PRODUCTION RISK
Risk Faced by Small Scale Producers
March, 2008
Dr. Laurence Crane
National Crop Insurance Services
www.ag-risk.org
1
Today’s Discussion
 Risk profile of Rhode Island farmers
 Special concerns of small farmers
 Risk management priorities
 Discussion of production risks
 Control or minimize
 Reduce variability
 Transfer to someone else
 Brief overview of crop insurance
2
Special Concerns of Small Farms
Limited WORKFORCE
 Rely on family members for labor and
management
 Major business disruption if:
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Disability
Disagreement
Divorce
Death
 Stress and fatigue add to risks
3
Special Concerns of Small Farms
Limited TIME to study and make decisions
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Good record keeping takes time
Following the market takes time
Comparing options takes time
Attending meetings/workshops takes time
Decision-making takes time
4
Special Concerns of Small Farms
Limited FINANCIAL RESOURCES
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No savings cushion in case of emergency
Small, inadequate, or no line of credit
Risk reducing purchases are not possible
Delayed purchases may increase risk
“It takes money to make money”…and
“It takes money to save money”
5
Special Concerns of Small Farms
Difficulty TRANSFERRING the farm
 Overlapping decision making
 Overlapping income requirements
 Competing goals
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Farm purchase vs retirement income
Expansion purchases vs reducing debt
6
Special Concerns of Small Farms
Lack of HEALTH insurance
 Disability and life insurance are both important
 No or inadequate health coverage
 Long-term care
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Can become very expensive
Drain on limited time
7
Special Concerns of Small Farms
Older EQUIPMENT and FACITITIES
 Increased breakdowns
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Cost of repairs
Lost opportunities and product quality
 Safety risks are increased
8
Risk Management Priorities
Minimize safety risks—nothing is more
important than safety!!
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Take the time to do things right
Don’t move faster than you can think
Wear protective gear
Properly store chemicals, fuel, pesticides, etc.
Maintain equipment
Adopt a stress management plan
Teach your children (and others) about safety
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Age appropriate tasks
Friends and visitors
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Risk Management Priorities
Use good agricultural practices
 Follow industry and university standards
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IPM, nutrient management, rotational grazing, herd
health, chemical & fertilizer application rates, etc.
 Record and maintain adequate records
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Documentation required for some chemicals
Limit legal liabilities in some cases
Required for insurance purposes
Improves management skills and decisions
10
Risk Management Priorities
Support your neighbors
 Develop a strong network of friends
 Share labor, equipment, knowledge
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Reduces costs
Increases satisfaction
 Make emergency plans in case of illness, etc.
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Write down procedures so someone else can follow
 Create study group/club
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Risk Management Priorities
Property, liability, and health insurance
 Review policies and know their terms
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Pay attention to “exclusions”
Evaluate coverage levels and deductibles
Shop around and compare
 Get a good agent who gives you the service
you need
 Pay attention to your liability exposures
12
Risk Management Priorities
Attention to business management
 Analyze in writing the impact of decisions
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What, how, why, expectations, results
 Maintain orderly records
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Keep and file receipts
Keep and file ownership manuals and paperwork
Create “memory aids”
 Document, Document, Document
13
Production Risk
What is it?
 Any production related activity or event
that is uncertain
 Variability in production caused by
weather, disease, pests, genetic variation,
machinery failure, timing, etc.
14
Production Risk
Examples
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Variability in crop yields
Animal weaning weights
Product quality
Animal rate of gain
Death loss
Machinery breakdown
Excessive rain or drought
15
Production Risk
Primary Sources
 Adverse weather
 Disease and pests
 Input availability and
quality
 Technological
advances
 Mechanical failure
 Agricultural
industrialization
16
Why U.S. Crops Fail
17
Production Risk
Primary Responses
1. Control or minimize risk through management
practices
2. Reduce production variability
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Diversification
Flexibility
Vertical Integration
Apply technology
Contingency planning
3. Transfer risk to someone else
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Contracting
Insurance
18
1. Control or Minimize
Examples
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Use irrigation to offset drought
Increase herbicide use to control weeds
Increase pesticide use to control pests
Be more timely in performing functions
Monitor more closely to detect problems
before they become serious
 Practice preventative maintenance
19
2. Reduce Variability
Diversification Types
 Additional Enterprises
 Different Mix of Enterprises
 Differentiated Product
 Specific attribute produce
 Value-added product
 Non-farm income and investments
20
2. Reduce Variability
Diversification Issues
 Product form and
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specifications
