2015 Business of Farming Conference: Risk Management Options: Crop Insurance and Accessing Credit

Risk Management Options

James Robison -- RAFI-USA

Charles Zink -- USDA Farm Service Agency

Molly Nicholie --ASAP

Welcome and Introductions (Molly Nicholie- 5 minutes)

2

Five primary sources of risk

�

Production Risks Marketing Risks Financial Risks

Legal Risks Human Resource Risks

3

Managing Risk: Planning

Managing Risk: Diversification

Managing Risk: Market Opportunities

Managing Risk: Regional Branding

Managing Risk:

Know your strengths

Know your weaknesses

Recognize opportunities as they arise

Understand threats

Whole Farm Revenue Protection

James Robinson, Research and Policy Associate

The Rural Advancement Foundation International (RAFI) combines on-the-ground services with policy and market advocacy in order to ensure that farmers have the opportunity to make the right choices for their farm and families and that these are also the right choices for the environment and farming communities.

Sections

1. Crop Insurance Overview: Why does RAFI work on crop insurance?

1. Whole Farm Revenue Protection (WFRP): An Overview 1. The Nuts and Bolts of WFRP: How does it work?

• Crop Insurance 101 • Application Process • Claims Process • Model Farm Premiums

Crop Insurance Overview: Why Does RAFI Work on Crop Insurance?

How many have considered crop

insurance?

How many of you have crop insurance?

What comes to mind when you hear…

“crop insurance”

A farm’s risk management strategy and overall level of risk is directly

linked with what financial concept?

Credit Worthiness

The structure of lending and crop insurance programs drives investment and production decisions long before a disaster takes place.

Farmer Decisions • Specialty crops? • More diverse cropping

systems? • Other production-

based risk management practices?

Creditors • Limited recognition of

production-based risk management, like crop, and income diversification

• So, creditors reduce risk by requiring crop insurance

Crop Insurance • Historically not designed

for specialty crop, diverse, or livestock producers

Farmers Find Limited Credit

Opportunities for Specialty Crop, Diversified and

Livestock Operations

What does this mean for specialty crop, diversified, and livestock?

• If obtaining credit is difficult for specialty crop and diversified producers, then it is:

• Harder to access land, • More likely producers farm under production contracts,

• And harder to expand operations.

1.Whole Farm Revenue Protection (WFRP): An Overview

Why is WFRP Important?

• Multi-peril Insurance

• Pest related losses

• Weather related losses

• Losses in price caused by “natural” events

• Incentivizes Diversification

• Insures multiple crops without requiring a producer to purchase multiple policies

• Premiums reduced for growing up to 7 additional crops • Covers crops and livestock

What’s Covered by WFRP? • Crops

• Any agricultural product established or produced on your farm operation, except timber, forest, and forest products, animals for sport, show or pets

• Covers livestock up to 35% of revenue or $1 million

• Events • Insures against loss of approved revenue due to unavoidable natural

causes that occur during the insurance year • Includes declines in both crop yield and price as long as the decline

can be linked to a natural cause (i.e., weather-related) • “Decline in local market price will be presumed to be from unavoidable

natural causes unless the Company or FCIC is able to specifically identify a man-made cause that resulted in a measurable change in the price.”

What’s Not Covered by WFRP? • Yield

• Negligence, mismanagement, wrongdoing • Act of person rather than nature (chemical drift, fire) • Water contained by dam or reservoir • Damage to machinery or equipment • Breakdown in irrigation equipment or practices when not related to

natural cause • Theft and vandalism

• Price • Quarantine, boycott or refusal of anyone to accept commodities • Lack of labor • Deterioration of commodities in storage, unless due to unavoidable

natural cause

Why Did Prior Whole Farm Revenue Crop Insurance Policies Not Work?

• Adjusted Gross Revenue (AGR) & Adjusted Gross Revenue-Lite (AGR-Lite) • Geographically Limited- Policies were not available in some major farming

states • Coverage- limited to 72% of average adjusted gross revenue • Expensive- Producers frequently reported the policy was not cost-

effective • Difficulty Expanding Coverage- producers were required to show a history

of crop expansion in prior years before being able to expand coverage

• Low Liability Limit- $1 million liability limit • Only 3 policies sold in NC each of the last three years

Whole Farm Revenue Protection

WFRP Comparison

WFRP AGR-Lite AGR Type of Coverage Revenue Revenue Revenue 5-year Tax History Yes- Schedule

F Yes- Schedule

F Yes-

Schedule F Diversification Incentive

Yes Yes Yes

Coverage Level 50%-85% 65%-80% 65%-80% Payment Rate 100% 75%-90% 75%-90% Maximum Subsidy 80% 59% 59% Covers Post Production Expenses

Yes, on-farm, post-production expenses that do

not add value

No No

Liability Limit $8.5 Million $1 million $6.5 million

Additional Needed Reforms

• Beginning farmers do not have access to WRFP until 7th year of farming

• 5 years of Schedule F tax records • Plus 1 lag year • No option to build a history using

transitional-yields

• How can we reform the policy during the pilot phase to increase access for beginning farmers?

