Crop insurance is one of the only ways a farmer or farming entity can protect him or herself from an economic or weather disaster. Farmers face the dual risk of guessing correctly regarding upcoming weather and economic conditions. Although they are sometimes intertwined, sometimes they are not. For example, in 2012, the corn crop suffered from a continued drought thought the Midwest and corn-belt states. As a result, the corn supply was severely impacted and crop yields were way down. Subsequent to this year, the weather turned in 2013 that sent yields though the roof and a commensurate drop in pricing. Weather impacts yields, which sometimes impacts pricing. There is no real way for a farmer to predict the weather.
At the same time, there were other pressures that were impacting the corn price, which had nothing to do with the weather. For example, there were ships that were turned around at China’s doorstep due to the decision of Syngenta’s CEO to prematurely release their Viptera seed. China’s regulators had not approved the GMO modified seed that was put into the stream of commerce and when China discovered it in shipments, it acted appropriately. There was no way for a farmer to have predicted this type of bad act.
Crop insurance can help farmers moderate and sometimes eliminate the risk related to weather or unseen economic actions. Generally there are 5 types of crop insurance. First is Yield Protection. With this kind of policy, growers are protected against a production loss for crops for which revenue protection is available but not selected. It also provides prevented planting and re-plant protection. This policy allows growers to protect their bushels, and nothing more. In 2012, Yield Protection policies set the spring price for corn at $5.68. And for every bushel the grower lost, he or she was going to get paid $5.68 regardless.
Then there’s a Revenue Protection policy. This is probably the most common policy, especially for your larger acre growers. It is a tool that allows producers to manage both their yield and price risk. The policy is structured to allow growers to “lock in” a certain level of revenue, which is usually yield times price.
Then there’s the Revenue Projection with Harvest Price Exclusion. This is essentially the same as a Revenue Protection policy, except that the amount of insurance is based upon the projected price only. This policy can protect a grower, but there is no bushel guarantee with this plan. So growers could end up not getting covered if the spring prices for corn are significantly different than the fall prices were when the policy was purchased.
Finally, there are the Group Risk Protection and Group Risk Income Protection policies. These are multiple peril insurance programs designed to help growers protect their crops from disastrous losses. However, these policies only protect growers when yields are low all over the county they are in, not when isolated problems hit an individual’s crops. In addition, neither provide coverage for prevented and delayed planting or reduced grain quality, such as aflatoxin damage.
The use of crop insurance can be a powerful tool that if used properly can give a farmer some assurances he or she might need in order to stay in the business of farming long term.
Written by:
Brian Berryman
Watts Guerra LLP
4 Dominion Drive, Bldg. 3, Suite 100
San Antonio, Texas 78257
Phone (210) 447-0500
© Watts Guerra LLP 2015
