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Friday, February 20, 2015

What's New in Crop Insurance for 2015?

By Jayson K. Harper, Professor of Agricultural Economics, Penn State University

The answer? A lot.  There have been many new changes coming out of the 2014 Farm Bill, as well as several improvements in recent years that have made crop insurance more flexible and provide additional coverage for your farm.  Some of the changes you should consider for your risk management plan in 2015 include: enterprise units, trend adjusted yields, the supplemental coverage option, and whole-farm revenue insurance.  There have also been improvements made for organic producers, new benefits for beginning farmers, and a provision that allows farmers to exclude extremely low yields due to bad weather from calculation of their Actual Production History (APH).  With the improved NAP (from FSA) with Buy-up protection the 65% coverage level at 100% of established prices, producers can purchase meaningful protection for each crop that they grow.

Remember, the sign-up deadline for spring seeded crops is March 16, 2015.  A list of crop insurance agents who sell crop insurance in Pennsylvania can be found here.

Another important deadline that farmers should be aware of is the deadline for conservation compliance certification.  In order to be eligible for the premium subsidy on crop insurance policies in 2016, farmers must file form AD-1026 (Highly Erodible Land Conservation (HELC) and Wetland Conservation (WC) Certification) with FSA by June 1, 2015.

Enterprise Units.  Enterprise units have been available for several years now, but many farmers are not aware of how they work.  When choosing your crop insurance coverage in Pennsylvania you have the choice of basic, optional, or enterprise units.  Your choice of insurance unit will have an impact on your cost of insurance, the likelihood of collecting for losses, and how you will need to keep and report your yield records.

You receive one basic unit for the land you own and cash rent within a county.  You also receive one basic unit for each landlord with whom you crop share rent.  Each crop share landowner can also insure their own interest in the crop as a separate unit.  Each different crop also creates a separate unit, and tracts of land in different counties must be insured as separate units.  Each crop/county can have a different type of policy and level of coverage, and could receive a loss payment separate from the other units.  Separate production records must be kept for each basic unit.  Insuring all acres as basic units entitles producers to a discount on their premiums.

Basic units may be divided into optional units when a crop is being grown under distinctly different production practices.  For example, a grower with both irrigated and non-irrigated acres of the same crop may qualify for optional units.  Other special farming types or practices may also qualify acres to be insured as separate units.  Optional units may also be established by FSA farm serial number or on a section equivalent basis for annual crops.  Optional unites based on section equivalents must be requested through a crop insurance agent, contain a block of land at least one mile square, and be clearly indicated on a map using identifiable boundaries.  Separate APH records must also be kept and reported for each optional unit.  Farmers selecting optional units do not receive the premium discount allowed for basic units.

An enterprise unit combines all of the acres of a single crop within a county in which you have a financial interest into a single unit, regardless of whether they are owned or rented, or how many landlords are involved (separate enterprise unites may be available for irrigated and non-irrigated acreage of a crop).  Because enterprise units are usually larger than basic units or optional units, this would make it less likely that the overall yield in a given year would be low enough to trigger a loss payment.  This is especially true if you have a very large acreage of the insured crop that is widely dispersed.  However, this isn't the case for most Pennsylvania farmers and in many of these situations there is no real difference between choosing basic and enterprise units.  This is important because enterprise units are eligible for additional premium discounts over basic units.

Examples of the cost of both yield protection and revenue protection coverage for a farmer with 130 bushel APH yield in a medium risk county are given in Table 1.  Using basic units rather than option units generally results in a cost savings of around $2 - $4 per acre.  Switching from optional units to enterprise units would result in substantial savings, in some cases up to $15 per acre.  Carefully consider the difference between using basic and enterprise units for your farm; you could reduce your premiums and keep the same level of overall protection.  The cost savings from using enterprise units could also be used to purchase higher levels of coverage for your farm than under either basic or optional units without increasing your farm's crop insurance costs.  For example, if you insured at the 75% level before using either optional or basic units, you could now insure at the 80% level with enterprise units and also save a couple dollars per acre.

