Friday, January 23, 2009
Crop Insurance,, Nemesis or Friend?
I never bought crop insurance until 2004. Crop insurance was started in the United States in 1938, The Federal Crop Insurance Corporation or FCIC. It remained an experiment until 1979 when one insurance product covering 12 crops was offered to farmers. In 1980 new federal legislation expanded the program beyond an experiment to cover many crops under many circustances.
In 2004 my operation expanded to the point I didn't want to bear all the risk by myself. Financiers often require crop insurance for an operating loan and put a lien on the crop until it is paid.
Some smart friends explained to me the GRIP or Group Risk Income Program which I signed up for. It paid nice dividends due to group yield versus price for me in 2004 and 2005 but was expensive. In 2006 and 2007 I received no payments for my premiums which added to my expenses without adding income. At an investment of $30-40 per acre, the cost of many premiums is often the difference from profit and loss on a crop.
Some farmers never participated in the program and some still do not today. The GRIP program brought in a lot of new customers trying to hedge their risk on volatile price swings that have occured during the recent marketing years.
Writing crop insurance has become very profitable for the agents receiving up to 16% of the premiums paid that they sold. Crop insurance is a "hot topic" in crop country this time of the year.
I ventured over to Williamsport, Ohio this morning to hear the explanation by Cargill and their crop insurance partners RUA out of Minnesota. I viewed a good presentation and met some farmers and agribusinessmen new to me in the industry.
The program is so complex now to cover so many situations that it is full of acronyms. The program is based on the original APH or Actual Producton History as the program started to just protect against low, unprofitable yields. CAT or catestrophic insurance was added for potentially extreme losses.
The basic group layout looks like this:
It is easier to look at this complex program by reading the link in this sentence. My point isn't to explain the program or which one I will choose but to point out a complex decision to be made by farmers by the cutoff date of March 15. Since this date falls on Sunday this year we have until March 16 to sign up for a crop insurance program.
Add this to the myriad of decisions being made right now selling last years crop, pricing new crop, finishing budgets, filing taxes, pricing and buying inputs, whew! The farmer is busy doing what some farmers love and most farmers hate and that is farm business management!
The decision whether to buy crop insurance or not is easy or mandatory for some but not for others. Once you buy it you still have decisions to make!
Crop insurance is a good tool for risk management when a farmer learns to leverage is risk with the right program. Choosing that right program is no easy task once you decide you do need risk coverage. Agents tend to specialize in one type or another as that is what they are use to writing and may fit the need of a majority of their clients.
I don't know which product I will choose this year but I do know it is another big decision I have to make before March 15.
A farmers work is never done! The financial aspect has become a huge time and business management issue for many farmers.
I encourage comments on this complex issue and look forward to what you have to share.
Until next time, have a good day!