Crop Insurance Q&A

Ethan Branscum

Ethan Branscum

Risk management tool sparks questions from farmers

Editor’s Note: When the new Farm Bill was signed into law, the spotlight beamed brightly on crop insurance. Ethan Branscum, Arkansas Farm Bureau Federation Assistant Director of Commodity Activities & Economics offers answers to frequently asked questions regarding this risk management tool in today’s ag environment.

Q. Why is crop insurance a new focus for rice farmers today as compared to where it ranked in importance in the past?
A. The new Farm Bill changed the focus of risk management for all farmers, including rice farmers. Now, crop insurance has become the main risk management tool. Policy makers have eliminated the farm programs under previous Farm Bills and placed more emphasis on crop insurance through new programs for farmers to help manage their risk.

Q. Why is crop insurance not viewed favorably in the Delta?
A. In the Delta, we are blessed with the ability to irrigate our crops on a large scale. This is one reason why we are so efficient at growing rice. Crop insurance probably doesn’t work as well in the Delta because farmers are going to have fairly consistent yields every year due to irrigation. Farmers make large investments to irrigate crops, and some farmers see this investment as a self-insurance mechanism for the crop. Crop insurance works really well for Midwestern agriculture, and the Midwest does not have the luxury of water that the Delta has. We hope that crop insurance can be changed to become a useful tool for Southern agriculture as well.

Q. Which insurance option seems to best fit rice production and why? Yield Protection or Revenue Protection?
A. I will give you the greatest answer for every question – “It depends.” Location and
past production history definitely play a major role in determining the best insurance program for rice acres, but I would say that in general, Revenue Protection is going to be the more popular program for rice farmers. This goes back to a farmer’s ability to irrigate the crop. If the weather is close to favorable and a farmer has plenty of water to irrigate, Yield Protection does not make much sense. The farmer needs protection on the price variation that could occur in a marketing year and this can be captured with Revenue Protection. However, there are some scenarios where Yield Protection would make more sense for a rice farmer.

Q. Where does CAT coverage fit in today’s crop insurance environment?
A. CAT coverage is extremely affordable ($300 per policy) but you shouldn’t purchase
CAT and expect to get an indemnity payment every year since it is only a 50 percent
coverage-level policy. CAT exists to protect against “catastrophic” and devastating events, and for the price, it seems worth it to invest in this policy as a minimum coverage level. CAT is very popular in the South because it is inexpensive and most producers are not expecting a return from crop insurance anyhow. In the Midwest, CAT is not as popular because farmers are enrolling in true Yield Protection or Revenue Protection plans.

Q. Does cultivar selection affect crop insurance outcomes?
A. On average, hybrid rice will trigger higher indemnity payments than conventional
rice for both Yield Protection and Revenue Protection, according to University of Arkansas (U of A) research. Recently, the Agricultural Economics Department at the
U of A researched this very question and found that cultivar selection (hybrid or conventional) will impact crop insurance outcomes for farmers. Hybrid rice cultivars have higher yield potential, but they also have higher yield variability, which could be the reason for higher indemnity payment potential with hybrids. When considering both yield potential and indemnity payment potential, hybrid rice produced higher farmer revenues on average.

Q. How is rice crop insurance different from other major commodities?
A. Rice crop insurance differs from other commodities because of the unique way that
rice is marketed. Unlike other crops, rice is milled and a farmer’s revenue depends on
the milling quality of his rice. Current crop insurance programs do not fully protect farmers against poor milling quality, which can occur from unfavorable weather events. A gap exists for which farmers are losing potential indemnity payments if their rice mills poorly (between 55 and 48 percent head rice yield). We would like to see a crop insurance program that fully protects rice farmers’ revenue risk associated with milling. Researchers at the U of A have proposed a new revenue protection program for rice that eliminates this milling gap.

Q. What are the crop insurance deadlines that rice producers need to be aware of this year?
A. February 28 is the 2015 sign up deadline for rice crop insurance. Each state will vary on the early and late planting dates. Farmers should check with their local or regional Risk Management Agency offices to find out these dates.