Crop Insurance Basics: Actual Production History

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One of crop insurance’s defining attributes is its self-correcting nature.

That is, farmers who exhibit more risk pay more than those who exhibit less – much in the same way that car insurers reward safe drivers.

This is done by collecting and analyzing a producer’s Actual Production History (APH), which takes into account a grower’s actual yields over a period of time. It also compares performance to other farms within the county and surrounding communities.

Growers with a higher APH are able to get lower insurance premiums, saving both themselves and taxpayers money.

In this way, the APH formula serves to reward farmers for adopting new technologies and techniques that enhance efficiency and productivity.

For example, some agronomists, conservationists, and policymakers are currently promoting conservation practices – e.g., reduced till and cover cropping – explaining that these practices not only help the environment but can boost a farm’s bottom line.

When these conservation practices show dividends through higher-than-average yields, then the producer will be financially rewarded for adoption through cheaper insurance premiums.

This structure is one reason why a new peer-reviewed study in the renowned Journal of Environmental Management recently credited crop insurance with encouraging the adoption of conservation practices.

Conversely, higher premiums under the APH system act as a deterrent to farmers taking on more risk – for example, by not adopting the latest tools and techniques like their neighbors, planting the wrong crop for the geographic region, or farming on marginal land.

Such deterrents are of particular importance as farmers and ranchers must optimize efficiency to deal with extreme weather and the effects of climate change.

With a clear APH history record, farmers can more accurately select insurance policies that help them manage their unique risks and benchmark their performance.

The APH system provides growers with a clear incentive to constantly improve.

Crop Insurance Basics: Available to All

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In the everyday insurance world, coverage may sometimes be hard to come by.

That can be true if you’ve had a disaster – such as a fire in your home – or live in an area at high risk for disaster. Car insurance coverage may be more expensive or even denied if you are a very young or very old driver, even if you’ve never had to file a claim.

Crop insurance is different.

Under the crop insurance system that has become the centerpiece of America’s farm policy, private-sector insurance providers must offer insurance to growers who are eligible for coverage and want it – regardless of a farm’s size, location, or cropping choice.

Additionally, crop insurers don’t have control over premium setting. A farmers’ rates are calculated and published by the USDA and, unlike other lines of insurance coverage, prices will not fluctuate between insurance providers.

Crop insurers compete on customer service, not price. And they cannot choose to simply do business with well-established farmers from areas that have a history of lower risk crops.

In fact, the crop insurance system must always look for ways to cover more and more farmers. Such inclusivity is a shared responsibility of the public and private sectors, which have partnered to bring additional public and privately augmented insurance options to the marketplace and keep pace with a constantly evolving agricultural sector.

While crop insurance was originally only available to major crops – such as corn, cotton, and wheat – it now offers coverage on 130 different crops, including most fruits and vegetables. Today, more than 1 million insurance policies provide $100 billion in protection to nearly 400 million acres – including about 90 percent of U.S. crop acreage.

And more policies and options are regularly being added through the USDA’s program to encourage new product development, where insurers work along-side farm leaders and researchers to create new and unique policies for everything from alfalfa seed to all-encompassing whole farm revenue protection.

Furthermore, this partnership teams up to deliver in-depth training services across the country for small and socially disadvantaged farmers to strengthen and broaden their familiarity with the inner workings of business planning and risk management strategies.

It’s a system that has married the best of the private sector with the best of government, and the result has been the most effective, popular farm safety net in the history of agriculture.

Agricultural Coalition Sends Letters Urging Federal Leaders to Protect Crop Insurance

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With a new Administration taking control in Washington, D.C., and many new members joining Congress, it’s more important than ever to remind elected leaders the crucial role crop insurance plays in protecting farmers, ranchers, and rural communities.

That’s why a group of 58 farming, banking, and conservation organizations sent letters last week to House and Senate budget and appropriations committees, as well as to Secretary of Agriculture Tom Vilsack and leaders at the Office of Management and Budget, asking them to protect crop insurance and avoid any harmful budgetary reductions.

