The federal crop insurance or multi-peril crop insurance is coverage for farmers and is paid by the U.S. federal government. It is also marketed and serviced by private insurers and agents. Federal crop insurance provides different kinds of insurance policies that protect you from loss of crop value due to extremely hot weather, drought, excessive moisture, flood, wildlife damage, earthquake, insects, and plant diseases. This also protects a farmer against income losses when a certain insured crop does not meet a specific production standard. The Risk Management Agency of the U.S. Department of Agriculture manages the federal crop insurance program. They also arrange policies for more than 100 major crops of the country. However, some of these insurances may not be available in selected areas. If they are not covered, farmers are offered by the Non-insured Crop Disaster Assistance Program.
When a farmer buys multiple peril crop insurance, they have several coverage options. One is a catastrophe policy which is the lowest among the options of protection laid out. The federal government pays the whole cost of catastrophe coverage. While the farmers will pay only an administrative fee. They can also pay for additional insurance called “private supplemental” to acquire higher and enough coverage. Under this buy-up program, the U.S. federal government pays a part of the premium. Some farmers may be allowed for a peril coverage called “group risk” crop insurance that may be cheaper than others. This is different from the basic coverage since the yield guarantees are formed on the county average yield. Farmers who are insured immediately receive their insurance payment in any year that the county average yield decreases.
Furthermore, multiple peril crop insurance policies are an agreement between the insured and the insurer to insure a specific farm product. The insurance policy contains the accepted application, basic provisions, crop provisions, special provisions, and other policy endorsements. The documents will also include the plan of insurance, type, variety, and the practice that may be insured in a certain place. They will also give you information on the available insurance options, level of coverage, price elections, applicable premium rates, and subsidy amounts. The special provisions will also let you know the calendar dates and may include general statements that will modify your coverage.
A Public-private Partnership
It is the U.S. Department of Agriculture that manages the multiple peril crop insurance through a public-private partnership. This means that the U.S. federal government pays for the premiums. However, it is the private companies’ role to write all the multiple peril crop insurance policies. You may find a list of providers at the United States Department of Agriculture’s website: www.usda.gov. The federal government requires and allows these insurance providers to sell multiple peril crop insurance policies to any qualified farmer who asks and requests for it. Meanwhile, the United States Department of Agriculture Risk Management Agency sets all the rates and decides what crops will be insured in which regions of the country.
The Risk Management Agency computes the amount of multiple peril crop insurance coverages based on the actual production history for each of the producer’s farms. Actual production history numbers are from farmer production records from the past four up to the past 10 continuous crop years. Coverage levels are usually from 50% to 75% of the actual production history of the farm. The U.S. Department of Agriculture Risk Management Agency allows 85% coverage for specific crops in select counties.
A multiple peril crop insurance policies will also ask you for an election of an indemnity price which can range from 60% to 100% of the expected market price of the Federal Crop Insurance Corporation. Your insurance is paid when your yield falls short than that of a calculated yield guarantee. This is computed by actual production history times the insured acreage times the level of coverage times the farmer’s elected to share.
Of course, having a higher indemnity price will also bring in higher indemnity payments and costly premiums. But good news, if you have low yields in case of loss, the compensation will be greater.
The History of the Federal Crop Insurance Program
At the height of the Great Depression in 1933, the U.S. Congress passed major legislation called the Agricultural Adjustment Act. The goal of this certain act is to protect the family farm. This aimed to raise prices for agricultural products and with subsidies to keep acreage unplanted by limiting domestic production. The federal government also wanted to bring back their farmers’ standard of living to pre-World War I levels. After five years in 1938, the U.S. Supreme Court had overseen that the law was unconstitutional and new legislation with the same goals was passed. This gave the Secretary of Agriculture to settle acreage and marketing quotas for most important and export crops and also pay cash subsidies for crops that conserve soil. However, it was only in the 1990s that Congress began taking the safety of their farmers seriously since the programs were only created to protect only a small part of the agricultural production.
It was also in 1938 that Congress approved the Federal Crop Insurance Act and thus created the first federal crop insurance program. Lawmakers with the help of the resources of the U.S. Treasury Department expected that the federal program would bring lesser problems that had blocked the appearance of the private multi-risk insurance industry. However, it was afflicted with expensive prices, many farmers did not participate and the program was unable to produce enough funds to pay for catastrophic losses. As the government spending increased under these programs, farmers lost their interest to buy crop insurance and also the program remained limited in scope for several years.
