Crop insurance is bought by farmers, subsidized by the federal U.S. government, in order to protect against the potential loss of their crops due to loss of income and natural disasters such as hail, drought, floods, etc. There are two general categories for crop insurance. These are crop-yield insurance and crop-revenue insurance. Normally, the U.S. government subsidizes 62% of the premium. Last year, crop insurance covered almost 380 million acres. Most crops are insurable in most states where they are planted and about 90% of crop acreage is insured under the federal crop insurance program. Corn, cotton, soybeans, and wheat have more than 70% of total acres. Most of this is covered by crop insurance.
A subsidized multi-peril federal insurance program is administered by the Risk Management Agency in the U.S. and this is available to most farmers. This is authorized by the Federal Crop Insurance Act. Federal crop insurance can be bought for more than 100 different crops although not all are covered in every territory. The Department of Agriculture is also authorized to offer free catastrophic coverage beyond its level. For crops that insurance is not available to purchase, they are protected under the non-insured assistance program. You can purchase crop insurance through private insurance companies. A part of the premium and the administrative and operating expenses of the private companies are subsidized by the government. The Federal Crop Insurance absorbs some of the losses of the program when the insurances exceed the premiums. Many revenue insurance products are also available as additional coverage.
History of Crop Insurance in the U.S.
As early as the 1880’s, a group of tobacco farmers in Connecticut gathered and formed the first organized crop insurance company that offered protection against hail. This was continued in the next 50 years by private companies.
In 1935, the Great Depression and Dust Bowl transpired. Dust storms ruined the crops and the cattle died thus urging the U.S. federal government to announce the first national crop insurance program to help the agricultural sector to recover from the disaster.
The Congress of the U.S. passed the Federal Crop Insurance Act in 1938 which made the first Federal Crop Insurance Program. Initially, this started as an experiment. However, this was not particularly successful since the program costs are high and there is low participation among farmers. The program had trouble collecting enough supplies to pay and was not practical for your money’s worth. The program was also limited only to major crops in the center point of producing territories. This continued until the next 42 years until the Federal Crop Insurance Act of 1980 was established.
After a long time in 1980, Congress passed a law to increase participation in the Federal Crop Insurance Program and made it more affordable and accessible. There is also now a public-private partnership between the U.S. federal government and private insurance companies beginning in 1988. There is already an increase in the number of participation among American farmers. However, this still did not meet the level of participation that the U.S. government had hoped for. A major drought also came in 1988. Unplanned assistance was made for this disaster to provide relief to qualified farmers. Another disaster bill was passed in 1989, another in 1992 and the next one in 1993.
Participation rates for crop insurance were still low when the 1990s came and Congress was spending a lot in disaster relief rather than the insurance itself. This resulted in the Federal Crop Insurance Reform Act of 1994. The Federal Crop Insurance Reform Act of 1994 largely restructured the program. This led the crop insurance program to be required among farmers to be qualified for deficiency payments under price support programs, loans, and other benefits. Since participation is required, catastrophic coverage was also given. This kind of coverage paid farmers for losses more than 50% of an average yield paid at 60% of the price for the crop in a year. The premium for catastrophic coverage was also subsidized by the U.S. government. On average, farmers paid $50 per crop per county that were conditionally upon maximum amounts for many crops and counties insured by the same person.
Come 1996, the Risk Management Agency was started by the U.S. Department of Agriculture to manage the Federal Crop Insurance Program. Subsidies were also made thus increasing the participation of the farmers. By 1998, about 180 million acres of farmland were insured. This is thrice the increase since 1988.
When 2000 came, the U.S. Congress was allowed by the Agriculture Risk Protection Act to make a law that enlarged the role of the private sector. This led to allowing concerned citizens to participate in producing research and development of new insurance products. The Risk Management Agency can now create contracts and partnerships for this research and the development of more effective insurance products.
The Board of Directors was allowed to create an expert review panel to help the board in assessing the new insurance products for practicality. The Agriculture Risk Protection Act had also increased subsidy levels for the farmers’ premiums to further increase participation and also had provisions to lessen fraud, waste, and abuse.
