What is Covered by Crop Insurance?

Jan 2, 2021 | Business Insurance

Crop insurance is purchased by agricultural producers, and subsidized by the federal government. It covers the loss made by natural causes such as deep freezes, flood, drought, excessive moisture, disease, hot weather, and other forms of natural calamities. There are also coverage options now that offer to combine yield protection and price protection. It can safeguard the farmers from potential loss in revenue due to low market prices and a decrease in yields. 

The company must sign a Standard Reinsurance Agreement (SRA)  it is a contract between the company and the FCIC. The terms and conditions stated that FCIC will provide subsidies on eligible crop insurance contracts that are sold by the company.

There are 2.1 million farms all over the United States that received subsidies. Most of them are producers of corn, soybeans, cotton, and wheat. This subsidy that serves as an agricultural incentive is given to agribusiness, farms, and agricultural organizations. It is like a supplement to the farmer’s income. The subsidy was able to help the farmers to produce a balanced supply of agricultural commodities. If the supplies are enough and managed; the cost of the basic foods will be average as well.  

There are two types of crop insurance in the United States. The Crop-Hail is under the private sector and Multiple Peril Crop Insurance or MPCI which is underwritten by the federal government and private sector. MPCI is offered under the Federal Crop Insurance Program. 

The History of Federal Crop Insurance 

Congress passed the Federal Crop Insurance Act in the year 1938. At that time, the country suffered from the Great Depression and dust storms ( The Dust Bowl ). Due to inevitable calamities, private insurers had a hard time providing affordable insurance policies. The potential risks for catastrophic losses associated with agricultural production were just so high. Therefore, creating the first federal crop insurance was their solution to provide aid. U.S. Department of Agriculture or USDA created a corporation named the Federal Crop Insurance Corporation or FCIC to carry out the federal crop insurance program of the country. And their main objectives are:

  1. To protect the income and harvest of the farmers against crop failure or decrease of price. 
  2. To protect consumers against food shortage and overpricing.
  3. To help business and employment by providing an even flow of farm supplies and making a stable farm buying power

Over time, the scope of federal crop insurance became broader. Here are the changes made over the years:

1980 – Providing subsidy for premiums was passed, a new variety of crops was added on the eligible crop list to insure, and other regions of the country were added as well. 

1988, 1989,1992, to 1993 – A lot of unexpected natural calamities happened that caused necessary disaster assistance bills. 

1994 – The Federal Crop Insurance Reform Act was passed. They increased the subsidies and made the coverage for certain benefits mandatory. 

1996 – The U. S.  Department of Agriculture created the Risk Management Agency ( RMA). Their goal is to have an agent who will operate and manage the Federal Crop Insurance Program. It is also the year when the requirement for mandatory enrollment was lifted. 

2008 – Permanent Disaster Assistance Program was created. The Food,  Conservation, and Energy Act of 2008 changed the legislation to lessen the overall cost. 

2014 – Agricultural Act 2014 made a major reform in commodity programs. They include additional crop insurance options. Programs for specialty crops, bioenergy, organic farmers, and rural development was expanded as well. This year was also where Supplemental Coverage Option (SCO) and the Stacked Income Protection Plan (STAX)  was introduced. These two new products were made to help producers to expand their protection against losses due to price declines and natural calamities.

2018 – The 2018 Farm Bill made huge improvements regarding product pricing. They use additional data from USDA, National Agricultural Statistics Service ( NASS),  and Farm Service Agency  (FSA).  Broader coverage options were given to specialty crops like industrial hemp. Also, the coverage was extended to include even the farms that are operating in multiple counties. Moreover, a Veteran Farmer or Rancher category was made to give additional benefits to veterans. The revisions also recognized the vital role of independent insurance companies in the farming industry.

2019 – President  Trump proposed revisions to the Federal Crop Insurance Program. To optimize crop insurance and farm subsidies by removing the subsidies to higher-income farmers. The revisions also include that the huge crop insurance premium subsidies that were given to farmers must be reduced. 

What is Multiple Peril Crop Insurance 

(MPCI) 

MPCI is the first and most common form of federal crop insurance. This policy must be purchased prior to planting, to ensure that the claims will be valid in case the farmer needs to make one. The Federal Crop Insurance Program offers Multiple peril insurance coverage. It is a public-private partnership between 15 private insurers that are approved by the US Department of Agriculture Risk Management Agency or USDA RMA to write the policies of MPCI. Their tasks include: 

  • Marketing
  • Adjusting claims
  • Reinsuring the policies
  •  Training
  • Processing claims
  • Keeping important records

 It is mandatory that private companies must sell insurance to all eligible farmers that need it.  Moreover, they must retain a large part of the risk up to 80%  of the written policy. RMA is the one who will decide whether what will be the premium rates for multiple peril insurance. They set the amount to be charged and determine the crops that can be insured within the United States. The federal government subsidizes as well the farmer-paid premiums; by this help from the government, the farmers can save a lot of money. Also, reimbursement is provided to the private insurance companies to offset administrative and operating costs for the premiums that should be paid by the farmers. Because of this method, crop insurance became affordable to farmers. With the financial support of the federal government, the help of the private sectors, and regulatory authority, the main goal of congress to have a unified and organized farm sector was met. 