The letters, which arrived in the respective chambers just as leaders turn to the FY2022 budget, highlight the fact that the past several years have been incredibly challenging for farmers and ranchers because of drastic weather extremes, the disruption of international markets, the COVID-19 pandemic and numerous other unforeseen challenges.

“Even in good years, farmers need access to a strong and secure Federal crop insurance program,” the letter states. “The strength and predictability of the program is only more critical given uncertainty that characterizes the production agriculture sector. USDA and Congress have taken extraordinary ad hoc measures over the past three years to ensure the financial security of rural America.

“It would only serve to undercut these efforts to propose harmful changes to a crop insurance program that provides predictable, within-budget assistance to farmers in a way that helps lenders continue to support America’s farmers and ranchers. It is the certainty of the crop insurance program that provides critical reassurance to lenders.”

The letters, which were signed by groups ranging from the American Farm Bureau Federation to the National Association of State Departments of Agriculture to the National Farmers Union, close by asking lawmakers to continue supporting farmers’ most important risk management tool.

Crop Insurance Basics: Good Farming Practices

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Suppose you’re a homeowner who intentionally neglects your property, refusing to make basic repairs and even creating unsafe conditions like exposed wires or leaky pipes. Now suppose your house, not surprisingly, is damaged from a resulting fire or flood.

Are you entitled to a full homeowner’s insurance payout?

Of course not. A homeowner’s policy has exclusions and conditions to ensure the homeowner acts responsibly and is not neglectful. Otherwise, fraud could become more commonplace and responsible homeowners would wind up paying more in premiums to offset others’ losses.

Crop insurance is no different and requires responsible stewardship. A farmer who starves a crop of nutrients and water, plants late, or farms in a manner that jeopardizes the insured property would be ineligible for indemnities when the crop fails.

Fortunately, America’s farmers are the most efficient and productive in the world. They are honest and determined to take care of the land that takes care of them. And they do the job right.

Doing the job right in agriculture is officially known as Good Farming Practices, which are defined by the USDA’s Risk Management Agency and required as a condition of insurance.

Good Farming Practices, or GFPs, are constantly evolving to keep pace with new technologies and changes in the market, weather, and land management. These practices are rooted in science and data and are based on regional research. In other words, GFPs must be proven to work.

GFPs are the production methods that farmers follow to cultivate a crop and allow it to make normal progress to maturity, ranging from the timing of planting and harvest to using the best crop rotations, crop inputs, and farming techniques in the area.

Farmers follow GFPs when they choose the right variety of seeds to grow a good crop with high yield potential and a good market price. GFPs also include properly preparing the field, irrigating, fertilizing, and weeding during the growth period. Finally, GFPs mean collecting the mature crop from the field with harvesting methods that maximize output and minimize damage.

GFPs help ensure that production methods do not adversely affect the quantity or quality of production, and to keep up with the latest science and technology, they continually are monitored and improved. Local researchers, agronomists, and USDA extension agents are the keys to helping farmers keep pace with the latest and greatest in their area.

The GFP known as no-till is a great example.

The technique – which leaves crop residue in the field after harvest and a new crop planted using a drill or planter instead of first tilling the ground – is used on more than 65 million acres of farmland today. But it was rarely used until the late 1980s because farmers had long believed that tilling improved yields.

As more and more research showed the production and environmental benefits of no-till, including carbon sequestration and soil health, farmers were encouraged to change the way they farmed.

No-till is just one example. Other environmentally beneficial GFPs that have been adopted by agriculture and embraced by crop insurance in recent years include recognition of new drought-resistant seed varieties, more efficient irrigation systems, buffer strips, cover crops, and precision agricultural technology and equipment.

The flexibility within the insurance system helps expand the list of GFPs as farmers look to new proven technologies and techniques to tackle climate change, improve conservation practices, land management, soil health, water conservation, and any challenge tomorrow brings.