More than 272 million acres were insured in 2008. By 2013, crop insurance has now protected more than 294 million acres. Almost 300 million. That was about 89% of planted crops including 128 different crops with an insured value amounting to $124 billion.
The farm bill strengthened crop insurance by adding more products and options for agribusinesses in 2014. The insurance was made more affordable for starting farmers with a new provision called Beginning Farmer and Rancher Benefits. The farm bill also required a variety of revisions to focus on crop insurance’s role as the main factor of the farm safety net. The U.S. federal government added two supplemental policies to crop insurance as a major enhancement. These are the supplemental coverage option and the stacked income protection plan. These two help agribusinesses to expand their protection against losses due to natural disasters or a decline in prices. Another addition was the whole farm revenue protection policy which provides insurance for highly diversified farms and farms that are selling many commodities to markets. The farm bill also aims for increased program integrity ensuring taxes are used effectively and efficiently as it expands the farm safety net.
Just last year, farmers bought 1.1 million crop insurance policies. That is about 380 million acres of farmland with new liabilities of more than $110 billion. These covered 90% of eligible acres. Records show that about more than $17 billion were paid out to farmers in 2012.
Currently, the Federal Crop Insurance Program is the primary risk management program for agricultural producers in the U.S and is an important factor in the farm safety net. This is for both the risks of price unpredictability and with probable disasters coming. The crop insurance covers more than 100 crops and does not require yearly subsidy payments to the farmers. When crop insurance supplies monetary payments, the payments come as insurance checks that replace a part of an actual loss. A lot of farmers actually pay a crop insurance premium for several years without receiving insurance payments since they haven’t experienced an actual loss.
There are two types of crop insurance that are available for US farmers. These are crop-hail insurance and multiple peril crop insurance.
Crop-hail insurance is not part of the Federal Crop Insurance Program and is usually given by private insurance companies to farmers. Many U.S. farmers purchase this type of insurance since hail, one of the possible disasters on a farm can heavily destroy a significant part of a planted field while the rest of the area is safe. Farmers often buy this kind of insurance to protect their high-yielding crops. Unlike multiple peril crop insurance, crop-hail insurance can be bought anytime during the growing season.
Multiple Peril Crop Insurance
Multiple peril crop insurance must be bought first before planting and covering loss of crop yields from all-natural disasters such as drought, excessive moisture, freeze, disease, fire, or insect damage. Some types of multiple peril crop insurance bundle yield protection and price protection to protect farmers against possible loss in their income due to low yields or market price changes.
The Federal Crop Insurance Program already has partnerships with private insurance companies. There are about 15 private companies that were permitted by the U.S. Department of Agriculture Risk Management Agency to write multiple peril crop insurance policies. Writing and reinsuring the policies, marketing, adjusting and processing claims, training, and record-keeping are all handled by each private company. The program is overlooked by the Risk Management Agency and they set the rates and determine which crops can be insured. The private insurance companies sell insurance to every allowed farmer who asks for it and retains a large part of the risk on about 80% of the policies included.
The U.S. federal government also subsidizes the paid premiums to lessen the total cost to farmers. They also reimburse private insurance companies their operation and administrative costs instead of farmers directly paying them. Crop insurance becomes reachable to many American farmers due to this government support.
The crop insurance program has finally met the goals placed by the U.S. Congress. The program now has an increase in participation, also has diversity and inclusion. This was possible because of the combined regulatory authority and financial support of the U.S. government and the private sector. With the help of the private sector, the risk is shared among private companies and also the government.
Individual Plans of Insurance
These are based on the insured’s individual production, revenue, or both.
Actual Production History
The actual production history plan of insurance is the oldest kind of federal crop insurance plan available in the market. This gives you protection against a loss or cheap-valued production due to natural disasters. This plan gives the producer a yield based on the actual production of their crops. The value you will get here is calculated by multiplying the average yield by the coverage level set for the insurer’s share of the crop. A loss payment will be given if the harvested goods are less than the guaranteed amount.
