Personalized Risk Management
Plans
Steve Richards
Program Director,
NY FarmNet and NY FarmLink
1
Risk Management Checklist
 Was initially created to address those
areas that might be sensitive (family or HR
type issues).
 Also addresses those issue which
producers have very little patience for
(Crop Insurance, for example).
 3 trainings for FarmNet consultants have
been held to train them to be proficient
and consistent in filling out the checklist.
 There are NY FarmNet/NY FarmLink
workbooks to back up almost every area
of risk. They are free to farmers who
complete the checklist.
2
Risk Management Checklist
 Accompanied by a consultant trained in
the 5 areas of risk.
 The consultant reviews the risks with the
farm business.
 In the farmer’s opinion, what are the risks
on his/her farm.
 Works with consultant to identify
strategies to mitigate risks.
 The last page is a review of what the
farmer will do in the next year to reduce
risks to their operation.
 50 performed in 2004. 50 more in 2005.
3
Human Resource Risk
Some Key Risk Management Strategies:
 Buy-sell agreements between business partners
 Life Insurance on key family members/employees
 Disability Insurance and/or paying the minimum
SE tax to obtain disability benefits.
 Power of attorney for finances for the key
members of the business.
 Health Insurance, Medicare, Medicaid, State and
Federal Programs.
 Business transfer and succession
 Estate planning
 Good communication and HR practices
4
Legal Risk Management
Some Key Risk Management Strategies:
 Review liability/casualty insurance
policies
 Changing business structure to a structure
with liability protection (LLC, Corps)
 Update current legal agreements.
 Get all contracts in writing.
 Periodic review with attorney and
insurance agent.
 Environmental liability and certification,
neighbor relations.
5
Financial Risk Management
Some Key Risk Management Strategies:
 Record Keeping
 Communications with lender and
accountant
 Meeting cash flow requirements
 Examining industry trends and planning
accordingly.
 Cost control through better management
practices
 Investing off the farm to balance portfolio
 Increasing profit growth
6
Production Risk Management
Some Key Risk Management Strategies:
 Crop Insurance!
 Yield based vs. Revenue based
 Crop production practices
7
Marketing Risk Management
Some Key Risk Management Strategies:
 Price risk management, contracting
 Marketing plans/clubs
 Futures, options, etc.
 Direct marketing and the skill of
marketing.
8
Results
 There is always an area of risk that can be
mitigated easily, quickly, and cheaply.
 Every farm has different risk exposure
 Example: Crop Insurance vs. Health Insurance
 At least 2 different consulting firms are using this
checklist with their clients.
 RMA has mentioned that in the future there may be
a producer discount on crop insurance if they have
completed one of these plans
9
Workbook #1:
Do I Need Crop Insurance?
Steve Richards
Program Director
NY FarmNet
NY FarmLink
10
Do I Need Crop Insurance?
Chapters in Workbook:
1.
2.
3.
4.
What is your risk exposure?
How large of a loss can you afford?
What are your crop insurance options?
Comparing Yield based, Revenue based,
and Catastrophic coverages.
5. Should you buy crop insurance or selfinsure?
11
What is Your Risk Exposure?
 What kinds of losses are likely on your
farm?



Look through your records
What has been the variability in the yields you have
had (per crop and total)
What has been the variability in the income from
your farm operation?
 What % loss is probable?

