How crop insurance helps farmers manage risk

How crop insurance helps farmers manage risk

Crop insurance is a farmer’s best friend when managing risk.

These programs have been around since the Great Depression, when Congress first implemented the federal crop insurance program. Ever since, crop insurance has helped farmers manage the risk that comes hand-in-hand with farming in an affordable way.

Today, crop insurance is relied upon heavily. In fact, about 90% of cropland in the United States is protected by it.

Without crop insurance, risk management would be a much more difficult process. For one, there would be much less protection for farmers against widespread losses that would wipe away many operations.

Since risk management plays such a significant role in agriculture, we thought it was time for a refresher on the role crop insurance plays.

History of crop insurance

Before the federal crop insurance program, affordable insurance was much harder to come by for farmers. Even when the program was put in place in 1938, prices were still high and participation lagged among producers.

Insurance finally became more affordable in 1980 when Congress enacted legislation that encouraged an increase in participation in the federal crop insurance program. The private sector worked together with the federal government to make sure the system was both affordable and deliverable for producers.

Still, participation didn’t increase rapidly until the 1990s, when the program was restructured. New subsidies helped boost participation. In 2000, the Agricultural Risk Protection Act was approved, making it even easier for farmers to get different insurance products.

By 2014, with that year’s Farm Bill, crop insurance became the primary tool farmers used when they managed production and price risk for their farming operations.

How crop insurance works

Let’s cover the basics of how crop insurance works. First, there are two forms of crop insurance available to farmers in the United States: crop-hail and multiple peril crop insurance.

Crop-hail policies are outside of the federal crop insurance program. Instead, private insurers make these available to farmers directly.

A crop-hail policy is popular in many areas of the country, but especially in parts of the country where hail is common. The policy adds protection against hail, which can destroy significant portions of a planted field.

Multiple peril crop insurance (MPCI) policies cover a producer’s loss of crop yields from natural causes, such as drought, too much moisture, freeze and disease. Some policies allow for options that provide both yield and price protection.

There are 15 private companies that work with the federal government to provide MPCI. The government subsidizes the farmers’ premiums to lower their cost, but also reimburses private insurers to help offset operating and administrative costs.

USDA Risk Management Agency assists farmers

The United States Department of Agriculture’s Risk Management Agency, or the RMA, was created in 1996 to help equip farmers and ranchers with risk management tools. It works to increase the availability and effectiveness of federal crop insurance as a risk management tool.

The purpose of the RMA is to make the agriculture structure more economically stable. Rural communities and their overall economic health are also reliant on the stability of the ag economy.

Risk in farming

Anyone in the agriculture industry will quickly tell you that risk has always been a reality for farmers. There is always uncertainty surrounding prices, yields, government policies and how foreign markets are behaving that influence business decisions for farmers and landowners.

Government programs, such as crop insurance, have begun playing very large roles in U.S. farm policy. For example, in 2013, there were more than 295 million cropland acres enrolled in the federal crop insurance program. That year, insurance subsidies totaled more than $7 billion.

Though yield and revenue insurance programs are relied upon heavily in recent years, there are other government programs with strategies centered around addressing farm risk management, including:

  • Futures and options,
  • Contracting sales and purchases
  • Enterprise diversification
  • Debt management and credit availability
  • Off-farm employment

Crop insurance helps farmers

Insurance policies for their crops helps take a lot of pressure off the shoulders of farmers and ranchers across the country. It allows them to stay competitive and be more innovative in their farming practices.

In short, it helps keep farmers strong and in stable financial condition.

If they are ever faced with an unexpected natural or economic disaster, crop insurance can literally save the farm. Programs provide that financial security and support farmers and ranchers need to stay in business from season to season.

Why farmers need insurance

Crop insurance is a must-have for farmers wanting to better manage the risk they face day-in and day-out.

It’s not a one-size-fits-all solution, but this is a beneficial feature, not a flaw. Most programs allow for producers to customize the plans and the coverage they receive so that their own possible losses and other forms of risk are covered appropriately.

Because farmers are able to participate in these decisions that affect their plans, they must find affordable plans that also can respond appropriately to the risk they face.

One of the other benefits that needs to be highlighted is how quickly farmers receive crop insurance payments. This allows producers to turn around and cover costs associated with farming in a timely manner, keeping the business afloat.

Know whether and how you are covered

Farmers need to have a strong grasp on what their insurance policies cover - and to what extent.

The RMA recommends producers review their policies frequently so that they know the eligible causes of loss. Farmers should also keep any related records stored and secure so that they are on-hand when needed.

It’s also important that farmers know who to contact about their insurance programs, such as the agent or company they work with.

Contact us to discuss insurance services

Midwest Land Management and Real Estate Inc. offers to our clients one-on-one professional crop insurance. This is available to all landowners and farmers in our territory.

Our clients receive accurate and current insurance information, ranging from multi-peril to hail coverage, because we work closely with providers. Since insurance options are in a near-constant state of change - and because landowners’ and farmers’ needs are always changing - our close work with providers is invaluable to clients.

Contact Midwest Land Management to learn more about our insurance services and how we can help you better manage risk with this powerful tool.