance company will arrange for a loss adjuster to inspect the insured property.
When crop damage occurs, adversely affecting yield or crop values, the insured individual is eligible to file a claim. It is recommended and often required that the crop insurance agent be contacted within 72 hours of discovering the damage. If the insured feels it is best to replant the crop, assuming there is still time to do so, switch to another crop, or destroy the damaged crop for any reason, the insurance agent should first be contacted. The issuing insurance company must have an opportunity to inspect the crop’s damage to process the insurance claim. Doing something prior to their inspection could mean a claim denial.
If a crop is destroyed or damaged by a hurricane or drought or another weather issue, but the farmer still intends to harvest his or her crop, to file a claim, the agent must still be contacted within 72 hours and allowed time to survey the damage. Usually, it is required that the crop continues being cared for until harvest or until the insurance company appraises the crop and releases the acreage. Never should a farmer or farming operation destroy the crop or representative samples without clear direction from the insurance company, preferably in writing.
While waiting for the adjuster’s arrival and report, do not destroy any of the crop. Do not disk or plow. Do not replant. Do nothing to destroy the crop until permission from a claim adjuster or an insurance company representative has been received.
Prevented Planting
Prevented planting is the failure to plant an insured crop with the proper equipment by the final planting date or during the late planting period. To be covered, the farmer or farming organization must have been prevented from planting by an insured cause that is general to the surrounding area, preventing other farmers and organizations from planting too. The dates for planting vary with the crop and area.
Each policy will state whether prevented planting is covered and if so, to the extent it is covered. Farming is complex, so eligibility for a prevented planting payment must be determined on a case-by-case basis. Loss is based on each producer’s personal circumstances.
Supplemental Coverage Option for Federal Crop Insurance
The Supplemental Coverage Option, called SCO, is a crop insurance option that provides additional coverage for a portion of the underlying crop insurance deductible. This must be bought as an endorsement to the Yield Protection, Revenue Protection, or Revenue Protection with the Harvest Price Exclusion policy or to the Actual Production History policy for crops that do not have revenue protection available. The Federal government pays 65 percent of the premium cost for SCO.
Because this is an endorsement, it must be purchased when the policy is bought. Obviously, it must also be purchased from the same company issuing the policy. Crops that are participating in the Agriculture Risk Coverage (ARC) program are not eligible. This is a program that began in the 2014 Farm Bill, administered by the Farm Service Agency.
Nursery Commodity Insurance
Nursery crop insurance is available in counties where a premium rate is provided in the actuarial documents for those operating nurseries that meet specified criteria. Insurance coverage applies, by practice (field-grown or container) to all the nursery plants in a county and:
1. for which the individual has a share,
2. are on the EPLPPS,
3. are grown in a nursery that receives at least 40 percent of its gross income from the wholesale marketing of nursery plants,
4. meets all the requirements for insurability,
5. are grown in an appropriate medium, and
6. are grown and sold with the root system attached (not cut flowers in other words).
Nursery plants are not insurable if they are grown in containers containing two or more different genera, species, subspecies, varieties, or cultivars. Neither are they insurable if they are grown as stock plants or grown solely for the harvest of buds, flowers, or greenery.
Plants that are produced for edible fruits or nuts can be insured if the plants are available for sale. Harvesting the edible fruit or nuts does not affect insurability if the plants themselves are grown to be sold.
The nursery must be inspected and approved as acceptable before insurance coverage can begin.
Like all types of insurance, these policies cover specified losses. In nursery insurance, insureds are protected against:
1. adverse weather conditions, including wind, hurricane, and freeze. If cold protection is required by the EPLPPS, adequate and operational cold protection measures must be in place.
2. failure of irrigation water supplies, if due to an insurable cause of loss, such as drought.
3. fire provided weeds and undergrowth are controlled, and
4. wildlife.
Plant damage or losses in value due to the following situations are not typically covered:
1. collapse or failure of buildings or structures, unless caused by an insurable cause of loss,
2. disease or insect infestation, unless effective control measures for the infestation do not exist, so the nursery owner could not prevent it,
3. failure of plants to grow to an expected or desired size,
4. inadequate power supply, unless the inadequacy is the result of an insurable cause of loss, and
5. inability to market nursery products due to a stop sales order, quarantine, boycott, phytosanitary restriction on sales, or buyer refusal.
Insurance coverage levels range from 50 percent to 75 percent of the plant inventory value. Crop insurance premiums are subsidized.
Pasture, Rangeland, Forage, Pilot Insurance Program
The Risk Management Agency’s (RMA) Pasture, Rangeland, Forage (PRF) Pilot Insurance Program is designed to provide insurance coverage on pasture, rangeland, or forage acres. The PRF program utilizes a rainfall index to determine precipitation for coverage purposes and does not measure production or loss of products themselves. The Rainfall Index uses National Oceanic and Atmospheric Administration Climate Prediction Center data, utilizing a grid system to determine precipitation amounts within an area.
The Pasture, Rangeland, and Forage insurance was designed to help protect a producer’s operation from the risks of forage loss due to the lack of precipitation (not enough rain). It is not intended to insure against ongoing or severe drought, as the coverage is based on precipitation expected during specific intervals only.