Market location and
availability
Yield variability
Price variability
Price discovery
Credit availability
 Size/scale restrictions
and requirements
 Product volume
constraints
 Special management
skills
 Production
practices/technology
21
2. Reduce Variability
Flexibility
 Flexibility is the ability to adjust to uncertainty and
has three components:
 Time flexibility
 Cost flexibility
 Product flexibility
 Flexibility easier to obtain in marketing and financing,
than in production
22
2. Reduce Variability
Vertical Integration
 Includes all of the ways that output from
one stage of production is transferred to
another
 Accomplished by the mix of enterprises
the farm is engaged in
 More common in livestock and specialty
crop industries than in field crops
23
2. Reduce Variability
Vertical Integration—Examples
 Corn and hay raised and fed to dairy cows is
integration across crop and livestock production
• Backgrounding feeders
from a cow-calf operation
is integration within the
cattle industry
• Joining a cooperative is
integration across
functions
24
2. Reduce Variability
Vertical Integration—Issues
 Record keeping very important
 Production contracts can reduce risk, but
may also reduce production control
 Benefits are greatest in industries with
complex production/marketing
interrelationships
 Management skill is required
25
2. Reduce Variability
Apply Technology
 Includes high tech and biotechnology
 Can improve management and production
efficiency
 The need to specialize increases as
technical knowledge increases
 Need to compare benefits to costs
 May reduce production risk but increase
overall farm risk
26
2. Reduce Variability
Apply Technology—Examples
 Computerize record keeping and
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analysis
Plant Roundup Ready soybeans
Plant seedless watermelons
Drip irrigation systems
Minimum or no-till practices
Mechanical butterbean
harvesting
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2. Reduce Variability
Apply Technology
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Positives
Reduce cost
Enhance yield
Enhance quality
Enhance Price
Provide market access
Save time
Provide management
information
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–
–
–
–
–
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Negatives
Increased costs
Increase risk
Increased management
Applicability based on
size and scale
Consumer rejection
Environmental risk
Reduced flexibility
28
2. Reduce Variability
Contingency Planning
 Whole farm business planning
 Budgeting
 Enterprise, partial, whole-farm
 Transition planning
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Feasibility
Start-up costs
Additional credit needs
Cash flow requirements
29
3. Transfer Risk
Methods
 Production contracts can be used to
transfer specific risks associated with
production to someone else
 Insurance can be used to transfer
certain risks to others
30
3. Transfer Risk
What is a Contract?
 A written or oral agreement between two
or more parties involving an enforceable
commitment to do or refrain from doing
something
 In agriculture, contracts usually specify:
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Production and/or marketing conditions,
Price,
Quantities to be produced, and,
Services to be provided
31
Crop Insurance
Overview
32
Why Would Farmers Want
Insurance?
 Protection against losses due to natural
disasters
 Facilitates business planning
 Loan security
 Forward market crops with assurance
33
Insurance Principles
 Insurance is the pooling/combining of enough
small unpredictable risks so that over time the
losses for the combined group become
statistically predictable.
 Basic purpose of insurance is to provide
protection against economic loss arising from
adverse events.
34
Insurance Principles
To be insurable, risks must meet this criteria:
 Loss would result in economic hardship.
 Sufficient number/quality of units must be
exposed to the same peril.
 Occurrences must be accidental/unintentional.
 Definite in time/place and measurable with
reasonable accuracy.
35
Crops Insurable in Rhode Island
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Apples
Corn
Fresh Market Corn
Cranberries
Nursery
Peaches
Potatoes
 An additional 100+ other crops insurable as
part of Adjusted Gross Revenue Lite plan
36
Crops Insurable in Rhode Island
ADJUSTED
GROSS
REVENUE*
AGRLite
CORN
Corn
Fresh
Market
90,44
50
86
90,44
50
90
50
61
86
90,44
50
90
50
(P)63
61
86
90,44
50
90
50
(P)63
61
86
90,44
50
COUNTY
AGR
Bristol
(P)63
61
Kent
(P)63
61
Newport
(P)63
Providence
Washington
APPLES
CRANBERRIES
NURSERY
PEACHES
POTATOES
50
50
90
86
90
*AGR is a plan of insurance and not a crop. Under AGR many crops (including livestock) are insurable that are
not insurable under any other plan of insurance.
90
44
50
86
61
63
(APH) Actual Production History
(CRC) Crop Revenue Coverage
(DO)
Dollar Amount of Insurance
(GYC) Grower Yield Certification
(AGR-L) Adjusted Gross Revenue Light
(AGR) Adjusted Gross Revenue
(P)
Pilot program
37
Why a Government Program?
 Weather tends to impact a large area
 Losses are correlated, insurance works best
when losses are not correlated
 Without federal subsidies premiums would be
too high for most farmers to participate
 Without federal reinsurance, federal capital
requirements would be too high for most
companies to participate
38
Basic Components of the Program
Farmers
Insurance Sales Agents
(Most agents work for more than one company)
Responsible for Sales and Premium Collection of the Farmer-paid Portion
Private Insurance Companies
Responsible for Reinsurance and Delivery of the Program
Contribute to Policy Development
Federal Crop Insurance Corporation (FCIC)
(Managed by USDA/RMA)
Responsible for Policy Development, Rating, Reinsurance, and
Administrative Expense Support
(as negotiated and contracted by the Standard Reinsurance Agreement)
39
What Does the Federal
Government Do?
