Crop Insurance Streamlined For 2011

Crop Insurance Streamlined For 2011

New rules for federal crop insurance have resulted in changes for 2011. The changes reduce the confusion and improve the coverage, explains Iowa State University Extension economist William Edwards.

The last several years USDA's Risk Management Agency or RMA and various private crop insurance companies have been negotiating a major overhaul of the basic policy that is used for most insurable crops. The new Common Crop Insurance Policy, called COMBO, goes into effect for crops insured in 2011.

The new policy simplifies and streamlines the number of crop insurance choices, a list which became longer and more confusing over the last 20 years. Covered crops include corn and soybeans, as well as several crops that are grown outside of Iowa. William Edwards, Iowa State University Extension economist, gives the following update on these changes and the choices farmers have for 2011.

There will now be one master policy, with several options

Instead of a different policy for each type of insurance, there will now be one master policy with several options:

Yield protection

Revenue protection

Revenue protection with Harvest Price Exclusion

First Option: Yield Protection is equivalent to the old Actual Production History policy. Yield Protection establishes a guarantee based on the APH yield. A major change from the old APH policy is that the indemnity price used to calculate the payment in the event of a loss is now the same as the price used for revenue insurance policies. Previously, RMA set the indemnity price using a projected price that tended to be less than the futures price average used for revenue policies.

For spring-planted crops beginning in 2011, the average closing futures price for each day during the month of February will be used. The corn price is based on the December Chicago Mercantile Exchange contract, while the November contract is used for soybeans. Farmers can choose to use 55% to 100% of this price for the indemnity price at which yield losses are paid. Naturally, choosing a higher price and higher levels of yield protection will result in a higher premium.

As the name "Yield Protection" implies, a yield loss must be incurred first before an indemnity payment is triggered. While premiums are much lower than the revenue products, the likelihood of collecting an indemnity payment is much less.

Catastrophic level yield coverage is still available for a cost of $300 per crop. The guarantee is 50% of the APH yield, and losses are paid at 55% of the indemnity price.

Second Option: Revenue Protection can also be chosen by a farmer. Revenue Protection is equivalent to the old Crop Revenue Coverage and the Revenue Assurance with the Harvest Price Option.

Revenue Protection guarantees the insured farmer a minimum number of dollars of gross revenue per acre. The yield used to set the guarantee is the same as the APH yield used for Yield Protection, and the price is the same as February futures price. The guarantee is the product of these two values, times the level of guarantee selected (from 65% to 85%).

If the average Chicago Board of Trade price for the relevant contracts during the month of October is higher than the February price, the guarantee is increased, based on the October price. The October price is also used to calculate the "actual" revenue. Approximately 85% of the insured corn and soybean acres in Iowa in 2010 were covered with this type of policy.

Third Option: Revenue Protection with Harvest Price Exclusion is a third choice you have. It is equivalent to the former basic Revenue Assurance policy. With this option, the guarantee does not increase even if the October price is higher than the February price. Consequently, premiums will be lower for RPE than RP.

The accompanying table summarizes the old and new terminology. Current policies will automatically be converted to the corresponding policy options for 2011 unless the farmer requests a change.

Table 1. Old and new crop insurance policy options

Old policy option                                  New policy option
———————————————————————————————————————————
Actual Production History (APH)            Yield Protection (YP)
———————————————————————————————————————————
Crop Revenue Coverage (CRC)            Revenue Protection (RP)
Revenue Assurance with Harvest         
Price Option (RA-HPO)
———————————————————————————————————————————-
Revenue Assurance (RA)                      Revenue Protection with
                                                           Harvest Price Exclusion (RPE)
Income Protection (IP)
———————————————————————————————————————————-

Previously, CRC and RA used different procedures for computing premiums each year. In some years, RA-HPO was cheaper than CRC, and in other years, CRC was cheaper, despite the fact that they offered essentially the same coverage. Under the new Common Crop Insurance Policy, only one set of premiums will be offered.

Group risk policies are still available—three options for these

Three insurance options based on county yields instead of individual farm yields are still available—Group Risk Plan, Group Revenue Insurance Plan and Group Revenue Insurance Plan with Harvest Price Option (GRIP-HPO). Group risk policies have not been widely used in Iowa.

Should you opt for enterprise units or whole farm coverage?

Two years ago, USDA's Risk Management Agency or RMA increased the level of premium subsidies for policies specifying enterprise and whole farm units. Many producers elected to shift to enterprise units and bought a higher level of guarantee for essentially the same cost as for a lower guarantee. These premium subsidies will be continued under the new common policy.

Whole farm units are also available for Revenue Protection (but not Yield Protection), in which all insurable crops in a county are combined into one coverage unit. Eighty percent of the premium for whole farm unit policies is paid by RMA. However, combining corn and soybean fields together as one unit could result in loss for one crop and still not trigger an indemnity payment.

Combining more acres and farm units into a single policy reduces the probability of collecting at least a small payment each year. However, when an indemnity payment is triggered, it will likely be a larger payment. Moreover, the biggest risk in recent years has come on the price side rather than the yield side, and price declines have the same effect on enterprise and whole farm coverage as they do on basic or optional units.

Nevertheless, farmers who opt for enterprise or whole farm coverage may want to consider purchasing add-on coverage to take care of localized weather events such as hail.

For more information: go to the ISU Ag Decision Maker site www.extension.iastate.edu/agdm and click on the Ag Decision Maker newsletter article titled "The New Common Crop Insurance Policy." Another helpful source of information is the USDA Risk Management Agency's site www.rma.usda.gov/help/faq/combo.html and read "Common Crop Insurance Policy: Frequently Asked Questions."

TAGS: USDA Extension
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