Coverage is based on a producer’s selection of coverage level, index intervals, and productivity factor. The index interval represents a two-month period and the period selected should be the one when precipitation is most important to the producer’s operation. Insureds can select a coverage level from 70 percent to 90 percent. The rainfall index does not measure direct production or loss. Rather it is insuring a rainfall index that is expected to estimate production.
Producers select a productivity factor to match the amount of protection to the value of the production that best represents the operation and productive capacity of the person’s acres. It is not necessary to insure all acres, and it is not possible to insure more than the total number of insurable acres.
Peanut Revenue Federal Crop Insurance Policy
For those raising peanuts, all their peanuts are insurable in the county if the actuarial documents provide premium rates, and they are a type designated in the special provisions. They must also be planted for marketing as farmers’ stock peanuts and the individual must have a share in the crop.
Unless allowed by a written agreement, the insurance policy does not cover peanuts that are planted to harvest as green peanuts, that are interplanted with another crop, or planted into an established grass or legume area. It is possible to buy crop insurance coverage under one of three insurance plans offered:
1. yield Protection,
2. revenue Protection, or
3. revenue Protection with Harvest Price Exclusion.
Under Yield Protection, insurance coverage is provided only against production loss.
Under Revenue Protection, insurance coverage is provided against revenue loss due to a production loss, price decline, or a combination of both. Harvest price is not excluded for determining the value of production in the loss determination unless you have the Harvest Price Exclusion.
Insurance protection is available against the following if it is due to natural causes:
1. adverse weather conditions,
2. earthquakes,
3. failure of irrigation water supplies, if caused by an insured peril during the insurance year,
4. fire,
5. insects or plant disease, but not damage that was due to insufficient or improper application of accepted control measures,
6. price change for revenue protection,
7. volcanic eruptions, or
8. wildlife.
Coverage begins when the crop is planted and ends with the earliest occurrence of one of the following:
1. total destruction of the crop,
2. harvest of the crop,
3. final adjustment of a loss,
4. abandonment of the crop,
5. November 30 in all states except New Mexico, Oklahoma, and Texas, or
6. December 31 in New Mexico, Oklahoma, and Texas.
If there is damage or loss, it is the responsibility of the insured to notify their agent within 72 hours of the initial discovery of it, but no later than 15 days after the end of the insurance period. Representative samples of the unharvested crop must not be destroyed or harvested until it has been inspected by the insurance company or 15 days after harvest of the balance of the unit is completed.
Stacked Income Protection Plan (STAX) for Upland Cotton
The Stacked Income Protection Plan is a crop insurance product for upland cotton that provides coverage for a portion of the expected revenue for the area. Typically, the area will be the county where the cotton is grown, but it could include other counties besides the one the cotton is located in. It might even include areas beyond that as necessary to obtain a credible amount of data to establish an expected yield and premium rate.
STAX insurance may be purchased on its own or in conjunction with another policy referred to as a “companion policy.” Companion policies might include Yield Protection, Revenue Protection, Revenue Protection with the Harvest Price Exclusion, and any of the Area Risk Protection insurance policies. As of 2017, it is possible to buy STAX if the farm is covered under the Whole-Farm Revenue Protection policy. The Federal government pays for 80 percent of the premium cost for STAX. It is available in counties where federal crop insurance coverage for upland cotton is offered.
STAX provides coverage for up to 20 percent of the expected area revenue in increments of 5, 10, 15, or 20 percent. Loss payments begin when area revenue falls below 90 percent of its expected level, but a lower loss trigger can be selected. Loss payment maximums are reached when area revenue falls to 70 percent of its expected level unless the companion policy has coverage levels above 70 percent, in which case payments end sooner. As in other types of insurance, the amount of coverage may be increased or decreased by the selection of a protection factor so that growers may obtain levels of insurance they desire, within the limits offered.
Whole-Farm Revenue Protection
Whole-Farm Revenue Protection also referred to as WFRP, provides a risk management safety net for all commodities on the farm under one insurance policy. The insurance policy is tailored to meet the needs of the insured farm, with up to $8.5 million in insured revenue, including farms with specialty or organic commodities, meaning both crops and livestock, or those marketing to local, regional, farm-identity preserved specialty, or direct markets. This coverage is available in all counties in all 50 states.
Whole-Farm Revenue Protection provides protection against the loss of insured revenue due to an unavoidable natural cause of loss, which occurs during the insurance period. It will also provide carryover loss coverage if the farmer or farming organization is insured during the following year. It is necessary, as always, to refer to the policy for a list of covered causes of loss.
Insurance coverage is effective for the duration of the producer’s tax year, the insurance period. The insurance period is a calendar year if taxes are filed by calendar year, but it can also be the fiscal year if taxes are filed using a fiscal year.
WFRP insures the farm against the loss of farm revenue that is earned or expected to be earned from:
1. commodities produced during the insurance period, whether sold or not,
2. commodities bought for resale during the insurance period, and
3. all commodities on the farm except for timber, forest, and forest products, and animals used for sport, show, or kept as pets.