Come 1980, Congress decided to make the crop insurance the leading program to help farmers survive major disasters since they were not satisfied with the program. Their goal is to increase the participation of farmers in the program until disaster assistance programs of the government could no longer be done. Another goal is to increase the level of competence by cooperating with private sectors to sell. The government also carries some of the risks of providing coverage and creating an effective program that would lessen federal expenses while maintaining coverage cheap through their subsidies.
The private sector played as the main marketers and reinsured companies. The main marketers were insurers that were paid by the U.S. federal government to sell crop insurance policies. However, they were not responsible for the policies they offered. This program was stopped in 1994.
Differences Between Crop-hail and Multiple Peril Insurance
Crop-hail and multiple peril insurance have several differences. First, multiple peril insurance lets you choose coverage levels by “unit” which is the whole acreage of the crop planted in the county. While crop-hail is by acre. Farmers can also choose coverage by “sections” or “one square mile” or by irrigated land. Furthermore, the amount of the loss or the reduced yield is taken out over all the fields in the unit. For crop-hail insurance, the loss is taken over the affected acre or the insured acres.
Second, multiple peril coverage must be bought before the deadlines set by the U.S. federal government. The dates vary in each county and each crop and are set in the season when farmers already start to plant. The insurance coverage will take place once the crops are already planted. However, the crops must already be planted before the last set planting date. Farmers will not be able to add coverage during the growing season.
Lastly, multiple peril coverage has a deductible up to 100% of the expected market price but not 100% of yield. Meanwhile, crop-hail coverage only has coverage from the first amount of loss even though deductibles are also given.
Why Crop Insurance is Important
- Economic Security – Of course, all people want healthy and fresh food placed on their tables every day. The country’s farmers do not fail to provide that for you, your family, and people all over the world. Crop insurance helps farmers to increase their crop yields, improve efficiencies, and still can compete with their products in world markets. This is important to the country’s economy.
- American-made materials – Aside from growing food, farmers also grow fiber for your blankets, sweaters, wedding gowns and the farmers are also responsible for giving feed for livestock that also provides raw materials for other important products.
- Assurance through insurance – The crop insurance program set out $7 billion to producers who bought insurance in the whole country. This insurance protects against perils such as frost, drought, flooding, and hail. The financial security of each farmer could be in danger if they experienced calamities and they are not insured at the same time.
- Ensuring affordability – American citizens depend on the goods produced by the farmers and ranchers every day. Farmers then depend on crop insurance as an important business instrument in today’s time. Also, crop insurance makes farmers financially stable and can avoid further harm if a disaster strikes. If there is affordable crop insurance, farmers can continue to provide cheaper food for American citizens and the world.
Standard Reinsurance Agreement
The federal crop insurance or multiple peril insurances is a special program by the U.S. government. One good thing about it is the Standard Reinsurance Agreement. This certain agreement states the risk that the private insurance companies and the federal government will bear. These risk pools are the commercial, developmental, and assigned risk funds. The amount of risk the insurer will get will vary according to the pool and state. Policies covering acreage in places that have low yield will be located in the assigned risk fund where the federal government will take most of the risk. As for the risk of low yields will also be lowest in the commercial pool. Farmers may also reinsure a part of their business in the private reinsurance market. Second, the agreement will also pay you back the administrative and operating costs. This started in 2011 and the federal government pays on a per-policy basis, not on the percentage of premiums to lessen the possible influence of fluctuations in the prices of commodities.
Unfortunately, crop insurers have less income than other insurers of other industries since they receive payment for the coverage after it has been given rather than being paid in advance. For instance, premiums are not given until the end of the insurance period and they are not paid on claims that have not been reported. The premium is subtracted from the money that was owed and the administrative costs are not given back until the actual acreage planted was relayed. This takes about five months after the insurance sales closing date. In addition, the price of premiums changes since they are connected to the market value of the crop and the planted acreage.
In order to balance the budget of the federal government, the Federal Crop Insurance Act of 1994 was passed. This also happened since all the agricultural programs were badly criticized. The government hoped to lessen their expenses so they made changes in the program. Congress combined crop insurance and disaster assistance which then reformed the safety net of the agricultural community.
The government’s lawmakers handled multiple approaches towards making the program. First and foremost, farmers would need some economic security if disaster payments are not given. The legislation decided to make a supply of free catastrophic coverage. This is insurance against catastrophic losses. All farmers of insurable crops would be able to buy this insurance for a minimal processing fee. The crops that are not covered by this program would be considered for a special disaster assistance program that will give them payments for area-wide losses. The kind of payment would be the same as that of catastrophic insurance.