The Nuts and Bolts: WFRP in Action

Crop Insurance 101

• Past records → On average, you earn $1,000 in revenue on the farm, so expect to earn this in 2015

• You decide to buy a policy that insures 85% of your expected revenue: • $1,000 * 85% = $850

Hail hits a week before harvest, wiping out 50% of the crop and leaving you with only $500 in revenue for the year.

$1,000 expected revenue

$500 actual revenue

$350 Pa

$850 coverage level $350 indemnity

Crop Insurance 101

• Past records → On average, you earn $1,000 in revenue on the farm, so expect to earn this in 2015

• You decide to buy a policy that insures 85% of your expected revenue: • $1,000 * 85% = $850

Minor flooding in a single field brings your revenue down to $900 in 2015.

$1,000 expected revenue

$900 actual revenue

$350 Pa

$850 coverage level

NO INDEMNITY

Application Process: Tax Records

• Requires 5 consecutive years of Schedule F • Sales of products raised on your farm for sale (or bought for resale),

such as livestock, produce, or grains • OR you may use another person’s tax returns if you

purchased, inherited, or leased 90% of their farm operation • Prices must be from verifiable sources and come with

documentation

Approved revenue

Coverage level

Actual revenue

Application Process: Calculating Approved Revenue

• The lower of historic and expected revenue • Historic revenue from 5 years of Schedule F

calculated using Allowable Revenue and Expense Worksheets • May include adjustment for recent or future

growth • Expected yield based on expectations for the

coming year and the Farm Operation Report

Approved revenue

Coverage level

Actual revenue

Year Revenue

2009 $5,608

2010 $6,789

2011 $4,578

2012 $3,567

2013 $7,890

5-Year Average = $5,686 *Can also expand by 10% with approval of insurance provider

Calculating historic revenue

Approved revenue

Coverage level

Actual revenue

Approved revenue

Coverage level

Actual revenue

Calculating expected revenue

• Farm Operation Reports • Submitted at sales closing date for each insurance year • Detailed information for each commodity you intend to produce

or purchase for resale on your farm • what the farm can reasonably produce during the insurance year • expected revenue for each commodity, reflecting expected sale

price in markets where the crop is normally sold • 3 Versions

• Intended and Revised – Submitted before season begins and before coverage level is finalized, used to calculated expected revenue

• Final – Submitted after season is closed, reflects actual production and sales

Farm Operation Report - Sample

Commodity Name

Method of Estab. Yield/Acre Expected Value

Expected Value/Ac

Intended

Quantity Expected Revenue

Cucumbers Acres 425 carton $20/40 lb carton $8,500 0.10 $850

Greens Acres 800 carton $16/20 lb carton $12,800 0.10 $1,280

Strawberries

Acres 1,750 cont $17/8 lb container

$29,750 0.10 $2,975

Total Expected Revenue $5,105

Calculating expected revenue

Approved revenue

Coverage level

Actual revenue

• Expected values must be realistic and consistent with available local market information, supported by verifiable records and take into account current local markets, cycles and trends.

Historic revenue = $5,686

Expected revenue = $5,105

What is the approved revenue?

Approved revenue

Coverage level

Actual revenue

• Approved revenue = $5,105

• 50% to 85% in 5% increments available – 85% level is only available if you have 3 or more crop – Higher coverage=higher premium cost

$5,105 * 50% = $2,553 $5,105 * 85% = $4,339

Approved revenue

Coverage level

Actual revenue

Commodity Name

Expected Revenue

10% Loss, Actual

Revenue 40% Loss,

Actual Revenue Cucumbers $850 $746 $900 Greens $1,280 $990 $1,400 Strawberries $2,975 $2,858 $763

Total Revenue $5,105 $4,594 $3,063

Approved revenue

Coverage level

Actual revenue

Review

• Approved revenue is the lowest of 5-year historical revenue from Schedule F or expected revenue from Farm Operation Report

• Coverage level is up to farmer, based on premiums and perceived risk

1. Timeline: What to do after experiencing a loss?

1. Documentation: What forms will I need to file a claim?

1. Claims Calculation Process: How is my indemnity calculated? 1. Miscellaneous Claims Information: When am I eligible for a

replant payment? What happens if I amend tax forms after a payment is received? What happens if I’m audited?