Additionally, the policy provides replant coverage:
1. for annual crops, except those covered by another Federal crop insurance policy,
2. equal to the cost of replanting up to a maximum of 20 percent of the expected revenue multiplied by the coverage level, and
3. when 20 percent or 20 acres of the crop needs to be replanted.
The approved revenue amount is determined on the Farm Operation Report and is the lower of the expected revenue or the whole-farm historic average revenue. Coverage levels range from 50 percent to 85 percent. Catastrophic Risk Protection coverage, called CAT, is not available.
In a Whole-Farm Revenue Protection plan, the number of commodities produced on the farm must be determined. This is accomplished by counting them, using a calculation that determines:
1. if the farm has the diversification needed to qualify for the 80 and 85 percent coverage levels. There is a three-commodity requirement for this.
2. the amount of premium rate discount the policyholder will receive due to farm diversification.
3. finally, the subsidy amount. Farms with two or more commodities will receive a whole-farm subsidy and farms with one commodity will receive a basic subsidy.
It is possible to buy WFRP alone or with other buy-up levels Federal crop insurance policies, which means additional coverage. When additional coverage is purchased, the WFRP premium is reduced due to the coverage provided by the other policy. If the individual has other federal crop insurance policies at catastrophic coverage levels, then he or she does not qualify for WFRP.
Organic Farming Practices
Organic farming is one of the fastest growing segments of United States agriculture. The United States Department of Agriculture’s (USDA) Risk Management Agency recognizes organic farming practices as good farming and continues to move forward in improving crop insurance coverage for this segment of agriculture. This includes producers transitioning to organic production to make viable and effective risk management options available.
In general, regulations governing the insurability of organic and transitional practices are the same as they are for conventional farming practices. RMA provides coverage for certified organic acreage and transitional acreage, which means farms transitioning to certified organic products.
Insurance specific to organic farming can only be provided when a premium rate for an organic practice is specified in the actuarial documents or there is an approved written agreement.
On the date acreage is reported as organic, the owner must have a current organic plan and organic certificate (written certificate) as required. Written documentation may be provided from a certifying agent indicating that an organic plan is in effect.
For transitional acreage, an organic plan is required or written documentation from a certifying agent that indicates an organic plan is in effect. The organic plan must identify the acreage that is in transition or organic certification, list the crops grown or to be grown during the 36-month transitioning period, and include all other acreages in conventional farming operations.
All production loss or insurance amount loss due to an insured cause of loss listed in the crop provisions apply to the organic and transitional to organic farms unless otherwise specified. The following losses are not covered:
1. failure to follow good organic farming practices,
2. failure to comply with the USDA National Organic Program standards, or
3. crop contamination by the drift of prohibited substances.
RMA continues to expand premium organic price elections to provide a safety net through crop insurance, providing fair and flexible solutions for organic producers. There are premium organic price elections for the majority of crops insured by RMA. Crops grown in the buffer zone are insured using applicable price elections, projected prices, harvest prices, insurance plans, and coverage levels shown in the actuarial documents for the acreage it buffers.
Apiculture Pilot Insurance Program
The Risk Management Agency’s (RMA) Apiculture Pilot Insurance Program (API) gives a safety net for beekeepers’ primary income sources, which is honey, pollen collection, wax, and breeding stock. Apiculture systems consist of different types of plants or crops and contain mixtures of different species, each with different growth habits and seasons, precipitation requirements, and other climate conditions necessary to maintain plant growth over long periods of time. API was designed to provide maximum flexibility to cover these diverse situations.
The Apiculture Pilot Insurance Program coverage is based on the selection of coverage chosen, index intervals, and productivity factors. The index interval represents a two-month period and the period selected should be the one when precipitation is most important to the farm’s operation.
Beginning Farmer and Rancher Development Program (BFRDP)
We have seen in the news in previous years that the United States is facing a shortage of farmers, with the average age of farmers in their mid-fifties. Therefore, it is understandable that the government wants to encourage farming to those leaving school and entering the workforce.
Beginning farmer education for adults and the young in the United States can be traced back to the advent of the 1862 and 1890 Morrill Land Grant Acts. Today, we see the Food, Conservation, and Energy Act of 2008 appropriating $75 million for the fiscal years 2009 to 2012 to develop and offer education, training, outreach, and mentoring programs hoping to bring in the next generation of farmers and ranchers.
The Agriculture Act of 2014 provided an additional $20 million per year for 2014 through 2018. The reasons for the renewed interest in beginning farmer and rancher programs include the rising average age of U.S. farmers, the 8 percent projected decrease in the number of farmers and ranchers between 2008 and 2018, and the growing recognition that new programs are needed to address the needs of the next generation of beginning farmers and ranchers.
The Beginning Farmers and Ranchers in Agriculture: Title II (Conservation), Title V (Credit), Title VI (Rural Development, Title VII (Research), Title XI (Crop Insurance), and Title XII (Miscellaneous) all address these issues.
The legislation provides support to beginning farmers and ranchers in agriculture by increasing funding for beginning farmer development, facilitating farmland transition to the next generation of farmers, and improving outreach and communication to military veterans about farming and ranching opportunities.
