Crop insurance: An essential part of risk management

With crop insurance, most producers understand selecting the insured protection (percentage) level and most producers select between 65 and 75 percent. When evaluating Revenue Protection policies, a confusing aspect of crop insurance may be whether to use an Optional Units or an Enterprise Units policy.

As with most risk management tools, crop insurance has so many alternatives it may be like being stranded in the middle of a mountainous forest on a cloudy day. It would be essential to have a guide who knows the forest, understands your abilities and needs, and is determined to make your trip worth the costs and effort. At a minimum, make the experience as painless as possible.

With crop insurance, most producers understand selecting the insured protection (percentage) level and most producers select between 65 and 75 percent. When evaluating Revenue Protection policies, a confusing aspect of crop insurance may be whether to use an Optional Units or an Enterprise Units policy.

With the Optional Units policy, loss payments are paid by section, field, and/or share, depending on the farm (we will refer to fields). A producer could have above-average revenue on four out of five fields and receive a loss payment for the one field that had revenue less than the purchased percentage level.

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With Enterprise Units coverage, a loss payment is paid only if the total revenue for all fields is less than the purchased percentage revenue coverage. A farmer could have above-average revenue on four out of five fields and may or may not receive a loss payment.

Crop insurance premiums are subsidized by the USDA. Minimum coverage is 50 percent and increases in five percent increments. For Optional Units, the subsidy factor decreases from 67 percent at the 50 percent level to 38 percent subsidy at the 85 percent level.

With Enterprise Units the subsidy is 80 percent for the 50 through 70 percent levels, is 77 percent at the 75 percent level, 68 percent at the 80 percent level, and 53 percent at the 85 percent level. Enterprise Units’ policy premiums are significantly less than Optional Units’ policy premiums.

The following example is a real farm in Kingfisher County, Oklahoma, and may represent many farms in Oklahoma and the Texas Panhandle. The guaranteed (insured) wheat price for the 2015 crop is $6.30. Because of lower premiums and higher subsidies for the Enterprise Units policy, the Enterprise Units protection level selected was 75 percent compared to 65 percent for Optional Units. The premium for the Option Units policy was $8.29 per acre and the premium for the Enterprise Units policy was $4.98 per acre.

The producer had four fields with an APH of 31, 35, 35, and 31 bushels per acre. Assume that 2015 actual production is 8, 26, 30 and 11 bushels per acre, respectively. Also assume that Kim Anderson’s projected June 2015 harvest price of $5.50 happens. The total farm size is 560 acres.

The payoff for the Revenue Protection Optional Units policy would be zero for the two of the fields, $77 per acre on one field, and $58 dollars for another. The total loss payment (560 acres) was $18,806. The premium was $4,838 and the net payment was $13,968. The average net payment was $24.94 per acre.

The payoff for the Revenue Protection Enterprise Units policy is based on combining all four fields into one farm. The farm’s APH was 32.86 bushels per acre. Actual production was 18.68 bushels per acre and the payoff was $37.58 per acre.

For the 560 acre farm with the Enterprise Units policy, the total loss was $21,042, the premium was $2,934 and the net payment was $18,108. This may be compared to the $13,968 net Optional Units’ payment. The average per acre payment was $32.34 per acre for the Enterprise Units policy compared to $24.94 for the Optional Units policy.

Producers may shy away from the Enterprise Units policy. They tend to like payment by field. With Enterprise Units’ lower premiums compared to the Option Units’ higher premiums, producers may be better off using the Enterprise Units policy with a relatively higher coverage level.

Two things to remember are: insurance is a risk management tool, not a revenue enhancement tool. Second, “put the calculator” to your farm and your numbers.

TABLES

 

Farm

APH

Acres

2015 Actual Yield

Loss Bu

Indemnity per Acre

Optional Unit Loss Payment

Home Place

31

80

8

12.15

$76.55

$6,124

Mom’s

35

100

26

-3.25

$0.00

$0

Step  Farm

35

160

30

-7.25

$0.00

$0

Lloyd Farm

31

220

11

9.15

$57.65

$12,682

         

TOTAL LOSS

$18,806

         

TOTAL PREMIUM

$4,838

         

NET

$13,968

 

 

 

Enterprise Units – Revenue Protection – 75% Level

Farm

APH

Acres

2015 Actual Yield

Loss Bu

Indemnity per Acre

Enterprise Unit Loss Payment

 Home Place

31

80

8

15.25

$96.08

$7,686.00

Mom’s

35

100

26

0.25

$1.58

$157.50

Step Farm

35

160

30

-3.75

($23.63)

($3,780.00)

Lloyd Farm

31

220

11

12.25

$77.18

$16,978.50

         

TOTAL LOSS

$21,042

         

TOTAL PREMIUM

$2,934

         

NET

$18,108

 

 

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