Friday, February 18, 2011
Crop Insurance for 2011: Selecting Units.
Typically you like to have choices, but when it comes to crop insurance you don’t like to have choices and wish it would all come in the same flavor. But for the benefit of all farmers, crop insurance can be customized for each farm operation, and one of those choices is what type of units you want to insure. Now, only if you understood the differences, after all you only have to deal with this once a year. How can you be expected to remember it? That is why we’re here.
Your choice of units in crop insurance will affect the premiums that you pay and may have a significant influence on any indemnity payment that you might earn. That is the nutshell version from Iowa State University Extension economist William Edwards. His analysis of crop insurance units in the Ag Decision Maker provides help in making your decision.
1) Optional units are the Cadillac of the four choices, since they will be the most expensive, but will have the greatest chance of providing an indemnity payment. For each farm in a different township, an optional unit can be applied, and since they give the most protection against an isolated weather loss, it will carry more premium cost.
2) A Basic unit is more of a generic product than optional units, since a producer would combine all of his acreage of an individual crop into one policy. However, any land farmed in a lease with a different individual would be considered a different basic unit. Distance among fields is not considered. And because of the wider distance, the risk is less, and therefore the premium is less than an optional unit.
3) An Enterprise unit combines all of your fields of a single crop in a county together, including those owned by other individuals and leased from them. Because the fields might be different soil types and lie in different weather patterns, the risk is further spread and the premium cost is lower.
4) Whole Farm Units will be the least cost, if the producer is willing to combine all insured crops into a single insurance unit. The discount depends on the proportion of the total acres planted to each crop. A whole farm unit can be applied in a single farm for multiple owners and with multiple crops, but the indemnity depends on the proportion of crops. The more tracts that are combined in a single policy will push down the premium as far as possible, since there is a lesser chance of filing a claim.
If you are buying insurance for the revenue protection against declining prices, Edwards says, “If a producer is primarily concerned about declining market prices, any unit structure under a Revenue Protection policy gives the same price risk protection. This is because the same prices are used to set the level of guarantee and the actual revenue each year are applied to all insured acres, regardless of the size, number or location of the units.”
If you are making a crop insurance decision based on premium amounts, remember the larger the combined acreage, the lower the premium. But Edwards also says USDA adds more of a discount for Enterprise units with a higher subsidy of the premium. This will also allow higher coverage levels to be selected while paying the same amount. On the other hand, indemnity payments may be less frequent because the USDA risk is spread out more.
In making your crop insurance decision, you will have to decide whether to obtain yield protection or revenue protection. Group risk plans are another alternative.
Iowa State has a section on crop insurance in its crop cost and returns fact sheets.
Summary:
When selecting crop insurance, a decision that will be required is the size of the production unit. The choices are optional units, basic units, enterprise units, and whole farm units. As you move from optional to whole farm, your premium cost will decline because you are spreading risk over a larger number of fields and crops. As you move from optional to enterprise you will move away from the likelihood of getting an indemnity payment, because you are spreading the risk over a wider area.
Posted by Stu Ellis on 02/18 at 12:00 AM | Permalink