Claims Process

Timeline

• 72 hours after initial discovery to notify insurer of loss

• 60 days after farm tax forms filed

Required Documentation

Claim Year Updated

Application forms

• Allowable Expenses Worksheet • Allowable Revenue Worksheet • Final Farm Operation Report

Additional Forms

• Inventory and Accounts Receivable • Market Animal and Nursery Inventory if applicable • Replant Payment Worksheet if applicable

Claim for Indemnity Form

Claims For Indemnity Form



Approved Revenue * Coverage Level =

Allowable revenue with adjustments =

Insured Revenue

Revenue-to-count


Insured Revenue – Revenue-to-Count =



I bought coverage for $140,000. My farm’s actual revenue was $130,000. What’s my claim?

Insured Revenue

What you bought insurance for, expected revenue during application process

• Claim = Insured Revenue – Revenue-to-Count • Insured Revenue

- Approved Revenue * Coverage Level - Both from application process - Approved revenue based on farm’s history - Coverage level elected by farmer

• Potential adjustment for crop losses

Revenue-to-Count

• Claim = Insured Revenue – Revenue-to-Count • Allowable revenue from claim year Schedule F

- As determined by Allowable Revenue and Allowable Expenses worksheets

• Adjustments with forms for changes in - Inventory - Accounts receivable & payable - Market animal and nursery inventory - Other

What actually happened?

Revenue-to-Count





Inventory grows (End > Beginning)

Add to revenue-to-count Lowers claim

Inventory falls (End < Beginning)

Subtract from revenue-to-count Increases claim

Claim = Insured Revenue – Revenue-to-Count

Inventory Report

Inventory grows (End > Beginning)


Inventory falls (End < Beginning)


Claim = Insured Revenue – Revenue-to-Count

Inventory Report

WFRP only covers revenue from commodities produced within the

current tax year

Revenue-to-Count





Accounts receivable grows (End > Beginning)


Accounts receivable falls (End < Beginning)


Accounts Report

Revenue-to-Count





Market Inventory and Other Adjustments

• Market animal and nursery inventory • Other

- Revenue loss from uninsured cause of loss ▪ Quarantine, neglect, etc.

- Abandoned acreage - Other indemnity payments - Gains from hedging - Anything else discussed by insurer and farmer


Approved Revenue * Coverage Level =

Allowable revenue with adjustments =



Model Farm Examples

• What is Diversification? • WFRP offers a premium discount for more diverse

operations – But what does this mean?

• Crop Diversification – Count of crops grown

• Income Diversification – How much farm income comes from each crop

RMA WANTS BOTH

But How Much Does it Cost?

• It depends! – How much revenue you want to insure – The premium level – The specific crops you grow and how they interact – How many crops you grow (more diversity = lower

premium!)

• Ultimately, this must be settled with your agent • For your own purposes, http://tinyurl.com/USDA-

WFRP

http://tinyurl.com/USDA-WFRP


Crop Revenue % of Revenue

Cucumbers $400,000 33%

Bell Peppers $400,000 33%

Tomatoes $400,000 33%

85% 80% 75% 70% 65% 60% 55% 50%

Total $71,808 $40,090 $24,300 $19,992 $16,692 $14,256 $12,012 $10,200 Per Acre $334 $186 $113 $93 $78 $66 $56 $47

• Mid-scale specialty crop commercial operation: – $1.2 million in revenue, 215 acres

Model Farm Example

Producer-Paid Premium

Crop Diversification




Tomatoes $390,000 32%

Watermelons $30,000 3%

85% 80% 75% 70% 65% 60% 55% 50%

Total $72,706 $40,646 $24,660 $20,160 $16,848 $14,256 $12,276 $10,440 Difference $898 $556 $360 $168 $156 $0 $264 $240


Income Diversification




Tomatoes $500,000 42%

85% 80% 75% 70% 65% 60% 55% 50%

Total $78,091 $43,709 $26,460 $21,840 $18,096 $15,264 $13,068 $11,160 Difference $6,283 $3,619 $2,160 $1,848 $1,404 $1,008 $1,056 $960





Tomatoes $300,000 25%

Watermelons $300,000 25%

85% 80% 75% 70% 65% 60% 55% 50%

Total $69,564 $38,698 $23,580 $19,656 $16,380 $13,968 $12,012 $10,320 Difference ($2,244) ($1,392) ($720) ($336) ($312) ($288) $0 $120

Combined Diversification


How Can I Calculate Premiums for My Farm?