Second, the federal government would then also pay for the premium for additional insurance coverage as an added incentive for farmers. This is done so that the farmers could invest in an all-inclusive multiple peril crop insurance programs.
Third, the emergency designation status for crop loss legislation which resulted in unnecessary borrowing to pay for disaster relief would be canceled. Disaster assistance would now be part of the budget and would not be allowed without a cut in spending for other programs.
Fourth, in order to improve service and program coordination, all farm programs including crop insurance will now be handled by one agency. The Federal Crop Insurance Program manages the crop insurance program. They are the people responsible for the insurance policy terms and conditions. They also set the rates and generate the payment of claims through their Risk Management Agency except for the non-insured crop disaster assistance program which is handled by the Farm Service Agency. Meanwhile, the role of the private sector is the sale and servicing of insurance policies.
The subsidy program called “The New Deal Price Support Program” made the farmers sell their crops to the federal government for a fixed price. This saved them since the market prices decreased below the target price. Now that the program ended, we need a new program. The 1996 Agricultural Market Transition Act was the answer and it addressed the need for income protection which is the product of yield and price. Some changes in the bill came up with various starting programs that answered to increasing and decreasing price levels and also the yield variability using the Chicago Board of Trade commodity prices.
The Agricultural Risk Protection Act was approved by Congress in 2000. Due to this law, the farmers were able to purchase different kinds of multiple-peril insurance including revenue insurance thus increasing government subsidies.
Expenses for farm safety-net programs including non-commodity specific spending from 1996 to 2017 were about $16 billion per year, $8.6 billion for commodity programs, 2.5 billion for disaster assistance, and $4.9 billion for crop insurance.
Crop insurance has successfully become the biggest only source of financial protection for farmers. The program insured about 182.2 million acres in 1997 and has reached up to 280 million acres in 2012. Furthermore, the farmers planted about 240 million acres of four major crops such as corn, soybeans, wheat, and cotton in 2018. Crop insurance coverage for these four crops reached up to 208 million acres also in 2018. That is 87% of planted crops. This is great news since only about one-third of farmers bought federal multiple peril crop insurance in 1995. They only relied on the disaster assistance and emergency loans given by the federal government.
With the help of changes in the law in 1995, it became evident that granting disaster aid is not needed anymore. The federal government also encouraged farmers to purchase insurance against loss of income due to natural disasters, making different kinds of products like income protection in order for farmers to purchase the insurance. The government also paid for a part of the basic coverage that gives you protection against loss of yield. These efforts resulted in more than 90% of insurers choosing more than just the basic coverage.
The U.S. Department of Agriculture is making a program to help small and underserviced farmers to better understand crop insurance and other tools they would need when disasters strike. They are trying to lessen the cost of federal subsidies to farmers which also includes ending direct payments to farmers despite crop yields since some of the savings could be used for the betterment of the crop insurance program. The subsidy increased in 2000 to motivate farmers to purchase insurance instead of relying on the disaster payment. The Crop Insurance Subsidy Reduction Act could save $40.1 billion worth of taxes over 10 years according to the Congressional Budget Office. However, if the subsidy reduction lessens crop insurance purchases, the U.S. Congress would again be making disaster emergency payments.
Expected Market Price
The expected market price is the price per unit of production that is expected when the crop is already started to be insured and is now being sold by the producers. This is set by the federal crop insurance corporation just before the sales closing date for a certain crop. Furthermore, this may be less than the actual price which the buyers pay if the price includes adjustments for huge amounts of post-production costs like conditioning, culling, sorting, packing, etc. The farmers make a price election of 55% to 100% of the proposed market price.
The actual production history yield is used to know the production guarantee by totaling the yearly actual, assigned, adjusted, or unadjusted transitional yields and by dividing the sum by the number of yields in the data given which would result in four yields. This is computed and approved by the insurance companies. Transitional yields will be used to complete the 4-year database if farmers only produce less than 4 years of actual yields. The database can include a total of 10 consecutive crop years of actual or assigned yields. Yield adjustments that are under the basic provisions may be used when the approved yield is computed.
The production guarantee per acre is the approved yield per acre multiplied by the coverage selected by the insurer.
If you maintain acceptable and good records, your insurance premium can decrease as approved yield increases.
Acceptable records include:
- Scale tickets
- CCC loan documents
- Summary sheets
- Livestock feeding records
- Farm management records
- Gin receipts
What Is a Unit?