Crop Insurance Basics: Cost Sharing

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Federal crop insurance is arguably the first farm policy in history that is financed, in part, by the farmers who benefit from it. Unlike farm policies of the past, which were 100 percent backed by taxpayers, modern-day farm policy requires growers to take an active role in sharing the financial costs of protecting America’s crops and livestock for a vibrant food supply.

The concept may be new to farm policy, but it’s not new to insurance. From the earliest shipping insurance at Lloyds of London in the late 1600s to the modern auto policy acquired instantly via a smartphone app, the principle is the same.

A customer pays a premium to an insurance company based on the value of property and predicted risks to insure its worth. If the property is damaged, the customer absorbs a portion of the loss, called a deductible, and the insurance company covers the remainder through an indemnity payment.

The deductible acts as a deterrent to risky behavior and keeps the insurance policy intact for true disasters. Meanwhile, premium dollars paid by customers fund the system that provides peace of mind.

The larger the pool of customers, the more risk can be spread, and the less expensive coverage becomes for all. The same applies to crop insurance, which is why arbitrarily excluding some farmers from participation or adjusting premiums without research-backed justification is not only a bad idea, but economically and actuarially unsound.

Today, famers collectively pay between $3.5 billion and $4 billion a year out of their own pockets in crop insurance premiums. And they absorb hefty deductibles (on average, 25 percent of loss) when disaster hits. In other words, they have a financial stake in the system, which ensures farmers are avoiding unnecessary risk and incentivized to embrace new technologies and techniques that drive efficiency and mitigate losses.

Famers utilize crop insurance because it offers predictability for marketing and for borrowing capital, and because it gives them the opportunity to tailor protection to their farms’ unique needs. Taxpayers reap the benefits, too.

That’s because in addition to farmers helping to offset costs, private-sector insurers are also investing dollars into the system. Crop insurance companies, for example, invest millions in new technologies, training, research, data collection, analytics, and customer service to keep things running smoothly.

And when Mother Nature strikes, companies often dig into their own reserves to keep farmers whole. For example, insurers experienced a $1.3 billion underwriting loss during the 2012 drought because indemnities paid outstripped premiums received.

Put simply, farmers, insurers, and the government must work together to fund crop insurance and ensure it can meet the challenges of tomorrow – from climate change to volatile markets.

Crop Insurance Basics: Actuarially Sound

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Unless you’re an economist, an insurance guru, or a pension fund manager, chances are good you’re not overly familiar with the term actuarial soundness.

In short, it’s a fancy way of saying “the math must work.”

For example, an actuarially sound pension fund will have enough money in the bank to meet future obligations. If not, and investments made by the fund are overly risky or too conservative – or expenses run amuck – then a whole slew of retirees could be left in the cold.

Federal crop insurance, by law, must be actuarially sound. This ensures that the amount of money in the system is sufficient to meet the costs of paying claims when disaster strikes – and to establish a small reserve for possible extreme losses in the future. To achieve this goal, premium rates are adjusted regularly to reflect current market and crop conditions – a process that requires constant number crunching and research.

This kind of diligence and regular adjustment becomes especially important for those areas where the weather is turning more and more extreme amid climate change. And on the flip side, adjustments can be made to reflect changing conditions that may indicate less risk.

By being actuarially sound, the crop insurance system has a loss ratio performance mandate of “not greater than 1.0” – meaning that over time, indemnity payments paid out to farmers should equal the total premiums invested into the system.

Actuarial soundness has helped the program survive extreme events like the devastating drought in 2012, the worst disaster to hit agriculture since the Dust Bowl. But the system was managed prudently in the preceding years meaning that insurers had reserves to help pay $17 billion in indemnities and keep rural America afloat. The same could be said for the flooding and string of hurricanes seen in recent years.

Things could have turned out much differently had crop insurance not been actuarially sound and historical premiums not been sufficient to cover long-term losses.

That’s why crop insurers invest in actuarial professionals, data collection and analytics. It’s also why decisions made by policymakers carry such huge ramifications for farmers’ most important risk management tool.

Lawmakers must guard against creating new policies that reduce premium rates below future anticipated indemnities, increase risk within the system, or negatively affect the coverage that can be offered. Such policies will likely upset the fine-tuned balance that defines the crop insurance system and makes it affordable, widely available, and economically viable.