Agriculture Improvement Act of 2018: Highlights and Implications
The United States addresses agricultural and food policy through a variety of programs, including nutrition assistance, crop insurance, commodity support, and conservation. Much of the legal framework for agricultural and food policy is set through a legislative process that occurs approximately every 5 years.
The current farm law, the Agriculture Improvement Act of 2018 (2018 Farm Act), was signed on December 20, 2018, and will remain in force through 2023, although some provisions extend beyond 2023. The 2018 Farm Act makes few major changes in agricultural and food policy. Nutrition policy, particularly the Supplemental Nutrition Assistance Program (SNAP), will continue with minor changes. Crop insurance options and agricultural commodity programs will exist much as under the 2014 Farm Act. All major conservation programs are continued, although some are modified significantly. Programs are expanded for trade, research and extension, energy, specialty crops, organic agriculture, local and regional foods, and beginning/socially disadvantaged/veteran farmers and ranchers.
The 2018 Farm Act increases fiscal years 2019-2023 spending by $1.8 billion (less than 1 percent) above the level projected for a continuation of the previous farm act. The Congressional Budget Office projects that 76 percent of outlays under the 2018 Farm Act will fund nutrition programs, 9 percent will fund crop insurance programs, 7 percent will fund conservation programs, 7 percent will fund commodity programs, and the remaining 1 percent will fund all other programs, including trade, credit, rural development, research and extension, forestry, horticulture, and miscellaneous programs.
The Beginning Farmers and Ranchers in Agriculture is not the only program to have issues, however. Programs stranded with funding but no authority to operate include the Conservation Stewardship Program, the Conservation Reserve Program, the Regional Conservation Partnership Program, and the Agricultural Conservation Easement Program. In addition, other programs that invest in rural economies have lost their funding, including the Rural Microentrepreneur Assistance Program, the Beginning Farmer and Rancher Development Program, the National Organic Certification Cost-Share Program, and several others.
Unit Structures in Farming and Ranching
A unit describes how crop acreage is grouped together for Crop Insurance coverage. Unit structure simply refers to the way farmers choose to group their fields. Typically, this applies to each field or location. So, each parcel of land that is insured independently of other parcels is called a unit.
One farming operation could have several insurance units. It is possible to have one crop severely damaged by weather, but another crop not affected at all, due to the different properties of the two crops. Each crop could be a different unit, insured differently as well. Farmers often like to divide their farms into different units for that reason.
Insurance claims are paid based on the total yield or production for a specific unit, so if the insured has elected to group all the fields together, all the production or yield is considered as a whole. If smaller groups are elected, then each smaller unit is looked at individually, increasing the chances of claim payouts.
Proving the yield and unit structure is the first step in developing a crop risk management program for insurance purposes. The actual production history yield is used to set the guarantees under all Federal Crop Insurance Corporation-backed insurance plans, except for the Area Risk Protection Insurance Products. True risk protection must be based on the farm’s production potential.
Proving the actual production history (APH) yield requires records for a minimum of four years and a maximum of ten years for each insurance unit. Information that will be used includes sale receipts, farm or commercial storage records, and feed consumption records. Insurers want records for continuous years, and it is not allowable to drop a yield from any particular year because of poor production for that year. An exception may be made if the crop being insured was not planted in one of the years in the sequential period. In that case, a zero-acreage report would be submitted for the non-planted year, but the grower would still maintain data for that year. Data is important for growers who rotate crops and those who have summer fallow acres that are normally not planted to the same crop each year.
Especially as it pertains to buying insurance, records must be continuous from year to year, starting with the most recent year and going back in time. Once a missing year is reached, no history prior to that year may be used, except for non-planted years, where an exception is made. As we said, it is not allowable to drop a year when buying insurance because the yield was poor.
When at least four successive years of records are not available, a transition or T yield for each missing year must be substituted. This will vary because each county has a different T yield. It is based on the 10-year historical county average yields. When a grower cannot show personal yields at all, they are assigned 65 percent of the T yield as their APH yield. Growers with a record for just one year receive 80 percent of the T yield for the other three years. If the grower can show two years of records, then he or she receives 90 percent of the T yield for the missing years. With three years of records, farmers receive 100 percent of the T yield for the one remaining year.
Once each of the four years has been assigned a yield, the APH is just a simple average of the four years.
When only a few years of yield records exist, the APH yield may not be accurate and may be below the actual expected yield because of the reduced T yields for the years that records were not available. That makes buying a PRPI product wise since the ARPI product guarantees are based on county yields rather than individual farm yields. It could mean a higher level of protection while the farm builds records to establish its own realistic actual production history yield.
As the new farmer or a farmer planting a new crop adds to their personal history as they replant each subsequent year, the T yields will replace their assumed yields with actual yield production. Once four years of actual production is reached, there will be four years of records enabling the farm’s own records to be used.
When a new yield record is added to the APH history, the APH has a cup of 10 percent, meaning the proven yield is not allowed to decline by more than 10 percent in any one year.