Table 1: Example of farmer paid premiums for yield protection and revenue protection coverage by unit structure (130 bu. APH yield, medium risk county)

Coverage level
Yield Protection
Revenue Protection

Optional
Basic
Enterprise
Optional
Basic
Enterprise
85%
$39.94
$36.34
$27.55
$51.88
$47.85
$36.27
80%
$28.90
$25.34
$15.60
$37.30
$33.28
$20.48
75%
$21.41
$18.04
$9.22
$27.31
$23.49
$12.00
70%
$16.54
$13.38
$6.53
$20.82
$17.19
$8.39
65%
$13.89
$10.76
$5.25
$17.26
$13.71
$6.69
60%
$10.12
$7.50
$4.17
$12.41
$9.44
$5.24
55%
$8.29
$5.88
$3.26
$10.09
$7.40
$4.11
50%
$6.14
$4.14
$2.51
$7.44
$5.23
$3.17

You may not want to use enterprise units if you have variable farms and inconsistent crop production histories, if disease and quality issues appear only on some farms, if the farms are dispersed throughout the county or if you have irrigated and non-irrigated acreage in the same unit.  For many farmers, however, enterprise units could provide a simple way to cut costs and provide additional coverage for their operation.

Trend Adjusted Yields.  Pennsylvania farmers have the option to use trend adjusted (TA) yields to increase their actual production history (APH) yields for corn and soybeans.  This adjustment better reflects increases in yield experienced  by farmers using certain farming practices, including hybrids with modified genetic traits.  This change is important because the APH yield underlies the insurance guarantees for both the yield protection and revenue protection crop insurance plants.  The TA option has been available to Pennsylvania farmers since 2013.

Your main choice when electing to take the TA option will be either to: 1) benefit from the protection afforded by a higher insurance yield or revenue guarantee or 2) move to a lover level of coverage and take advantage of higher premium subsidies.  A producer electing the TA option and keeping the same coverage level will likely pay a slightly higher premium because of the higher TA APH yield (because your premium cost is influenced by many factors, it is important to discuss all your options with your crop insurance agent).  A benefit for some farmers may be the opportunity to use a TA APH and opt for a lower level of coverage that provides a similar yield or revenue guarantee.  Although the overall level of protection would be similar, selecting a lower coverage level would be less expensive because of the way in which crop insurance premiums are subsidized by the Federal government.  For example, if you are currently insuring your corn or soybeans at 85% coverage level, you may be able to get a similar level of protection at lower cost by using the TA option and insuring at the 80% level.  The amount of subsidy varies greatly depending on the coverage level and insurance unit (ie. basic, enterprise, optional, or whole farm units) you select.

More information on trend adjusted yields can be found here; contact your crop insurance agent for a more detailed evaluation of your coverage options.

Supplemental Coverage Option.  The Supplemental Coverage Option (SCO) provides additional coverage for the deductible on your crop insurance policy based on purchase of additional county level coverage.  SCO is available for corn and soybean for both the yield and revenue protection policies.  Like your other crop insurance, SCO is heavily subsidized with the Federal government paying 65% of the premium cost for you.  Because higher levels of crop insurance are subsidized less than lower levels, SCO may be a more cost effective way to provide additional coverage for many farms.

SCO is purchased as an endorsement to your crop insurance coverage and must be purchased by the sales closing date.  The amount of SCO coverage depends on the liability, coverage level, and approved yield of your underlying policy.  If you elect to participate in the Farm Service Agency's Agricultural Risk Coverage program (ARC) you are not eligible to participate in the SCO.

The SCO works the same as your underlying crop insurance policy: it provides additional yield protection for yield yield protection policies and additional revenue protection for revenue protection policies.  The loss payment trigger for SCO is different because it is based on county yields or revenues rather than your farm's yields and revenues.