1) Click Quick Estimate

2) Fill in Quick Criteria

3) Fill in Individual Coverage

How much is covered by other policies?

Historical, Schedule F, Revenue

Expected, Farm Output Report, Revenue

4) Premium Estimates & Details

RECAP

• Sign-up for more info on sign-in sheet • Talk to crop insurance agents, try out the tools

yourself and please please let us know how it goes • WFRP – Completed application must be submitted

no later than the sales closing date specified in the actuarial documents (corresponds to spring sales closing dates for the county). – February 28th, March 15th

THANK YOU.

Follow-up thoughts or questions? James, [email protected], 919-542-1396 ext. 209

mailto:[email protected]

USDA – Farm Service Agency

Charles E. Zink

County Executive Director Madison/Buncombe County FSA Office

Farm Number (Why)

• Voluntary. • ID’s the land. • Required to apply for USDA programs. • Many NCDA and Soil and Water grants

and programs require a Farm Number. • Other benefits depending on the

county.

Farm Number (How)

• Landowner file a request with local FSA Office.

• Copy of the deed. (Address of property, survey, tax maps, or adjoining property owners helpful.)

• ID numbers and address for each owner listed on the deed.

• Entities have additional requirements.

NAP

• Non Insurable Crop Disaster Assistance Program

• Provides coverage for crop losses on crops when crop insurance is not offered.

• Covered losses are caused by natural disaster.

• Apply for the program at your local FSA Office.

Approved NAP Crops CROP APPLICATION CLOSING

DATE CROP APPLICATION CLOSING

DATE Alfalfa 11/15/14 Millet 02/28/15 Apples 11/20/14 Oats 09/30/14 Artichoke 02/28/15 Okra 02/28/15 Asparagus 02/28/15 Onions 01/01/15 Barley 09/30/14 Peaches 11/20/14 Basil 02/28/15 Peanuts 02/28/15 Beans 03/15/15 Pears 11/20/14 Beets 01/01/15 Peas 02/28/15 Blackberries 11/20/14 Pecans 02/28/15 Blueberries 11/20/14 Peppers 02/28/15 Broccoli 01/01/15 Plums 11/20/14 Brussels Sprouts 02/28/15 Potatoes 01/31/15 Cabbage 02/28/15 Pumpkins 02/28/15 Caneberries 11/20/14 Radishes 02/28/15 Canola 09/30/14 Raspberries 11/20/14 Cantaloupes 02/28/15 Rutabaga 01/01/15 Carrots 01/01/15 Rye 09/30/14 Cauliflower 01/01/15 Sage - herb 09/01/14 Celery 01/01/15 Sorghum 02/28/15 Chinese Bitter Melon 02/28/15 Soybeans 02/28/15 Chives 01/01/15 Spinach 01/01/15 Cilantro 01/01/15 Sprite Melon 02/28/15 Corn (SWT, POP, TRO) 02/28/15 Squash 02/28/15 Cucumbers (FH) (Proc) 02/28/15 Strawberries 09/01/14 Dill 01/01/15 Sunflowers 02/28/15 Eggplant 02/28/15 Sweet Potatoes 02/28/15 Grapes 11/20/14 Tomatillos 02/28/15 Grazing (Grass/Mixed Forg) 11/15/14 Tomatoes 02/28/15 Greens 01/01/15 Triticale 09/30/14 Hay (Mixed Forage & Grass) (codes 0102 & 0296) 11/15/14 Turnips 01/01/15 Honey 11/20/14 Watermelons 02/28/15 Honeydew 02/28/15 Wheat 09/30/14 Kale 01/01/15 Kenaf 02/28/15

Kohlrabi 02/28/15 VALUE LOSS: Aquaculture, Christmas Trees, Ginseng, Turf Grass Sod, Mushrooms, Floriculture & Strawberry Rootstock 09/01/14 Korean Golden Melon 02/28/15

Leeks 02/28/15 Lespedeza 11/15/14 VALUE LOSS: Ornamental Nursery/Propagation Stock Nonornamental Nursery 05/01/14 Lettuce 01/01/15

NAP (Eligibility)

• Application and administrative fee must be filed by sales closing date for the crop.