The APH also has a floor equal to 70 percent of the T yield for growers with only a one-year record. Growers with two to four years of yield records have a floor equal to 75 percent of the T yield, and growers with five or more yield record have an 80 percent of T yield floor. This prevents a year in which a producer has a severe crop failure from having a disproportionately large influence on the APH yield. This is especially important where there are only a few years of yield records available in the area.
Farmers can request that a low yield year be replaced with a yield equal to 60 percent of the county T yield. Those who qualify as a beginning farmer can replace a low yield with 80 percent of the county T yield. It becomes the minimum reported yield. It can be requested for any one of the past years used to calculate the APH yield. It is a good idea to establish the APH for any insurance unit with a licensed crop insurance agent long before the sign-up date.
Climate Change Affects Farming
Although many people still claim that there is no such thing as climate change, anyone who has researched the topic knows there is most certainly climate change occurring. We also know from our scientists that climate change has happened in the past, with landscapes, plants, and animals changing with it. Some animals and plants can adjust; others are not able to. Those that cannot adapt often perish from the landscape forever. In this current climate change, polar bears will likely become extinct, for example. Some plants will also be lost to climate change.
This climate change is different from past changes, but since there are so many more people living on earth today, that is not surprising. Five hundred or a thousand years ago, climate changes affected fewer living things because fewer living things existed. Populations have expanded over the years and when populations are higher, the changes are more likely to affect them.
In the United States today, Eastern populations could not easily migrate as they did several centuries ago when waters rose. Because our lifestyles are different today, how we mitigate the effects of climate change are also different.
Climate change refers to any significant change of climate that lasts for an extended period (over several decades in fact). It includes changes in temperature, precipitation, and wind patterns, although what people most often see are hurricanes, flooding, fire, and tornadoes.
Global warming refers to the ongoing rise in global average temperatures near the Earth’s surface. It is caused mostly by increasing concentrations of greenhouse gases in the atmosphere. Global warming is causing climate patterns to change, but global warming itself represents only one aspect of climate change.
Ozone is a gas that occurs both in the Earth’s upper atmosphere and at ground level. Ozone can be either good or bad for health and the environment, depending on its location in the atmosphere. Greenhouse gases contribute to the greenhouse effect. It is an effect that happens when greenhouse gases absorb energy and trap heat on the Earth’s surface. Greenhouse gases are essential to keeping our planet warm, but too much of the greenhouse gases concentrated in the atmosphere can increase temperatures around the world, something that may cause other issues.
Changes in our ozone, greenhouse gases, and climate change affect agricultural productivity and agriculture producers greatly because agriculture and fisheries depend on specific climate conditions. Farms were set up where the types of conditions they needed existed or they grew crops based on the weather conditions that already existed. Temperature changes cause habitat ranges and crop planting dates to shift and droughts and floods due to climate change will hinder established methods of farming. As this happens, farmers and ranchers will have to either move to other locations or change the products they are producing.
Changing How the FCIC Operates
In 2016 The Boston College of Environmental Affairs Law Review looked at climate change and how it is likely to affect the Federal Crop Insurance laws.
Their report said the federal crop insurance program is well-positioned to promote agricultural practices that could mitigate the future impact climate change will cause. There are many angles and many views on climate change from fossil fuel companies that want to continue their reign to citizens who view any kind of change with suspicion. It has created a political climate where common sense is often lost. Whatever one’s views on the subject, good farming practices have never been more important than they are today, since climate change poses, according to this report, clear and conspicuous risks to the future vitality of American agriculture and really, agriculture around the world. Everyone wants to eat after all.
As the Secretary of Agriculture at the time, Tom Vilsack, stated, climate change “is new and different than anything we’ve ever tackled.” He went on to say that we have witnessed intense and extreme weather, including hurricanes, flooding, droughts, and wildfires. Many states are seeing great woodlands and forests dying due to drought and the resulting insect infestation that follows weakened trees. Crops of nearly every type have been affected in some way. The reduced yields on crops for American farmers may cause food supplies to become scarcer, leading to continually rising prices.
Insurers are certainly aware of climate change issues, although some companies appear more involved than others in finding solutions. Back in 2013 leaders in the insurance industry discussed their concerns that the risk of climate change presents an “existential threat” to the insurance industry. This should surprise no one since we have seen the devastation by various weather events that continue to occur around the United States. When we see pictures of devastated neighborhoods, we should remember that any farming industry in the area was also affected in all probability.
Insurers have begun encouraging the various states to adopt strengthened building codes and policies that reward sensible resource management consistent with preventing events such as wildfires and flooding.
The federal crop insurance program is in a prime position to influence farming techniques and farming choices. As we know, the federal crop insurance program, managed by the Federal Crop Insurance Corporation through the administration of the Risk Management Agency within the Department of Agriculture, provides a safety net for farmers to hedge against the often-significant risks that are caused by weather events, such as drought and fire, as well as hurricanes, tornadoes, and flooding. Around 80 percent of insurable farmland is insured by multi-peril crop insurance, where policies are issued either directly by the FCIC or through the currently approved insurance providers.