 Subsidize insurance
 Pay delivery reimbursement
 Pay premium subsidy
 Offer reinsurance
 Set rates
 Establish insurance policy provisions
 Regulate the insurance companies
40
Risk Management Agency
 Administers Federal Crop Insurance Act for
Board of Directors of FCIC
 Headquartered in DC, major presence in Kansas
City
 10 Regional Service Offices
(Rhode Island in the Raleigh, NC Region)
 6 Area Compliance Offices
(Rhode Island is in the Eastern Regional Compliance
Office headquartered in Raleigh, NC)
41
Crop Insurance
2002 Subsidy Schedule
Coverage Level
Subsidy %
Producer Premium %
CAT—50/55
100
0
50/100
67
33
55/100
64
36
60/100
64
36
65/100
59
41
70/100
59
41
75/100
55
45
80/100
48
52
85/100
38
62
42
Multiple Peril Crop Insurance
Limited Resource Farmer Fee Waiver
 Limited resource farmers may be exempt
from paying the administrative fee for CAT
or additional coverage.
 Producer must sign waiver when applying
for insurance.
43
Revised Waiver Statements for
Limited Resource Farmer
I certify that I:
(1)
Am a person with direct or indirect gross farm sales not more than
$100,000 in each of the previous two years (to be increased
starting in fiscal year 2004…); and a total household income at or
below the national poverty level… or less than 50 percent of
county median household income in each of the previous two
years…; or
(2)
Was insured prior to the 2005 crop year, or for the 2005 crop year,
and administrative fees were waived… because I qualified as a
limited resource farmer under the… definition in effect at the time,
and that I remain qualified…
44

Determining Limited Resource
Farmer Status
The Limited Resource Self Determination Tool may be
used to determine if an insured qualifies as a limited
resource farmer.
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See http://www.lrftool.sc.egov.usda.gov/
for the actual dollar amount adjusted for inflation.
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(Example:) Washington County Rhode Island 2008:
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Gross farm sales < $116,800
Total Household Income < $31,301
(Example:) Kent County Rhode Island 2008:
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Gross farm sales < $116,800
Total Household Income < $28,067
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http://www.lrftool.sc.egov.usda.gov/
46
What Does the Company Do?
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Insures farmer
Processes all paperwork
Contracts agents and loss adjusters
Ensures all claims are fairly and promptly
paid
 Accepts risk on the insurance policies
 Interacts with RMA/Agents/Farmers
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Crop Insurance Providers
In Rhode Island in 2008
1. ARMtech Insurance Services
800-335-0120
www.armt.com
2. Rain and Hail L.L.C.
800-776-4045
www.rainhail.com
3. Rural Community Insurance Services
800-451-3836
www.rcis.com
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How Does A Farmer Get
Insurance?
 Crop insurance is a contractual agreement
between the farmer and an insurance company
brokered by an insurance agent
 Contacts an insurance agent who has a
contractual relationship with an insurance
company to sell crop insurance
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Agent Delivery System
 All crop insurance is sold by private insurance agents
who:
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Are the company representative with the insured.
May represent multiple companies.
Are responsible to educate producer about products.
Are compensated by a percentage of premium.
 Agent training requirements:
 State licensing requirements by insurance department
including annual continuing education hours.
 Additional RMA requirements to sell Federal products.
 Competency testing every three years.
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What Does the Agent Do?
 Explains product options—quotes price
 Sells insurance contract
 Collects production and acreage report
 Notifies company in case of loss
 Informs farmer about changes to the
program
 Contact for farmer, local, professional,
trusted
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What Does the Adjuster do?
 Fact finding/data collection role.
 Gather appropriate information.
 Visits the farm and physically appraises
crop damage.
 Follows established procedures for
determining extent of damage.
 Documents farmer provided data.
 Assists policyholder in filing a claim for
indemnity.
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Producer Obligations
 Report acreage accurately.
 Meet policy deadlines.
 Pay premiums when due.
 Report losses immediately.
53
Mistakes That Cost You Money
Insurance mistakes that cost money:
 Under-reporting planted acres per unit.
 Over-reporting planted acres per unit.
 Harvesting the crop in a manner other than
insured.
 Destroying the insured crop without company
consent.
54
How Does a Farmer Select an
Agent?
Q: Why do you select one agent
another?
over
A: Service!!!
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Components of Good Agent
Service
1. Product Knowledge
Knows what products are available and protection
they offer
2. Provides Guidance
Helps find best product/farming operation fit
3. Sends Reminders
Helps insured meet deadlines and policy
requirements
4. Available for Assistance
Available to answer questions and provide
assistance
5. Provide Gap Measures
Goes the extra mile
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Finding An Agent
 Ask other growers for recommendation.
 Check with insurance agency where you
purchase other types of insurance.
 Check with farm organizations you have a
relationship with.
 Use the USDA Risk Management Agency’s
Web site’s “Agent Locator.”
www.rma.usda.gov
57