When Do Farmers Reap The Benefits Of Crop Insurance?

Crop insurance is a vital risk management tool for farmers and ranchers, protecting them against unpredictable weather events and changing markets. The Federal Crop Insurance Program (FCIP) in the United States has been a key support program for agriculture since its inception in the 1930s. It offers financial protection against losses due to adverse events, including droughts, excess moisture, damaging freezes, hail, wind, disease, and price fluctuations.

Crop insurance policies are available for a wide range of crops, with multiple types of insurance plans to choose from. Farmers can select the most suitable plan based on their crop type, risk management needs, and budgetary constraints. The cost of crop insurance is influenced by factors such as the type of crop, the chosen insurance plan, and the farmer's location.

The process of obtaining crop insurance typically involves purchasing a policy from an insurance company, with premiums often subsidized by the government. In the event of a loss, farmers can file a claim and receive an indemnity payment to cover their losses.

By having crop insurance, farmers gain peace of mind and financial security, enabling them to continue providing essential food, fuel, and fiber despite the challenges posed by nature and market fluctuations.

The Federal Crop Insurance Program (FCIP)

FCIP was first introduced in the 1930s to help the agriculture industry recover from the negative impacts of the Great Depression and the Dust Bowl. Since then, it has evolved and expanded to cover more crops and regions of the country. From 2000 to 2021, FCIP provided financial and administrative support for 133 unique agricultural commodities, covering an average of 284 million acres annually. This included crops such as barley, corn, cotton, flaxseed, oats, peanuts, potatoes, rice, rye, sorghum, soybeans, sugar beets, sugarcane, sunflowers, sweet potatoes, tobacco, and wheat.

The program is administered by the Federal Crop Insurance Corporation (FCIC), which is a wholly-owned government corporation. The FCIC works with private insurance companies to sell and service crop insurance policies to farmers and other agricultural producers. These policies are available for a wide range of crops and can be purchased as either multiple peril crop insurance (MCPI) or crop-hail insurance. MCPI is the most popular option, chosen by over 90% of farmers who buy crop insurance. It covers losses caused by natural events such as destructive weather (hail, frost, damaging wind), while crop-hail insurance is often purchased by farmers in areas where hail is a frequent event.

The cost of the FCIP has increased over the years along with program participation. In 2022, federal costs for the program were $17.3 billion, with about $12 billion going towards subsidizing premiums and the rest covering insurance companies' administrative costs and government losses related to the policies. Premium subsidies have been the primary tool to increase program participation and represent the largest share of total program costs.

FCIP provides essential financial protection for farmers and ranchers, helping them to manage risks and continue producing essential food, fuel, and fiber despite changing market conditions and unpredictable weather.

Multiple Peril Crop Insurance (MPCI)

MPCI covers losses caused by natural events, including destructive weather (hail, frost, damaging wind). It is available for more than 120 different crops, though not all crops are covered in every geographic area. More than 90% of farmers who buy crop insurance opt for MPCI. The cost of insurance and the amount an insurer will pay for losses are tied to the value of the specific crop. MPCI policies must be purchased each growing season by deadlines established by the federal government and before a crop is planted. If damage occurs early enough in the growing season, the policy may include incentives to replant or penalties for not doing so.

MPCI is not a 'silver bullet' to protect a poorly performing business. It can delay the inevitable demise of a non-profitable business, but it may also reduce the time it takes for a non-profitable business to reach unsustainable debt levels. MPCI can give businesses the confidence to pursue long-term profit outcomes that carry a higher short-term risk. For example, some businesses in the Eastern States with borderline soil moisture levels would have stopped sowing early without MPCI, but with it, they were prepared to take that risk.

There are three broad categories of MPCI products: agreed minimum yield, include cost of production recovery, maintain revenue proportion, and parametric/weather index.

Crop-Hail Insurance

In addition to hail and fire, crop-hail insurance may also provide coverage for lightning, wind, vandalism, malicious mischief, transit coverage, debris removal, and clean-up of buildings blown into a field by wind.

Yield Protection (YP)

The crops eligible for YP coverage vary by state and county. In Iowa, for example, eligible crops include corn, soybeans, oats, wheat, popcorn, barley, potatoes, sweet corn, dry beans, forages, grain sorghum, and green peas. Other crops that are generally eligible for YP coverage include wheat, barley (including malting barley), corn, grain sorghum, soybeans, cotton, rice, sunflowers, canola/rapeseed, cabbage, forage seeding, raisins, fresh market sweet corn, fresh market tomatoes, peppers, sugar beets, and onions.

YP guarantees a production yield based on the individual producer's Actual Production History (APH), which is the average yield obtained on the insured unit for four to ten consecutive crop years in which that crop was produced. Producers can insure most crops at 50-85% of their APH yield, in increments of 5%. The indemnity price for YP coverage is the average daily futures market price closes during the month of February for December corn and November soybean futures, also known as the projected price or the spring projected price.

The amount of protection obtained from YP is determined by two factors: the level of yield coverage and the level of price coverage. Producers can choose a price coverage level from 60 to 100% of the indemnity price, with most opting for 100% coverage. A low-cost, minimum-level disaster policy, called catastrophic coverage (CAT), is also available, insuring crops at 50% of the APH yield and 55% of the projected price.

If the actual average yield (adjusted for quality) is equal to or greater than the yield guarantee, no indemnity is paid. However, if the average yield per acre is less than the yield guarantee, the indemnity paid is equal to the yield difference multiplied by the projected price and the number of acres insured. Indemnity payments are considered taxable income but can be reported in the tax year following the harvest if the producer typically sells half or more of their crop.

Premium rates for YP insurance are based on the coverage level chosen, the insurance unit chosen, and the loss history for the county in which the producer farms. The premium rate, expressed as a percentage of the dollar value of protection, also varies with the APH yield. Congress has authorized the FCIC to subsidize YP premiums to encourage broader participation. The amount of the subsidy depends on the coverage level and units structure chosen, ranging from 100% for catastrophic level coverage to 38% or less for the highest levels of coverage under basic and optional units. Enterprise units receive a higher level of premium subsidy.

Revenue Protection (RP)

RP is designed to provide additional assurance to farmers who often market their crop before harvest. Many farmers enter a forward contract to sell a portion of their production before harvest. If the farmer loses the crop, they are still obligated to deliver the contracted amount. RP helps provide the farmer with sufficient funds to settle the forward contract.

RP is also important for farmers who raise animals and grow their own feed. If a disaster wipes out feed production, the farmer must enter the market and purchase feed at the going price, which most likely would reflect higher crop prices due to a “short” crop reflecting the effects of the disaster. RP provides farmers with the needed funds to afford the higher feed costs and continue to maintain the animals, avoiding untimely or unnecessary liquidation or other disrupting impacts.

RP uses CME Group futures market prices and a farmer's Actual Production History (APH) yields to compute revenue coverage and guarantee. A projected price is determined during February by using the monthly average new-crop futures prices for corn (December futures contract) or soybeans (November futures contract). A harvest price is determined by averaging the new crop futures prices during October for both corn and soybeans. The final revenue guarantee is computed by multiplying the higher of either the projected price or the harvest market price by the APH yield for the farm, by the chosen coverage level (50% to 85%).

The revenue protection guarantee is established by: Average Yield X Coverage Level X Insured’s Share Percentage X Projected Price. An indemnity may be due when the calculated revenue (insured’s production X harvest price) is less than the revenue protection guarantee for the crop acreage.

Frequently asked questions