A unit is an acreage that decides the guarantee, premium, and the amount of any indemnity for that certain acreage. A basic unit can be an insurable acreage of an insured crop in a certain county on the date the insurance coverage starts for the crop year. It is also an acreage that has 100% crop share or possessed by one entity and used by another farmer on a share basis. The farmers have 100% crop share if the land is rented for cash, fixed commodity payment, or any consideration other than a crop share.
For instance, if a producer who farms his own property and has land rented from five people, three are on a crop share basis and two are on a cash basis. The farmer has four basic units, one for three crop share leases and another one for two cash leases and the property he owns.
A basic unit has optional units under certain circumstances. Optional units are decided by section, section equivalents, FSA Farm Serial Number, non-continuous land for certain lasting crops, irrigated and non-irrigated practices. When your insurance policy allows you, optional units may be added if the crop produced is noticeable in the planting pattern at the boundaries of possible optional units. The farmers should also have separate records of the planted acreage and harvested crops for each optional unit. However, optional units cannot be acquired for crops insured under catastrophic insurance.
In most cases, a 10% discount on the premium will be allowed when a basic unit is not separated into optional units. If there is a lower premium, there is also a diverse way of keeping everything in the basic unit. This will lessen the possibility of the farmers collecting on the policy.
What Counts as Production?
All harvested and appraised goods for the unit count are considered as production. Appraised production is a production that was lost against uninsured causes and mature unharvested production. Mature unharvested production may have resulted from quality deficiencies and excess moisture.
A replanting payment can be done on an insured crop replanted if the insurance company and the crop provisions allow it. The replanted acreage must reach not more than 20 acres or 20% of the insured planted acreage for the unit. This is decided on the last planting date or within the late planting period.
Prevented planting payment is given if the insured crop was not planted with the right equipment within the late planting period. This happens when the farmers have been prevented from planting the insured crops due to a covered condition that was common in the area. This may have also happened to other producers. The documents may include other levels of prevented planting coverage that you may buy for the insured crop.
Hail and fire coverage
This hail and fire coverage can be omitted from the covered causes of loss if the farmer opted for coverage of not less than 65% of the approved yield and 100% of the price election. This can also be excluded if the producer bought the same or a higher dollar amount of coverage for hail and fire from other insurance companies. However, farmers and producers cannot drop this coverage if the minimum catastrophic risk protection is bought.
If late planting is indicated in the crop provisions, crops that are planted after the final planting date can still be covered by your crop insurance. The yield guarantee is reduced by 1% per day for each day planted after the final planting date. This is for crops planted after the final planting date.
Multiple peril crop insurance is a constant policy that takes effect for each crop year starting from the acceptance of the application. The insurers can cancel the policy on a crop, a county, or for a distinguished crop year in one county after the first crop year. You may have to submit a written notice to your insurance company on or before the cancellation date as stated in the crop provisions. Furthermore, a producer must request policy changes on or before the sales closing date for a change of price election.
If you want to have additional maximum eligible prevented planting acreage above limitations stated in your crop policy, then this should be done by the sales closing date for that certain crop. Other contract changes such as successor-in-interest application or corrections of a producer’s name, address, identification number, administrator, and other information may be allowed to change any time.
Report of Acreage
The insurers are responsible to document and report the number of insurable and uninsurable acres planted or prevented from being planted. The planting date, share in the crop, the acreage location, farming practices used and kinds or varieties planted by a unit for each insured crop in the county should all be stated in the acreage report. Furthermore, this report should be signed and submitted by the producer on or before the acreage reporting date stated in the special provisions for the county and for the insured crop.
Notice of Damage or Loss
If damage or loss happens, a written notice for each unit should be submitted by the producer within 72 hours of the initial discovery but not later than 15 days after the date for the end of the insurance period. If you report the said damage or loss within this time frame, the insurance company has the chance to inspect the crop and decide the extent of damage or potential production before the crop is harvested or disposed of.
The yearly premium amount is decided by multiplying the production guarantee per acre times the price election, times the premium rate, times the insured acreage, times the crop share at the time coverage begins, and times any premium adjustment percentages that are applicable. The adjustment percentage for the premium is used to lessen the actual premium cost by the subsidy of the federal government.
Summary of APH Plan Features
- Insures your assets
- Guarantees income in the event of a crop loss
- Government subsidizes premium
- Uses your own farm yield history to establish guarantees
- Loan collateral improves borrowing power
- Has provisions for prevented planting and late planting
- Protects your investments
- Preserves your savings Invests in the future of your farm
- Protects cash flow
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