What crops are covered by Multiple Peril Crop Insurance 

US Department of Agriculture Risk Management Agency or USDA RMA will determine whether what crops will be insured under the federal program in each county. They based it on the risk of losses and how high is the demand for coverage in every county. The cost of the insurance and the amount the insurer needs to pay for losses depends on the value of the crops. More than 90% of farmers who buy crop insurance choose Multiple Peril Crop Insurance. Roughly 120 different crops are available in MPCI, though not all crops are covered in every part of the U. S.

The crops that are commonly insured under the federal program also called as traditional crops are:

  • Corn
  • Wheat
  • Cotton
  • Soybeans

Crops that can be insured as well, but the chance to pass as insurable crops depend on their areas:

  • Pumpkin
  • Walnut
  • Dry peas 
  • Blueberry 

The specialty crops that are not insurable are:

  • Fresh and processed fruits
  • Herbs
  • Coffee
  • Spices 
  • Honey
  • Maple syrup 
  • Tea
  • Fresh and processed vegetables 
  • Nursery plants such as shrubs, flowering plants,  and trees.

Unlike traditional crops, specialty crops have not been a major part of federal crop insurance support. However, as legislative made changes over time, the federal crop insurance coverage for specialty crops have grown. Currently, 38 specialty crops are now covered by federal crop insurance. Roughly 80 types of vegetables, fruits, nursery crops, and tree nuts are now included on the federal crop insurance list. 

What is Crop-Hail Insurance 

Crop-hail insurance is not part of the Federal Crop Insurance Program. It is provided by private insurers directly to farmers. Unlike MPCI that must be purchased before planting the yields; crop-hail insurance can be purchase at any point in the growing process. However, its coverage is narrower compared to MPCI. The perils that are covered by crop-hail are hail, fire, wind, lightning, theft,  and vandalism. 

Farmers often purchase crop-hail coverage because hail has the ability to fully destroy crops. Especially in hail-prone areas, farmers prioritized to protect their high-yielding crops. Also, farmers who chose this type of insurance are those who fall below the federal coverage threshold or are not insured under the federal program but still want to protect their farms against losses. 

In most cases, hail accounts for almost 6% of all crop losses within a year as per the United States Department of Agriculture Risk Management Agency. Using this policy, the farmers just need to select a dollar amount of coverage at first, then they can choose different options for deductibles. By doing so, it will allow the farmers to partially self-insure their crops for a lower premium cost. Another feature of the crop-hail policy is the acre-by-acre coverage basis. This allows the farmer to just file a claim for the part of the farm that was damaged. That being the case, the claim will be eligible for payment even the rest of the field remains unaffected.

Who Needs Crop-Hail Insurance?

Farmers who live in hail-prone areas must purchase crop-hail insurance. Also, farmers who grow vulnerable crops such as wheat, soybeans, and corn should consider this option too. Some areas where hail is not that common can also choose this insurance since it is affordable and rated. 

What is a Yield-Based Policy? 

A yield-based policy helps the farmers who suffered a yield loss in relation to the farmer’s usual or historical yield. A historical yield can be measured over one year, two years, and even up to five years. It gives a reference for the current performance of the mutual fund. For example: Let’s say that the current yield is 5%, one can compare it to the yield percentage of the previous years. By that, it is easier to determine whether the current yield percentage is a good return on the mutual fund or not. 

The basic catastrophe coverage provides a payout in case there are losses that exceed 50% of the usual yield. Farmers will receive 55% of the current market price of the yields. And though the farmers are not being charged for premiums for the catastrophic coverage, still the farmers must pay an administrative fee. If the farmers want higher coverage, they can do so. But here is the catch, they will pay a portion of the premium and the rest will be shouldered by the government. 

What is a Revenue-Based Policy? 

The revenue-based policy is much preferred by most farmers. It is more flexible than a yield-based policy for it can cover a single crop or an entire farm. Farmers can choose a certain level of coverage between 50% – 75% of the yield’s total average.

What is Disaster Assistance?

The Non-insured Crop Disaster Assistance Program or NAP provides financial assistance to farmers of non-insurable crops. When farmers suffer losses due to low yields, inability to plant crops due to natural calamities, and loss of inventory, they can apply for crop disaster assistance.

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