Crops that are not planted every year as apples, peaches, and grapes fall under this plan. Crops that do not have revenue coverage also fall under this plan so as oats, rye, flax, and buckwheat.
Actual Revenue History
The actual revenue history is grounded on the insured’s revenue history for the crop that is insured. The insurance money is calculated based on production and revenue history. When the revenue for the current year falls below the guaranteed revenue, a loss happens.
The yield protection plan is the same as the actual production history plan but it is only for crops that are qualified for revenue protection. This plan provides protection against a waste of production. This works just like the actual production history plan. However, this uses a price election set by the Risk Management Agency which is established according to the applicable board of trade/exchange called the Projected Price. The Projected Price is used to compute the guarantee, premium, and loss payments.
To get the guarantee, you have to multiply the average yield by the coverage level and by the Project Price. An indemnity will be given when the value of production is less than the yield protection plan.
The revenue protection plan protects you against a loss of revenue brought by price increase or decrease, loss of production, or both. This is also available for the same crops where the yield protection plan is at hand.
This protection plan uses the commodity exchange price provisions to form the pricing. However, this uses two different price discovery periods. This also uses the same formula as the yield protection plan to compute the premium replant and prevent planting payments. If harvest time is nearing, the harvest price is also released. The harvest price is used to compute a guarantee.
The insured will not be charged an additional premium if the revenue guarantee increases. The guarantee remains at the projected price if the harvest price is less. The losses are paid using the harvest price.
Revenue Protection With Harvest Price Exclusion
This plan is similar to a revenue protection plan. The only difference is that it provides insurance against loss of revenue caused by price decrease, low yields, or both. The increase in price is not included since the guarantee is not modified by the harvest price.
The project price is used to know the revenue guarantee, the premium, any replant or prevented planting payment. The harvest price is only to know the value production as an actual production or revenue loss. It is not used for computing the guarantee if there is an increase.
Dollar Plans of Insurance
Dollar plans of insurance are usually used in a dollar per acre or a different measurement applicable to the crop that you will insure. The maximum dollar amount per acre is formed by the Risk Management Agency. You can choose a percentage of the maximum dollar amount to set the guarantee. A loss will happen when the dollar to count per acres is below the dollar amount of insurance.
Area Plans or County-Wide Insurance Plans
Area plans or county-wide insurance plans technically cover an area-wide or county-wide loss production. If a whole county’s crop yield is low, most farmers in the county will also have low yields. National Agricultural Statistical Service county data is used to measure the expected and actual county yields.
The insured selects a percent of the expected county yield or revenue for an are plan. A loss happens when the actual county yield or revenue decreases below the expected county yield.
The producer is required to provide the amount of post-production so the insurance can be given. The insurance companies don’t use the producer’s actual yields to make a guarantee for area plans. In line with this, the new area risk protection insurance plan will still ask you to report the production at the end of the insurance period. Maintaining the production history is required and will be used by the risk management agency as a source of data to set up and maintain this kind of program.
Area risk protection insurance was released in 2014 and is the newest area plan of insurance. It has its own basic provisions so all of these should follow these different guidelines.
There are three area risk protection plans of insurance:
Area Yield Protection Plan
Rather than providing insurance for a sole farm, the area yield protection plan offers insurance based on the experience of the county. A loss may happen if the final county yield decreases below the insured’s expected yield. The Federal Crop Insurance Corporation gives the final county yield in the year following the insured crop year. However, it is possible for a producer to have a low yield on the farm and may not receive any insurance due to the plan being based on a county yield and not an individual yield.
Area Revenue Protection
The area revenue protection plan gives yield protection and also provides against a loss of revenue due to loss of production, low prices, or both.
Area Revenue with Harvest Price Exclusion
This is similar to the area revenue protection plan aside from that the guarantee is not adjusted by the harvest price.
Crop Hail / Named Peril
Private crop insurance or named-peril insurance is crop insurance that is not part of the U.S. federal government program. Most private coverage may be added to a certain crop to add coverage under the federal crop insurance policy. While for some, they are required to have a federal crop insurance underlying policy.
