Posted On 27 May 2020
There are two things, very important things, which if you keep in mind & properly execute, will take you 90% of the way to building an effective crop insurance program.
- Accurate information reported in a timely manner.
- Understanding unit structure.
Let us start with accurate information.
What information and why is it important? There are two important aspects of your farm operation that form the basis of your insurance protection and therefore what you eventually see from a crop insurance claim.
First, an accurate acreage report meaning the total acres of a certain crop, when they were planted, and are they insured acres or uninsured acres?
Second, what is the production or yield that eventually came off those acres?
Why is this important?
Your insurance protection or what we call your acre guarantee is established from what we call APH or actual production history.
Whose history? Your own farm’s history.
What history? That depends on the crop being insured.
For example, most spring planted crops, such as corn, soybeans, potatoes, onions, cabbage, peas, processing snap beans, processing sweet corn have a 10-year database making up your history of acres planted and production from those acres that when averaged together becomes your actual production history. However, some perennial crops such as apples and peaches only use a five-year history to determine your actual production history.
Once an actual production history is established, using a 10-year history, you choose how much of that production you want to insure & guarantee. Your choices are in most cases 50% to 85% in increments of 5% (50%, 55%, 60%, 70%, 75%, 80%, and 85%). Be aware that with some crops the highest insurance coverage option available is 75%. Each increasing level of coverage provides a higher level of production guarantee and therefore a higher per acre premium.
There are two reasons the insurance premium per acre increases with increasing the level of insurance protection.
One, obviously the per acre guarantee of insurance protection is increasing.
Two, as we choose higher levels of coverage for example, we go from 60% coverage to 65% coverage or 70% coverage to 75% the level of federal government subsidy decreases so we are paying a higher percentage of the true premium. The 5% increase from 70% to 75% would cost more per acre than the 5% increase from 60% to 65%. Even though we are purchasing the same 5% increase in coverage, the federal government subsidy at the 75% level is less than the government subsidy at the 60% level.
Another part of providing accurate information with your acreage report and or production report is that these reports must be turned in on a timely manner.
There are specific times in the year that this information must be reported and turned in. These dates are different for each different crop. A late report or a completely missing report has extreme negative consequences on your crop insurance policy, your crop insurance coverage and correspondingly a crop insurance payment at the time of loss. For example, a missed acreage report results in no insurance coverage attaching to that crop for that year. The policy states that crop insurance attaches to the crop when the crop is planted and an acreage report is filed. No report, no insurance, no premium generated or billed, no claim payment if there is a crop loss.
This also could be the result with a late acreage report. However, when a late acreage report is filed, the crop insurance provisions allow the insurance provider to do a field inspection and accept the acreage report and allow insurance to attach to that crop. After the inspection the insurance provider has the right to deny the acreage report and the grower would end up with no insurance coverage for that crop year.
A late or missed production report also affects your insurance coverage in a negative way. In the event that a production report is turned in after the production report date or never turned in and missed entirely the rules state that the insurance provider imposes a yield for that missed year. The rule gives instructions to the insurance provider to input 75% of the previous year’s yield as a plug for the missed year. This will result in a lower actual production history (A.P.H.) therefore, a lower insurance guarantee per acre therefore, a possible lower claim payment in the case of a crop loss in the current growing season.
This lower actual production history (APH) can be compounded in a situation where the previous year’s production was based on a crop loss and an insurance paid claim so that the 75% rule is applied to a low yield resulting from the previous year’s claim. Now we have an even lower actual production history, resulting in a lower insurance guarantee per acre, resulting in an even lower possible claim payment.
The key to providing accurate information in a timely manner is good communication. When we call our clients to remind them it is time to collect accurate information, an acreage report or production report, we understand they do not wake up every morning thinking about their crop insurance agent or their crop insurance program and may not be ready with the needed information.
We realize we may have to call a second time to remind you to get your information ready. However, people who make us call three or four times to remind them of the needed information give me the impression that crop insurance is more important to me than it is to them. When you do not take responsibility for your crop insurance program and your acreage and production reports become late or non-existent is when you’re crop insurance program becomes ineffective.
The second important element to understand, that will greatly improve the effectiveness of your Federal crop insurance program is to understand what unit options are available to the crops that you are growing.
There are many different unit options and they are found in different documents of the crop insurance policy. Why is there so much discussion on units? What is so important about units anyway? The reason is statistical information gathered from the history of claim studies show that individual farms that use unit options in their Federal crop insurance strategies participate in more claims and receive higher payouts from those claims. Please do not misunderstand me. I am not saying that if this coming year you implemented units to your Federal crop insurance program that you will have a claim or that a possible claim would be any larger. However, if you implement consistent unit strategies, over time you will have a greater chance of participating in more claims. When you do participate in a claim, on average, you could possibly receive a larger payout.
A unit refers to the way we report the acreage of an insured crop that you have planted. A basic unit is all the acreage of that particular crop planted in the same county. Basic units can be established by ownership share. For example, if I planted 1000 acres of crop A, I have a 1000-acre basic unit. When 200 acres of those 1000 acres have a low yield due to a weather event, I may not have a claim due to the fact the other 800 acres did well and had a high yield. There is a premium discount for choosing the basic unit structure as your reporting option. This is because statistically you will participate in fewer claims and therefore are charged a lower premium.
Our next blog will detail unit structure and how it will effect your premiums and your claims.