Crop Insurance Explained
Crop insurance is an important risk management tool that protects farmers and ranchers against unexpected yield or revenue losses due to changing weather or market conditions.
6 Minute ReadCrop insurance is an important risk management tool that protects farmers and ranchers against unexpected yield or revenue losses due to changing weather or market conditions.
Having the right coverage in place can mean the difference between a crop year focused on survival versus operational growth. That’s why it’s critical to stay up to date on the insurance options available and how they can protect your operation.
In this article, we explore the different types of crop insurance on the market, the difference between individual and area plans, and key takeaways for putting together a sound risk management plan.
In general, crop insurance is divided into two categories: federally subsidized Multi-Peril Crop Insurance (MPCI) and state-regulated Crop Hail insurance.
MPCI is the general name given to coverage provided through the Federal Crop Insurance Corporation (FCIC), the organization responsible for carrying out the federal crop insurance program.
While MPCI is federally supported and regulated, it is sold and serviced by private-sector crop insurance companies and agents. MPCI policies cover yield and revenue losses caused by natural events – such as drought, damaging winds or flooding – or declines in commodity prices.
In contrast, Crop Hail insurance is offered through the private market and regulated by state insurance departments, not the FCIC. As the name implies, Crop Hail insurance covers a much narrower variety of perils, including hail and fire, but many policyholders purchase Crop Hail coverage as a supplement to MPCI.
Because MPCI and Crop Hail insurance cover different types of losses, it’s not uncommon for farmers and ranchers to have both policies. However, unlike MPCI, Crop Hail insurance can be purchased at any point in the growing season.
A number of MPCI products exist today. Another way crop insurance is broadly classified is by whether an MPCI policy provides individual coverage or area-based coverage.
Individual crop insurance plans are based only on the insured’s production. In other words, indemnity payments are triggered in response to the individual policyholder’s loss experience.
Two examples of individual-based plans include Revenue Protection (RP) and Yield Protection (YP):
Revenue Protection
Revenue Protection (RP) safeguards against revenue losses caused by a decline in crop prices or yields. It guarantees a certain level of revenue based on projected prices and actual yields. In times of price volatility or yield uncertainty, RP provides financial stability.
Yield Protection
Yield Protection (YP) shields farmers from losses due to lower-than-expected crop yields. It offers compensation when a farmer's actual yield falls below the established guaranteed yield, ensuring they have the means to cover input costs and continue farming despite production setbacks.
Area-based coverage, on the other hand, insures against area or county-wide losses. Under an area plan, the insured chooses a percent of the expected county yield or revenue. If the actual county yield or revenue falls below the expected one, a loss occurs and indemnities are paid regardless of farm-specific production.
Two examples of area-based plans include Area Revenue Protection (ARP) and Area Yield Protection (AYP).
Area Revenue Protection
ARP works similarly to RP but focuses on county-level data. Instead of individual farm performance, ARP takes into account the overall revenue fluctuations within a designated area. An indemnity is paid if the county average per-acre revenue falls below the trigger level selected.
Area Yield Protection
AYP protects against widespread loss of yield in a county. It is similar to YP, but considers the average yield of crops across a specific region rather than individual farm performance. AYP pays an indemnity if the final county average yield falls below the trigger yield selected.
Selecting the most suitable plan requires accounting for how an individual’s yields compare with other area producers. If individual production tracks closely with county production, then an area-based plan could be an attractive option.
Before buying a crop insurance policy, it’s important to consider how the policy will work with an operation’s existing risk management strategies to ensure the best possible outcome.
A good place to start is knowing your cost of production and the profits you expect to see per acre. There are also several specialized products on the market worth considering as well as different types of MPCI coverage endorsements and options.
Here’s a quick review of some of the other risk management tools available and how they help safeguard farming and ranching operations.
Whole Farm Revenue Protection
Whole Farm Revenue Protection (WFRP) provides a risk management safety net for all commodities on the farm under one insurance policy. Rather than focusing on specific commodities, WFRP takes into account the entire farm's revenue, offering protection for both crops and livestock.
Pasture, Rangeland, Forage Insurance
Pasture, Rangeland, Forage (PRF) Insurance covers perennial forages and grazing land used to feed livestock. As an area-based insurance program, PRF protects against yield losses caused by low precipitation relative to a historic average on forage produced for grazing or harvesting hay.
Margin Protection
Margin Protection (MP) is an area-based product that provides coverage against an unexpected decrease in operating margin, or revenue minus input costs. It helps farmers shore up losses from reduced county yields, reduced commodity prices, increased prices of certain inputs or any combination of these perils.
Supplemental Coverage Option
Supplemental Coverage Option (SCO) is a risk management tool that works in conjunction with traditional crop insurance coverage. This option provides additional area-based coverage for a portion of the underlying policy. SCO will pay when the county experiences a yield or revenue loss regardless of whether the policy holder has a loss on their own acres.
Enhanced Coverage Option
Enhanced Coverage Option (ECO) is similar to SCO in that it provides area-based coverage for a portion of an underlying crop insurance policy. However, ECO provides coverage above the optional SCO coverage. ECO pays a loss on an area basis, and an indemnity is triggered when there is a decrease in the county-level yield or revenue.
Crop insurance decisions can feel complicated, but insurance agents and other specialists can assist you in choosing the right options and developing a sound risk management plan.
The cost of a policy will vary depending on the product, the number of acres covered as well as the selected coverage level. It’s a good idea to review your options annually and consult with your trusted agent or advisors to ensure you’re not leaving your operation exposed or any money on the table.
Whatever your risk management goals, you can get started with the right crop insurance coverage by completing the crop insurance inquiry form.
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Crop insurance is an important risk management tool that protects farmers and ranchers against unexpected yield or revenue losses due to changing weather or market conditions.
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