In other words, the math must work.

Crop Insurance Protected U.S. Farmers, Rural Communities as Weather, Health, Political Challenges Rocked the Nation in 2020

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U.S. crop insurance policies protected the country’s farmers and ranchers and ensured rural communities stayed strong in the face of the COVID-19 pandemic, tornadoes, hurricanes, and political unrest. In all, those policies protected 398 million acres of land in 2020.

In her opening remarks at the crop insurance industry’s annual meeting, Kendall Jones, chair of the National Crop Insurance Services (NCIS) and president and CEO of ProAg, told the group that 2020 had been a challenging year for our country. But crop insurers rose to the challenge and provided stability to rural communities.

“We are in the crisis business,” Jones said. “So, it is not surprising that we performed extremely well over the last year, helping America’s farmers and ranchers mitigate their risks, continue their essential work, and keep the world fed.

“From floods and wildfires to hurricanes and even ‘The Derecho,’” she continued, “we were there to help our customers pick up the pieces in an unprecedented time of hardships created by lost crops, lost customers, and lost markets in the U.S. and overseas.”

To date, the crop insurance industry has delivered $7.4 billion in indemnities to help farmers rebuild. This includes a brand-new insurance product that is tailored to hurricane protection – a product that was triggered by eight separate weather events during last year’s unprecedented string of hurricanes.

“Our industry works with our government partners and leverages the efficiency of the private sector to make sure farmers and ranchers get payments on time,” Jones said. “This keeps agriculture growing after disaster strikes and quickly stabilizes rural economies.”

During the annual meeting, which was held virtually this year, Jones told attendees that agriculture has the unique power to unite lawmakers on both sides of the aisle.

“Elected officials on the right of the political spectrum often emphasize the importance of vibrant rural businesses, reducing risk, keeping taxpayer costs low and expanding the economy,” Jones said. “On the left, lawmakers also tout a healthy economy and place an emphasis on sound science, sustainability, and giving those in need a helping hand. That sounds just like crop insurance to me.”

Jones concluded by taking time to applaud many of the behind-the-scenes industry initiatives that often go unrecognized.

This includes collecting and analyzing mountains of data and conducting new research to continually improve operations and customer service. She also highlighted industry investments over the past decade to provide free business training to socially disadvantaged farmers and award scholarships to minority students attending 1890 Land Grant Universities.

New Study Highlights Crop Insurance’s Role in Maintaining Healthy Soil

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Crop insurance is not acting as a barrier to the adoption of conservation practices and has a role in helping farmers maintain healthy soil. That’s according to a new peer-reviewed study in the renowned Journal of Environmental Management.

During the study, researchers from Purdue University, Arizona State University, and the Nature Conservancy used interviews and a multi-state survey to determine if crop insurance requirements limited cover crops and conservation tillage for corn producers in the Midwest.

“Questionnaire responses indicate that crop insurance was not limiting conservation adoption,” according to the study. “When given a list of potential limiting factors for conservation adoption, including cost and time/labor required, crop insurance was perceived as the least limiting, in comparison to all other factors, for both conservation tillage and cover crops.”

Conservation tillage and cover crops were specifically studied because, according to the researchers, these practices reduce soil erosion, improve water quality, and promote soil health.

The study noted that the federal Risk Management Agency, in the 2018 Farm Bill, designated cover crops planted in 2020 and later as a Good Farming Practice – a distinction that should help further promote the conservation practice.

Among the notable findings reported by the Journal of Environmental Management:

  • Fewer than 6 percent of farmers believed crop insurance was limiting conservation adoption.
  • Respondents were already using both crop insurance and conservation on their farms. 90 percent were enrolled in crop insurance, 60 percent used conservation tillage, and 25 percent planted cover crops.
  • Adoption rates of conservation practices were higher among respondents enrolled in crop insurance than those not using crop insurance.
  • Both crop insurance and conservation were credited by farmers as being important and complementary tools to their risk management strategies.