One usual example of a private crop insurance type is crop hail insurance. This type of insurance compensates damage caused by hail and others like transit coverage and vandalism. There are other more kinds of private crop insurance that depend on the area and kinds of crops that are harvested in a certain area.
Private coverages are on acre-by-acre coverage. The liability is also manifested in a dollar amount and production reports are not mandatory. Named peril or crop-hail premiums are also paid at the time of application or by a certain date after the application. Furthermore, losses are compensated when damage occurs to a crop by a specified peril.
How much does Crop Insurance cost?
The Federal Crop Insurance Corporation determines the premium rates and insurance terms and conditions. Insurance companies also provide products that are established with the approval of the Federal Crop Insurance Corporation. The price of insurance is sustained throughout the industry which means the value of the insurance is the same. So, companies and agencies compete in terms of crop insurance knowledge, customer service, and other insurance products. It depends on the ability of each insurance agent to build an effective business relationship with the insured farmers and that is an important factor of the whole delivery system.
So, how do crop insurance agents do the process?
Insurance agents are both doing the sale and are involved in the service of crop insurance. The crop insurance program includes many plans of coverage for more than 100 crops or commodities. Having insurance for more than 100 crops, the guidelines for the program always change.
The agent, of course, receives a commission just as stated in a yearly contract between the agent and the insurance company. Then, the agent provides product and premium information to the insured and collects information from them as required by the policy.
The policy is made up of different sections since the information differs for every crop from state to state and even sometimes from county to county. There are documents that both address the similarities and differences. Many information changes every year and sometimes every month as well. An effective agent is someone who can keep up to date and have a huge grasp and understanding of the crops and plans in their specific region.
Order of significance in getting crop insurance:
Basic provisions -> Crop provisions -> Commodity exchange price provisions -> Actuarial documents -> Special provisions of insurance -> Catastrophic risk endorsement -> Written agreement
The process is from general to specific. Each insurance agent should be familiar with each process in order to give their client a worthwhile service.
Why do farmers buy Crop Insurance?
Crop insurance is needed to protect the farmers, ranchers, or growers against the possible losses that may occur in running their business. These losses might be due to events that may be really unavoidable or beyond the insured’s control such as natural disasters like drought, freeze, and disease. Some of these policies also cover untimely weather events such as unable to plant due to excess moisture or poor quality of crops.
In most instances, the insurance companies cover the loss of income exceeding a provable amount. Agribusinesses can experience loss of income due to low production or price market changes. Due to the differences, each crop may have, the types of insurance may also vary by crop and county.
What is a crop? What is a commodity?
Rather than using the term “crops”, it is proper to use the term “commodities” when discussing crop insurance since most coverages are not exactly for crops per se. More than 100 commodities are insured such as crops that are not planted every year like apples and citrus, livestock like cattle or lambs, apiculture or beekeeping, clams, rangeland, pasture, and oysters.
Some crops can be insured under a number of plans. One great example is for wheat which basically includes yield protection, revenue protection, area yield protection, and many others. On the other hand, wine grapes can only be protected under a yield-based plan type of insurance.
Again, the kinds of coverage vary by crop due to the difference in each crop’s individual characteristics.
What is a plan of insurance?
This is a particular type of insurance that includes all the rules connected with it. A crop may have an insurance one plan at a time. When multiple choices of plans lay down on you, the client must carefully review each plan and select the best one that exactly fits the needs of their agricultural business and risk management. The insurance agent should of course be knowledgeable enough to explain and should know each detail of the plans they offer.
To meet the increasing needs of the producer, there is also an increase of insurable crops and products. It is important that each insurance agent be aware of each option available to the local producers in their state or county and they must also make sure that they provide the correct information regarding the insurance products that are available in their company.
What is an insured?
The insured could be a farmer, rancher, beekeeper, or a grower. They are the main customers of the crop insurance program. While the main goal of the federal crop insurance program is to provide tools to the insured in order to manage risks. The insured farmers, ranchers, beekeepers, and growers are also the ones who use the insurance policy for the commodity that they own. Once they decide what type of insurance they will get, they will enter a contract to insure their commodities in a county where insurance can be bought.