Just because the various programs for farming and ranching have been traditionally funded by the government does not mean they will continue to be. The federal crop insurance program faces more challenges than previously, as critics question the program’s costs and expenditures. An example of that was the defunding of the Beginning Farmer and Rancher Development Program, which lost funding in 2018.
New programs can develop as older programs disappear. For example, the Agriculture Improvement Act began in 2018, signed into law on December 20, 2018. It remains in effect until 2023, although some elements of the Act will continue beyond that date. This Act makes a few major changes in agricultural and food policy. Nutrition policy, especially the Supplemental Nutrition Assistance Program, known as SNAP, continues with just minor changes. Crop insurance options and agricultural commodity programs will continue mostly the same as the 2014 Farm Act. All major conservation programs are continued, although some are modified significantly. Programs are expanded for trade, research and extension, energy, specialty crops, organic agriculture, local and regional foods, and beginning/socially disadvantaged/veteran farmers and ranchers.
In 2014, the Government Accountability Office (GAO) released a significant report regarding the potential effects of climate change on the federal crop insurance program (see GAO, supra note 14, at 15). The report said that in the next 35 years, temperatures could increase anywhere from 1.8 degrees Fahrenheit to 5.4 degrees Fahrenheit. The variations in temperatures could cause declines in crop yields, even with technological advances in agriculture. The report warned that by 2100, climate change could double crop losses.
The problem is how few politicians and others react to such reports and statements. The year 2100 seems too far into the future. Politicians do not expect to be running for office by that time and citizens seem unable to picture the world so far in the future. In short, it is a problem for the babies being born today to solve.
The National Crop Insurance Services, a website that advocates for the crop insurance industry, says many services need to adjust how they operate in view of the current and coming climate changes. At a minimum, it states, climate change will introduce an entirely new way of production and at maximum, growers will face periods of intense heat or cold, abnormally high, or low moisture, and other altered weather patterns. Whatever the case, farmers need to be ready.
The Obama administration took several steps with agricultural policies to mitigate the threat of climate change and how it would affect our food supplies and food-growing methods. The next administration removed most of the mandates put in place between 2008 and 2016 to mitigate the effects of climate change.
The use of cover crops has been on the rise since 2010 when just over 2.5 percent of all farmlands consisted of acreage where farmers utilized them. A cover crop is a crop that is primarily intended to improve soil health, instead of a commodity crop planted for economic reasons. There are multiple environmental benefits to planting cover crops, including soil improvement and reducing soil erosion. Many cover crops also suppress weed growth.
Before 2013, farmers who utilized cover crops were reportedly at risk of losing their eligibility for crop insurance for their cash crops due to the rigid deadlines imposed by the USDA for the termination of cover crops. Unfortunately, the USDA used a system in 2013, and before that used rigid calendar dates that governed when cover crops had to be terminated instead of a flexible policy that tied the terminating date to the planting date of a cash crop. In June of 2013, Tom Vilsack announced that a new four cover crop termination zone system would be created that was more consistent with regional and local crop management systems. It encouraged the use of cover crops.
Most cases of “accepted” good farming practices and how these practices fare under climate change has been a matter of court determinations. There are not always structures under our law to encourage entrepreneurism as it relates to farming and climate change. When attempts to improve on procedures lead to loss of crop insurance, new methods, even when they might be beneficial for farmers and our Earth, are discouraged.
In November 2013 President Barak Obama signed Executive Order 13653, “Preparing the United States for the Impacts of Climate Change.” It was intended to facilitate the undertaking of actions to enhance climate preparedness and resilience, helping farmers in the process of these actions.
One of the directives of Executive Order 13653 that President Obama signed asked for the Secretary of Agriculture and other governmental officials to inventory and evaluate policies, programs, and regulations as they relate to climate change and procedures that could at least partially mitigate climate change effects. As the GAO reported, standards that were in place before President Obama took office discouraged looking for new avenues of farming. The Council was given the job of reforming federal policies that had unintentional consequences for farmers trying to mitigate risks as it related to climate change since the determination of “good farming practices” as they existed did not incentivize the use of sustainable and resilient agricultural practices. Therefore, the Executive Order (EO) had a direct application on the need to reform the existing “good farming practices” standard.
The 2014 GAO report seemed to touch on the dilemma of climate change when it looked at the “good farming practices” currently in place. It said: “Currently, many agricultural practices utilized by farmers help maintain the historic yields of a crop over the short term, but long term may make the environment more vulnerable to the effects of climate change. These practices are utilized due to the program’s structural loss cost ratemaking formula.” The report noted that not only may some of the practices go against the spirit of the law, but also encouraged experts to recommend or incorporate practices based on outdated ideas that did not take into consideration the changes in our climate.
In April of 2015 additional efforts were announced by the Obama administration to combat the effects of climate change as it related to agriculture. The goal was to reduce agricultural emissions to between twenty-six and twenty-eight percent by 2025. Called the ten Building Blocks for Climate Smart Agriculture, they included initiatives to promote climate change mitigation in the areas of:
1. soil health,
2. nitrogen stewardship,
3. livestock partnerships,
4. conservation of sensitive lands,
5. grazing and pasture lands,
6. private forest growth and retention,
7. stewardship of federal forests,
8. promotion of wood products,
9. urban forests, and
10. energy generation and efficiency.