Despite the clear evidence that crop insurance requirements are not barriers to conservation, researchers lamented the fact that some members of the agricultural media are perpetuating a myth that crop insurance and cover crops are mutually exclusive.

“Posing these two behaviors as incompatible is misleading and unrepresentative of the broader agricultural population,” the researchers concluded.

NCIS Scholarship Program Helps Students, Promotes Diversity in Agriculture

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Jaevien Akinmola grew up helping his grandfather raise vegetables and fruit in rural South Carolina.

Farming was everywhere in his hometown of Manning. He could walk out his front door and into a farm field just down the road.

Today, Akinmola is studying Agribusiness at South Carolina State University. He has big plans to be a leader in agriculture well beyond the limits of Manning.

“I want to pursue my master’s degree as well as a juris doctorate degree and begin working with (USDA) to start off to mastering more of the policy side … to understand what can be done internationally as well as nationally within our own borders as far as agricultural work,” he said.

Akinmola is one of five students who recently received scholarships from National Crop Insurance Services.

The NCIS 1890 Scholarship Program is designed to help students at 1890 Land-Grant Universities complete their education and prepare for careers in agriculture. Land-grant institutions are historically black universities focused on agricultural and mechanical sciences.

Since starting the 1890 Scholarship Program 10 years ago, NCIS has helped fund schooling for more than two dozen students. Many are the first in their families to go to college. The program is part of a commitment within the crop insurance industry to increase the diversity in its workforce, reflecting the diversity of the farmers it serves.

“It’s meant a lot,” said Akinmola. “For one, it’s just meant that my hard work paid off and to be able to get this recognition on a national scale is very, very meaningful for to me. I’m just glad they see the work I’m doing and are willing to invest in me. It shows that I have support out there and I can even have a future with them hopefully.”

Watch Akinmola’s story here along with video stories about all of the 2020-22 NCIS 1890 Scholarship Program recipients.

Idaho Farmer: Crop Insurance Helps Farmers Feed America

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Located in the southeastern corner of Idaho and situated in a high desert environment more than 5,000 feet above sea level, the town of Rockland can be a difficult location to farm. Extreme weather has the potential to quickly devastate crops.

Fifth generation Idaho farmer Jamie Kress understands these challenges and that’s why Jamie and her husband, Cordell, purchase crop insurance to help mitigate weather and markets risks on their family farm.

Jamie recently penned an op-ed for her local paper sharing her first-hand experiences with crop insurance.

“It’s really frustrating when all of your blood, sweat and tears is out there on the line and Mother Nature is calling the shots at that point,” she wrote.

“Crop insurance is one of those things that lets you sleep a little bit better at night because it protects you from the risks of Mother Nature. It means if you have a crop failure, or you have a yield that is not what it could have been, you won’t be out of business.”

Jamie went to school for accounting and Cordell is an engineer. Their backgrounds help them make data-driven decisions about what works best for their farming operation. That’s why Jamie and Cordell trust crop insurance.

“The protection crop insurance products offer today help farmers manage weather risks, and the markets, so they can stay in business and grow the essential food, fiber and fuel products that are critical to our nation’s safety and security,” Jamie explained.

“Crop insurance is extremely popular with farmers because it is very reliable,” she added.

Jamie has worked to share her family’s farming story with Congress.

“I’ve spent some time in Washington talking to our lawmakers about farming. I always try to help them understand that farming is not just a job – it’s a passion, it’s a lifestyle,” she writes. “For farm families, it is our world.”

And with so much on the line – including our nation’s food supply – Jamie is asking Congress to continue its robust support of the Federal crop insurance program.

“We are grateful that Congress maintained our strong system of crop insurance in the 2018 Farm Bill. As the new leaders take office in Washington, we hope they will keep crop insurance affordable and widely available.”

Crop insurance plays an indispensable role in supporting America’s farmers and ranchers as they invest in sustainable agriculture and grow the food and fiber products we all depend on. Congress must continue to protect crop insurance so that farmers and ranchers have the tools they need to succeed.