They have of course several responsibilities to take note of. First, they need to report specific information to make a contract and guarantee. Second, they of course need to pay all applicable premiums and fees. Third, they should follow proper farming practices. Lastly, they should also alert the approved insurance company when there is already an incident of a loss.
A loss payment will be issued to the insured when all requirements of the insurance policy are met. One great example is when a crop has not produced enough income due to an insurable reason like drought, disease, uncooperative weather, etc.
The Crop Insurance Cycle
The crop insurance cycle is a timetable being followed by the Risk Management Association and the Crop Insurance industry. The timetable starts when the U.S. federal government releases information about insurance products for the coming year and concludes with the release of changes for the program.
Application -> Production reporting -> Acreage reporting -> Claims -> Contract changes then back to application again
In order to apply for crop insurance, you need to fill out an application form in an agent’s office and send it via email to an approved insurance provider. All applications must be sent to the agent by the applicable sales closing date. These dates differ in terms of crop, region, and other factors.
The most common sales closing dates are:
March 15 and September 30 – annual crops (crops which are planted every year)
January 31 and November 20 – Category C / perennial crops (crops which are not planted every year)
Of course, during the application process, the agricultural producer decides which crops to insure and at what level of coverage. The policies for each insurance depends on specific crops and counties.
If the agricultural producer decides to insure a crop in a county, then he must insure all acres of land he owns which produce that particular crop in the said county. One example is if the insured decides to insure wheat in Saint Charles county, then he must also insure all acres of wheat grown in that county. He cannot decide to insure non-irrigated wheat and not insure the irrigated wheat acres. Of course, he can choose not to insure other crops planted in the same county or wheat planted in a different county.
The coverage for the insurance purchased is continuous and immediately renewed unless it is canceled in a contract by the insurance company or the policyholder until the cancellation date. The insured now have the chance to review any changes, change the coverage, or eventually cancel it. All the changes must be done no later than the crop sales closing date. If they did not reach the crop sales closing date, the changes will be brought the following crop year. If the insured wants to cancel the coverage, a written notice is required on or before the crop cancellation date.
It is important to document last year’s harvest information during production reporting time. This information should include how much acreage was planted, harvested, and any evaluated production due to loss. The amount of a crop that is produced is called “actual production”. The report must be given to the agent 45 days after the sales closing date. This report also should show how many units were planted and harvested in a specific area of land.
This information must be reported separately by:
- Crop (for example, corn)
- Practice (for example, irrigated or non-irrigated)
- Type (for example, grain)
- Location (unit and map area)
Acreage reporting is required when a crop is already planted and should be reported by the acreage reporting date. The dates can differ by crop, state, county, practice, and type. The insured farmers must state the number of acres planted, the percent share he has in those acres of land, and the dates they were planted. Once the information is already submitted, the insurance companies determine the liability and coverage for that year based on the provided data.
The acreage report for the crop includes:
- Crop all planted acres
- Practice and type of crop
- All acreage the producer was not able to plant (prevented planting acreage)
- Date of planting insurable share for that acreage and any applicable shareholders
Notice of Loss
The term loss refers to damage to a crop. You will have to submit a report called a notice of loss once there is damage caused and must be reported within 72 hours of knowing the damage and no later than 15 days.
- Total destruction of the insured crop on the unit
- Harvest of the unit
- Final adjustment of a loss unit
- The calendar date contained in the provisions
- Abandonment of the crop
- As otherwise specified in the crop provisions
Contract changes are both the end and the start of the crop insurance cycle. The cycle starts when the government issues information about insurance products for the next crop year and ends with new changes to the program the next year. The Risk Management Association can make changes to the rules and regulations of insurance every year or every other year.
Please do not hesitate to ask us questions or need any clarification with your policy. Don’t forget to call our company at (720) 221 8168, if you’re interested in getting crop insurance in Denver, Colorado, or whichever state your agricultural business is located. You may also send us your information by clicking on the chatbox on the lower right of your screen and one of our friendly agents will get back to you in the soonest possible time.