• Eligible producer is a landowner, tenant, or sharecropper who shares in the risk of producing the eligible crop and the individual or entity’s average adjusted gross income (AGI) cannot exceed $900,000.

NAP (Coverage)

• Basic Coverage guarantees 50% of normal yield at 55% of established price – Cost for basic coverage is $250 per crop. – Not to exceed $750 per county. – Not to exceed $1,875 total in all counties.

• Starting in 2015 you will have the option of buy up coverage, up 65% yield guarantee at 100% of established price. – Cost for buy up coverage is 5.25% of

guarantee not to exceed $6,562.50.

NAP (Coverage)

• Producers who elect buy up coverage must pay the administrative fee plus a premium equal to: – The producer's share of the crop; times – The number of acres of the crop; times – The approved yield per acre; times – The coverage level; times the average

market price; times – 5.25% premium fee.

NAP (Eligibility)

• Limited resource, traditionally underserved, and beginning farmers are eligible for a waiver of the administrative fee and a 50% premium reduction when they file form CCC-860, Socially Disadvantaged, Limited Resource and Beginning Farmer or Rancher Certification.

NAP (Eligibility)

• Beginning Farmer – a person or entity who: – Has not operated a farm or ranch for more

than 10 years, and – Materially and substantially participates in the

operation. • For an entity to qualify as a beginning

farmer, all members must be related by blood or marriage and each must be a beginning farmer.

NAP (Eligibility)

• Limited resource farmer – a person or entity that: – Earns no more than $176,800 in each of the 2

previous tax years, and – Has a total household income at or below the

national poverty level or less than 50% of the county Median household income for the 2 previous years ($23,850 for most WNC counties).

• Online tool located at www.lrftool.sc.egov.usda.gov

http://www.lrftool.sc.egov.usda.gov/

NAP (Eligibility)

• Socially disadvantaged farmer – a person or entity that consider their identity to be in one of the following groups: – African Americans; – American Indians or Alaskan Natives: – Asians or Asian Americans; – Hispanics; – Native Hawaiians or Pacific Islanders; – Women

• For entity to qualify the majority interest must be held by socially disadvantaged individuals.

NAP (Loss)

• Eligible crop losses include the following; – Damaging weather, such as drought,

freeze, hail, excessive rain, wind, etc. – Adverse natural occurrences, such as

flood or earthquake – Conditions related to damaging weather or

natural occurrences, such as excessive heat, plant disease, or insect infestation.

NAP (Loss)

• Producers with NAP coverage must notify FSA within 15 days of the earlier of: – A natural disaster occurrence; – The final planting date if planting is prevented

by the natural disaster; – The date that damage to the crop become

apparent; – The normal harvest date – Hand-harvested crops and perishable crops

must notify FSA within 72 hours of when a loss becomes apparent.

NAP (Loss)

• May report loss by: – phone (follow up with office visit). – Office visit.

• FSA will schedule an adjustor to visit the farm or farms to determine if the loss was due to natural disaster, amount, and if the crop can be salvaged.

NAP (Premium Calculations)

• Premium Calculator – www.fsa.usda.gov

http://www.fsa.usda.gov/








NAP (Crop Reporting)

• NAP producers are required to make crop acreage reports each year. Must report by crop reporting deadline (most crops July 15); – Name and type of crop planted. – Farm, field location and acreage. – Who shares in the crop. – Date crop is planted. – Intended use.

• In most cases this requires an office visit because the producer must identify the fields on aerial photography.

NAP (Record Keeping)

• Producers are required to provide record of production of the crop. Records must be: – Verifiable - such as sales receipts with dates,

name of buyer, product sold, and amount. – Reliable - such as pick records, farm book

keeping records. – Records must be easy to read and

understand. • Producers should contact FSA for

questions regarding acceptable production records.

NAP • Failure to make crop acreage report and

provide production information for NAP covered crops may result in reduced or zero NAP assistance.

• The acreage and production reports are used to calculate the approved yield. The approved yield is an average of the producer’s actual production history (APH) for a minimum of 4 to a maximum of 10 crop years.

• A producer’s approved yield may be calculated using substantially reduced yield data if acreage and suitable production records are not provided.

FSA Loans

• FSA’s loan programs are designed to help family farmers to start, purchase or expand their farming operation.

• Several loan options are available and each person’s needs are different so visit our booth during lunch to get detailed information.

FSA Loans

Questions

2015 Business of Farming Conference: Risk Management Options: Crop Insurance and Accessing Credit

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