12
10%, 20%, 30%, 100%??
What is the value of your
Probable Loss?
Crop
20% Loss
40% Loss
60% Loss
80% Loss
Total Loss
40% Loss
-$36,000
60% Loss
-$54,000
80% Loss
-$72,000
Total Loss
-$90,000
Total
Example
Crop
Corn
13
20% Loss
-$18,000
What Makes Your Business More
Vulnerable to Risk?
 Stage in Business Life Cycle:

Start up vs. Established
 Recent Losses

Had a loss last year? Can you afford 2 in a row?
 Undergoing business or family changes


14
Changes in family living costs
Transferring business from one generation to next
How Large of a Loss Can You
Afford to Absorb?
 Absorb through Equity: Have sufficient
assets (i.e. cash or ability to borrow
money) in reserve to cover loss
 Cash Flow: have sufficient cash flow
during the year to cover the loss.
 Combination: by adding up reserves and
“excess” cash flow, you can arrive at your
MAXIMUM ABSORBABLE LOSS
15
What is Your Maximum
Absorbable Loss?
Maximum allowable drop in equity:
Plus: Maximum funds available from cash flow:
Equals: Total amount of absorbable losses
$_______
$_______
$_______
Example
Example: Total losses that would be absorbable
Maximum allowable drop in equity:
Plus: Maximum funds from cash flow:
Equals: Total amount of absorbable losses
16
$23,227
$6,000
$29,227
Crop Insurance Options:
Crop Insurance Acronyms
 AGR-- Adjusted Gross Revenue
 APH--Actual Production History
 CAT--Catastrophic Risk Protection
 CCC--Commodity Credit Corporation
 CIH--Crop Insurance Handbook
 FSA--Farm Service Agency
 FCIC--Federal Crop Insurance Corporation
17
Crop Insurance Options:
Crop Insurance Acronyms
 LAM--Loss Adjustment Manual
 MPCI--Multiple Peril Crop Insurance
 NAP – Non Insured Crop Disaster Assistance
Program
 PHTS--Policyholder Tracking System
 RMA--Risk Management Agency
 Units: parcels of land that are insured separately
from other parcels (units) of land.
 USDA--United States Department of Agriculture
18
Crop Insurance Options:
Crop Insurance Dates
 Sales Closing Date: Last date to purchase a policy
 Cancellation Date: Last date to cancel policy
 Production Reporting Date: Date to report yields
and plantings for previous crop year.
 Acreage Reporting Date: the date to report
containing all acreage of insured crop in a county.
 Final Planting Date: The date by which the insured
crop must be planted in order to receive full
coverage.
19
Myths About Crop Insurance
 It Doesn’t Pay: For every dollar paid in
premiums, the Federal Crop Insurance
Program has paid out $3.93. (premiums
are subsidized).
 It Costs Too Much: For the level of
coverage purchased, the price is lower
than most other insurances (car, etc.)
 My Crops aren’t covered: There is at least
minimum coverage for every crop. There
may not be higher levels of coverage,
depending on what crop you are growing.
20
Myths About Crop Insurance
 You have to have a total loss to collect:
Losses that qualify for coverage range
from 10% to 50%, depending upon which
policy is chosen.
 You have to use the county average: Not
if you have adequate production records.
 There is too much paperwork: The crop
insurance agent will help you with much of
the paperwork.
21
Types of Crop Insurance
 Catastrophic Coverage Policies: Includes (CAT)
and (NAP) policies.
 Crop Yield Coverage Policies: Multiple Peril Crop
Insurance (MPCI) type of policies. The plans pay
out a certain % of yield at a certain % of price.
 Income Coverage Policies: Adjusted Gross Revenue
(AGR), Indexed Income Protection (IIP), and Crop
Revenue Coverage (CRC) type of policies. The plan
pays out at a certain % of insured income at a
certain % of the loss.
22
Typical Policies
MPCI-APH
Characteristics
Loss Based On
Yield Coverage
Price Coverage
Revenue
Coverage
Catastrophic
Coverage
23
Actual Yield
MPCI-Dollar
Dollar amt per
unit selected
You choose % Dollars rec'd
Coverage level for crop
CRC
Farm
Revenue
50%-85% Ave
Production
Feb avg/Dec
You choose % Insured dollar CBOT or Oct.
Coverage level amt. chosen
avg Dec CBOT
Not
Dollars lost by Losses due to
