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Tough Year Highlights Importance of Understanding Crop Insurance Options

Shawn Wade Crop Insuranceby Shawn Wade

Managing the risks associated with modern, capital-intensive agricultural enterprises requires risk management tools easily adaptable to meet the rapidly shifting needs of producers.

Fortunately, the federal crop insurance program has been able to meet that challenge through its unique public-private partnership, broad-spectrum policies with powerful internal adjustment mechanisms, and a system that encourages new product development to meet the evolving needs of the agriculture industry.

The financial risks faced by farmers are astronomical and their margin for error narrower than ever before. Increased costs and volatile markets on top of weather, which is the oldest challenge of all, puts a laser focus on every decision that is made on the farm.

Though not as visible as the seed and mechanical technology that has advanced agriculture to levels of productivity previous generations could scarcely imagine, crop insurance and the plans made in the area of risk management are arguably some of the most important decisions a farmer makes each year.

Risk management products available to producers through the federal crop insurance program are unsurpassed and provide farmers a tremendous level of flexibility to fashion risk management portfolios that meet the unique needs of their operation. Today’s crop insurance products not only help producers overcome the devastating impact of a crop lost to extreme weather, but also offset a portion of the financial loss caused by falling markets.

Like most of the insurance purchased on the major commodity crops, a majority of the insurance obtained by cotton producers through the federal crop insurance program is revenue based. With revenue coverage, the insurance policy incorporates the ability to adjust to changes in price alongside the traditional yield coverage mechanism. Since its creation in the early 1990’s, revenue-based policies have firmly established themselves as the foundation upon which most producers build their risk management program.

Policy Options That Enhance Both Yield and Revenue Protection

To ensure the right fit for their operations, producers are encouraged to visit with their crop insurance representative to better understand the policy options that are available to them.

Both Revenue and Yield plans of insurance offer powerful internal mechanisms and policy add-ons, such as Yield Exclusion and the Cottonseed (Pilot) Endorsement, that can significantly improve the coverage a producer can obtain. For example, the Yield Exclusion option can help mitigate the devastating impact of multiple loss years that drive historical yields down, while the Cottonseed Endorsement allows a producer who incurs a yield loss to capture the lost value of the cottonseed in addition to the loss attributable to the cotton lint.

While both options provide important added value to producers, they are just a few of the ways growers can fine-tune their insurance coverage. Other mechanisms that are commonly used include:

  • Yield Adjustment Option — provides yield substitutions when actual yields fall below a certain level.
  • Trend-Adjusted Yield Option — allows past yields to be adjusted upward to account for technology advances.
  • Quality Loss Option — a new option that allows a grower to maintain
    the actual production amounts in their production yield history when quality adjustment provisions would otherwise reduce the production to count inserted in their database.

Understanding how each policy option works is key to getting the best possible insurance coverage each year.

In addition to options that directly impact the yield used to calculate the insurance coverage, other policy choices give the grower the ability to purchase protection on a field-by-field basis through Optional Unit (OU) cover- age or to aggregate risk through the use of Enterprise Units (EU). If neither of these unit structures is a perfect fit, the program even allows you to take a hybrid approach by employing Enterprise Units by Practice where a grower can combine acres into separate EU’s for irrigated and non-irrigated acres or allowing them to utilize an EU for one practice while still purchasing an Optional unit protection on the other.

A major advantage of utilizing the enterprise unit options is the ability to purchase higher levels of coverage through the combination of higher premium subsidy allowances and decreased premium rates compared to purchasing insurance on an Optional Unit basis.

Options to Protect Against Shallow Losses

Understanding how to adjust and combine your crop insurance options is a must for tough growing seasons like the one experienced in 2022.

However, financial margins are so thin it isn’t always the big disaster year that proves to be the most difficult for growers to survive. Often the shallow losses created when yields are just a little short, quality is a little off, or when prices fall slightly can be just as disastrous.

Shallow yield and revenue losses that do not trigger an indemnity on a grower’s main policy, which will typically still have a loss deductible between 25% and 40%, can potentially be covered through area-based insurance endorsements that would kick in when losses are of smaller magnitude but impact a broad area.

Two optional endorsements that growers can use to broaden their risk management portfolio include:

  • Supplemental Coverage Option (SCO) is a product producers can purchase while still participating in the USDA Farm Service Agency (FSA) delivered Price Loss Coverage (PLC) program.
  • Stacked Income Protection Program (STAX) (cotton only) is a product producers can consider in place of the seed-cotton PLC and Agriculture Risk coverage (ARC) program options available through USDA-FSA.

Find the Combination That Works for You

The combination of policy type, coverage level, coverage enhancements and policy endorsements that work best is going to be different for every producer and operation. What stays the same, however, is the importance of working with a knowledgeable crop insurance professional to navigate the various options and help the grower understand how to tailor a policy that fits their individual risk threshold.

Crop insurance can never eliminate all the risks associated with farming, but it does provide an important backstop to ensure that when disasters strike, large or small, growers have access to a safety net that gives them an opportunity to stay in business and keep farming.

The High Plains of Texas presents more than enough challenges to the men and women that farm the land. To survive, a farmer has to be quick to adapt and careful to employ the best possible range of risk management tools. A complete understanding of the federal crop insurance program is the key to making the best possible use of a farmer’s most powerful and dependable tool to mitigate risk.