Secretary Vilsack said that the initiative would promote producer-use of cover crops and other agricultural practices that improve soil resilience, which was certainly significant to farmers. Farmers and others in the industry felt the federal government was taking the possible effects of climate change as it relates to the federal crop insurance program seriously.
The Natural Resources Defense Council (NRDC), an environmental advocacy group, lobbied for changes to address climate change with the federal crop insurance program. It seemed clear that change was needed regarding the federal crop insurance program as it related to climate change and effective growing techniques.
In the insurance industry, many insurers offer reduced rates to those who utilize energy-efficient features in buildings as well as vehicles. There is no reason the same technique could not be applied to farming and ranching. Outside of the actions of private insurance companies, many of the state governments have also provided incentives for the reduction of climate change risk.
The NRDC has offered proposals to incentivize climate change risk-reducing behavior by participants in the federal crop insurance program through lowered premiums tied to climate change risk mitigation. Many European insurers have, in fact, begun to do so. The Board of Directors of the Federal Crop Insurance Corporation authorizes pilot programs in the crop insurance area to be administered by the Risk Management Agency. Pilot programs provide incentives to make smarter agriculture decisions and policies. An example is the whole-farm revenue protection programs that insure farm revenues rather than single, individual insurable crops.
The NRDC proposed encouraging the RMA to develop additional pilot programs to reform crop insurance policies. They would like to see pilot programs to provide incentives to farmers who utilize cover crops and efficient irrigation technique that would increase soil health, that are consistent with reducing climate change factors. They hope to set premium rates lower than that of the current loss cost formula used for crops. They feel it would be actuarily sound, paying for itself, since the utilization of soil building agricultural practices would result in lowered or avoided loss payments.
Some steps have already been taken to reduce the effects of climate change, including reforming some areas of the federal crop insurance program. What needs to be done involves reforming the “good farming practices” standards to include incentives for farmers and ranchers to try new ways of farming and ranching that will mitigate some of the effects of climate change, without being penalized for doing so.
When it is determined that “good farming practices,” as currently written, have not been followed by an insured producer, it can result in a finding that the producer’s crop is not eligible for crop insurance. This is true even when the farm producer is attempting to improve on his or her crop or mitigate climate change consequences. The Federal Crop Insurance Act says that crop insurance will not cover losses due to “the failure of the producer to follow good farming practices.”
The original intention was to make sure farmers and ranchers did what they should so that benefits were not paid out for crops that could have succeeded with proper care. For example, a farmer that failed to provide his crop with water should not be rewarded by receiving insurance proceeds. However, mandates should not prevent farmers from using new and better ways of farming, and that is what is now happening. Determinations may initially be made by a privately approved insurance provider or the United States Department of Agriculture Risk Management Agency. The written standards or “good farming practices” determinations contain significant financial ramifications for farmers. The basic provisions of crop insurance, which are codified as federal law, define “good farming practices” in the following manner:
“The production methods utilized to produce the insured crop and allow it to make normal progress toward maturity and produce at least the yield used to determine the production guarantee or amount of insurance, . . . which are: (1) For conventional or sustainable farming practices, those generally recognized by agricultural experts for the area; or (2) for organic farming practices, those generally recognized by organic agricultural experts for the area.”
While the original intent and wording seems reasonable and probably necessary to maintain the integrity of the federal crop insurance program, it needs to be able to grow and change as situations grow and change. Some organizations have lobbied to ensure that organic and sustainable production practices could be recognized as “good farming practices” when what was in print was not compatible with what they were trying to achieve.
Even when the intention is to prevent insurance payments made to those who do not qualify to receive them, there must be avenues for recognizing new and better ways of farming, whether it is the elimination of pesticides or other innovations that are not necessarily bad farming practices.
The concern is that the restrictions placed on production practices are limiting innovations, the use of organic methods, or new conservation practices. Reform is needed in the area of “good farming practices” to ensure that production practices, which have been evolving as scientific evidence shows us better ways to farm, are not restricted from moving forward due to limitations on the crop insurance coverage.
Many of today’s farmers come with college degrees that enable them to think outside of the box. It is this “outside of the box” thinking that generates better ways of producing crops and other commodities. There is concern that requiring insured farmers to use farming practices “generally recognized” by experts in an insured producer’s area to qualify for federal crop insurance discourages the out-of-the-box thinkers from using farming techniques that could potentially be beneficial. The “good farming practices” determinations may unintentionally place significant limitations on the ability to move forward with better ways to farm and ranch during climate change. In fact, RMA has itself recognized the difficulties of applying what is considered “good farming practices” requirements to non-traditional production practices, including the alternative “organic agricultural expert” criteria for organic production practices. It is unfortunate that conservation practices, as well as changes in how things are done in other areas that would be beneficial to mitigate potential climate change impacts, routinely fail to meet the current definition of good farming practices. The result is disqualification for crop insurance.