Applicable
reduced yield price & yield
Not
Available
Available
Available
IIP
AGR/AGRLITE
Revenue
History
Based on
gross revenue
Februar y's
average of
Dec CBOT
Los ses due to
price & yield
Adj. Gross
Revenue
Based on
gross revenue
Available
Based on
gross revenue
Based on
gross revenue
Not
Available
Mechanics of Crop Insurance
 Crop insurance comes in two numbers:
one is based on the insurable amount
(either yield or revenue) and the other is
the payout (less a deductible percentage).
 Examples:
 Cat 50/55
 MPCI “Buy-up” 75/100
 AGR-Lite 80/90
24
Mechanics of Crop Insurance
 Example: You buy a policy that has 80/90
written on it:
 80: coverage level
 The first number is the “trigger”, after which the policy
begins to pay.
 So, in order for this policy to start covering, you must
have had at least a 20% loss.
 90: Payout level
 The second number is the payout level, less any
deductible percentage.
 In this case, any loss over 20% would be
compensated by this policy at .90 per dollar.
25
Which Policy To Choose?
 What crops do you grow?
 Where are you located?
 What kind of loss are you more likely to
experience?
 Yield losses? MPCI type products
 Yield and Price Losses? IIP and CRC type products
 Revenue Losses? AGR and AGR-Lite products
 Catastrophic coverage?
 Available for all crops
 Small administrative fee ($100 per crop)
 Small coverage level as well (50/55)
26
Comparing Insurance Products
 Choosing a coverage level
 You have calculated your probable loss
 You have calculated your absorbable loss
 You want to pick a coverage level that is
above your maximum absorbable loss!
 In the example $29,277 represented a over a 30%
loss, so our farmer would want to pick a coverage
level no less than 70%.
 The only trick is to convert dollars into yield or visa
vesa. The workbook will help you.
27
Deciding if You Should Buy Crop
Insurance
 Likely frequency of crop losses
 This is tricky, its betting on the weather.
 Likely frequency of crop losses that would
be covered by insurance,
 In our example, this is a loss greater than 30%.
28
Should you Buy Insurance or
Self Insure?
 What is the maximum premium you should
be willing to pay?
 Basically, you compare the years it would
take to recover from a loss with and
without insurance (with insurance payouts
being reduced by premium payments).
 When the value of the insurance is greater
than the premium, you should be willing to
purchase the insurance, right?
29
Appendix: How to File a Claim!
 Other than dashed expectations of what
was thought to have been covered, most
other mistakes occur in reporting losses.
 Contact your crop insurance agent within
72 hours of initial discovery of damage.
 Do not destroy or harvest your crop until
you have spoken to your insurance agent
and an adjuster has given you permission
to do so.
30
Workbook Results
 The workbook has been used for 4
presentations so far in New York.
 Over 200 copies of the workbook have
been distributed to producers.
 A copy has been given to each FSA office
in New York.
 Was included in the 2005 Risk
Management Notebook.
31
Workbook #2: Using Crop Insurance
Profiles of 13 Farms
Steve Richards
Program Director,
NY FarmNet/NY FarmLink
32
Profiles Booklet
 Farmer to Farmer learning
 Selected stories of experiences with crop
insurance
 Variety of commodities, farm sizes, and
marketing practices.
 Introduction: Dispelling myths about crop
insurance, summarizing available
products.
 Appendix: Crop insurance terms and
acronyms, grower responsibilities, and
sources for additional information.
33
Profiles Booklet Examples
 Mary and Frank Heyer
 Diversified vegetable/NAP
 Roy and Connie Ike
 Field Crops/MPCI-APH
 Wilhugh Farm
 AGR and MPCI-APH on forages
34
Profiles Booklet Results
 Farmers really like the booklet.
 The workbook has been distributed with
all of the Risk Management 2005
notebooks.
 A copy of the workbook is in each FSA
office.
 At least 150 copies distributed to
producers so far in 2004/2005.
35