SCO is meant to help cover potential losses between the coverage level you select and 86% of the expected county yield or revenue.  For example, if you have a revenue protection policy at the 75% coverage level, you decided to accept the first 25% of any losses as a deductible (in exchange for lower crop insurance premiums) before the crop insurance policy kicks in.  In the case of a 75% coverage level, up to 11% (86% - 75%) of the expected county yield or revenue could be covered using SCO.  Lower levels of coverage would have higher levels of coverage under SCO.  If the underlying coverage is revenue and the harvest price is lower than the spring projected price, the loss trigger for SCO may increase proportionally.

An interesting feature of this coverage is that you will now have both individual and county loss triggers.  It is possible that you could: 1) have a loss payment based on losses calculated both at the county level and at the farm level, 2) have a loss payment based on losses at the county level, or 3) have a loss payment based on losses on your farm.  Because your crop insurance policy will now have both individual and county insurance triggers with SCO, it is very important to consider how your farm's risk compares to the risk at the county level and if SCO provides the protection you are expecting.

Whole-Farm Revenue Protection.  The WFRP insurance plan provides a way to cover all commodities sold by the farm under a single policy.  A farm can protect up to $8.5 million in revenue under this plan.  Any farm meeting eligibility requirements can purchase WFRP including those with specialty or organic commodities (both crops and livestock), or those marketing to local, regional, farm-identity preserved, specialty, or direct markets.  WFRP replaces the Adjusted Gross Revenue plans (AGR and AGR-Lite) that were available in previous years.

WFRP is available at the 50, 55, 60, 65, 70, 75, 80, and 85% coverage levels.  The 80% and 85% coverage levels are only available to farms producing at least three commodities that meet minimum revenue requirements.  The premium subsidy levels range from 55 to 80%.  You can buy WFRP alone or with other buy-up level (additional) Federal crop insurance policies.  If you buy WFRP with another policy, the WFRP premium is reduced due to the coverage provided by the other policy.  You must purchase your other crop insurance policies at buy-up levels of protection to participate in WFRP (catastrophic (CAT) levels of coverage do not qualify).

In order to be eligible for WFRP you must have five consecutive years of federal tax returns for your farm (ie. for eligibility in 2015 you must have 2009 - 2013 tax records), be able to meet the diversification requirements of the policy, and produce commodities on-farm that generate at least 50% of your farm's total revenue.

Other Crop Insurance Improvements.  There have been several other improvements to crop insurance that came out of the 2014 Farm Bill including:

1) Improved protection for organic and contracted crops

  • Organic elections have been made available for more crops
  • Organic price coverage has been extended to eight more crops (oats, peppermint, apricots, apples, blueberries, almonds, pears, and grapes for juice) for a total of sixteen (producer has the option of using organic or conventional prices).  Organic prices and additional crops will be available for 2016.
  • The 5% premium surcharge for organic price options has been eliminated.
  • For many crops, a contract price may be used if the crop is contracted by the acreage reporting deadline and the price is higher than the established price.

2) New options for low APH yields

  • Farmers can choose to exclude disaster years from their production history if the county yield in that year was less than 50% of the county (or adjacent county's) 10-year average
  • New and beginning farmers get a 80% yield plug for replacing low APH yields; the current 60% yield plug is retained for everyone else.


3) New benefits for being beginning farmers (available for the first five years of insurable crop interest)

  • Beginning farmers are eligible for an additional 10% premium subsidy buy-up coverage
  • They are exempted from paying the administrative fee for catastrophic (CAT) and buy-up policies
  • They can use the production history of an existing farming operation, if they were previously involved in the decision making or physical activities of the farm
  • An increase in the substituted yield for yield adjustment, which allows a replacement of a low yield due to an insured cause of loss, from 60 to 80 percent of the applicable transitional yield (T-yield) for the crop in the county.

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