As we know, government mandates are often rigid, often by design, and may not contain the ability to fluctuate with changing times. Non-traditional and conservation farming practices often do not fit into the mold created by the federal crop insurance regulations. A prime example is the case of the insured crop producer who had been awarded a Natural Resources Conservation Service Conservation Innovation Grant for his work with cover crops on his farm but was later denied crop insurance coverage because of a “good farming practice” determination. There was also an allegation that his use of cover crops violated the RMA “interplanting” regulations.
One might assume that media coverage of these examples would prompt a change in the federal government’s practices, but the opposite appears to be true. Instead, the media coverage discourages other farmers from using innovative farming methods, because they fear the loss of their crop insurance.
It must be clear by now that the challenge to innovative production practices is the strict construction of the current “good farming practices” regulatory mandate requiring farmers and ranchers use standards that do not necessarily work best for all situations. It does, however, say practices “generally recognized by agricultural experts for the area.” Under this standard, farmers and ranchers must find an expert in their area, which can be difficult. The RMA made a regulatory exception for organic growers because they were able to produce recognized experts, but some types of innovative changes may not have an expert in the state, let alone in the area. This would especially be true of advances that were not widely known in the agricultural circles.
The ongoing risk of climate change is one of the many challenges facing America’s farmers today. Paradoxically, while a number of governmental initiatives seek to mitigate the risks of climate change, some of the very standards in the federal crop insurance program create a disincentive for adopting and implementing agricultural production strategies that minimize climate change risk. An amendment to the “good farming practices” standard concerning federal crop insurance claims can be a significant step toward creating a very vibrant incentive for farmers to incorporate sustainable agricultural practices into their land stewardship.
Many of the suggestions coming from environmentalists found their way into the policies promoted under the Obama administration’s Mid-Century Strategy for Deep Carbonization, which looked at greenhouse gases from all industries, including forests, farms, and fields. This was published around election time when Donald Trump won the presidency. As a result of the timing, many people assumed this was the last action by an out-going administration. It was primarily ignored. However, many of the highlights of this report had been in place already and was expected to grow at the time of publication, regardless of which party had power. After all, we all live on planet Earth, whether a Democrat or Republican is in the White House.
Carbon Sinks
Carbon sinks are natural systems that take in and store carbon dioxide from Earth’s atmosphere. The primary natural carbon sinks are the ocean, plants, and soil. Obviously, plants and soil fit right in with farming.
Plants take in carbon dioxide from the atmosphere for use in photosynthesis. Some of the carbon is transferred to the soil as plants die and decompose. The oceans are major carbon storage systems for carbon dioxide as well, along with forests around the world. Marine animals also absorb the gas for photosynthesis and some of the carbon dioxides simply dissolve in the seawater. All the Earth’s land and ocean sinks combined absorb about half of all carbon dioxide emissions from human activities, according to Paul Fraser of the Commonwealth Scientific and Industrial Research Organization.
Unfortunately, these sinks, which are critical in the effort to soak up greenhouse gas emissions, may be stopping up, due to deforestation, and human-induced weather changes that are causing the oceanic carbon dioxide “sponge” to weaken, according to a study led by Fraser and detailed in an issue of the Science, a journal.
Forests account for the bulk of the carbon sink, but climate change and the resulting drying of many forests could change that. As forests receive less precipitation (rain and snow), trees are impacted and weakened. The federal government has been active for many years in planting trees, but if the weather does not cooperate, providing rainfall, much of the planting may be futile. Private industry has also been active in tree planting. In some areas, new or different tree species are being planted since these trees require less water.
Trees like carbon dioxide, sucking it in, and then spewing out oxygen. It is a win-win for everyone. However, climate change is kicking at this process, by providing less water for the forests along with hotter temperatures. Forests are getting older, but primarily it is the higher temperatures with less water that is causing the damage. Once trees become stressed, they are vulnerable to insects. The Mountain Beetle, for example, has caused extensive damage as trees become stressed due to lack of water and higher temperatures.
For many reasons, but especially because we are losing our forests, we need to expand the giant carbon sink. For this to happen, we must make it worthwhile for people to expand and manage forests in ways that do not reduce our ability to grow food; that cooperative venture does not happen without incentives.
While forests are certainly important in reducing carbons, farms play a vital role too. Farms can lock carbon in soil by ramping up what is referred to as “climate-safe agriculture.” It involves strategically planting trees on farms in ways that enhance production. In some cases, that means adding fruit trees among other varieties (fruit falls if not harvested, enriching the soil), or mixing in nitrogen in other ways. It is estimated that this could be expanded to cover more than 50 million acres of farmland, while still increasing food production.
Generally, the focus is put on the Environmental Protection Agency as it relates to climate change, but we should also be looking at the United States Department of Agriculture (USDA). Its programs are broadly divided into two sections: easements, which involve paying to permanently set land aside for conservation, and cost-sharing programs, which help landowners implement sustainable initiatives.
There is no doubt that climate change is happening now. We see the results on the news each night. There is also no doubt that this should not be a political issue. It is a world issue that must be addressed by all countries, including the United States.
End of Chapter 5