Some Farmers Considering Production Cost Insurance-a Private Whole Farm Concept

DTN Executive EditorĀ Marcia Taylor reported on Friday that, “Veteran Ohio farmer Mark Bryant has spent much of his career gleaning lessons from the 1980s. So it’s no surprise his goal for his family’s Washington Courthouse operation in the current ag recession is to minimize losses, conserving strength to prosper when prices rebound.

The article noted that, “‘Bottom risk is what people need to concentrate on,’ said Bryant. ‘For the last 7-10 years, buying 85% crop revenue insurance provided a floor that averaged $50 to $70 per acre below our corn cost. Some years you could even guarantee a profit at 85% levels. But this year, federal crop’s best coverage was $100 per acre underneath our production cost, and prospects for 2017 now look worse.’

“Protecting the farm’s ‘floor’ is what persuaded the Bryant family to test a novel product in 2016 called Production Cost Insurance, a concept first launched by a Canadian insurer Global Ag Risk Solutions five years ago and available in the U.S. on a limited basis in 20 states in 2016. At least two insurance providers — CGB Diversified Services and ARMtech Insurance Services — are offering the plan in 2017, with coverage in more than 30 states. The program is underwritten by Everst Re Group, a respected Canadian reinsurer.

“Like business interruption insurance used by nonfarm businesses, Production Cost Insurance guarantees a fixed dollar amount per acre per farm. ‘The product insures your gross margin above your individual input costs — fertilizer, seed and chemicals,’ said Joanie Grimes with ICAP Crop Insurance, Bryant’s crop insurance agent.”

The DTN article explained that, “Premiums depend on a growers’ actual five-year records for gross income and input cost, so no two quotes are identical. But in 2016, another one of Grimes’ clients found that for an extra $10 or $15 per acre above what he’d pay for 85% crop revenue coverage, he could insure 100% of his production at many more thousands of dollars coverage, she said. The concept takes time for growers to absorb, but she expects more of her clients to enroll in 2017.

“Unlike federal crop revenue coverage, this policy sets a fixed guarantee before planting that doesn’t deviate based on crop yield or price fluctuations during the growing season. It is based on a whole farm’s historic five-year revenues from all commodities, so its revenue guarantees can at least temporarily capitalize on some excellent income years. In 2016, the average whole farm revenues of crop years 2010-2014 established the base.

“Lower income years will eventually replace those peaks, but Grimes believes it would be worth considering, especially if federal crop insurance guarantees stay depressed.”

Ms. Taylor explained further: “Forget what you know about federal crop insurance. Production Cost Insurance is a private policy that operates more like whole-farm revenue protection, not insurance on individual crops or fields.

“On a 10,000-acre farm in Iowa, for example, the farm purchases $300 per acre of fixed-cost margin coverage for all its corn and soybean acres. The farm typically uses $400 per acre of seed, fertilizer, and chemicals for both crops averaged together. So Canadian insurer Global Ag Risk Solutions would guarantee $700 per acre of revenue.

The farm has $7.0 million of whole farm revenue protection. If input costs rise to $450, due to additional passes of fertilizer, fungicide, etc., the total coverage will increase as well. Now the farm has $450 per acre of inputs, plus $300 of additional margin coverage, equaling $750 per acre of Production Cost Insurance coverage.”

Friday’s update added that, “So this 10,000-acre operation has $7.5 million of guaranteed revenue. If the revenue falls below the guaranteed level, Global Ag Risk Solutions will cover the difference.

“For example, with $7.5 million in guaranteed revenue, if farm revenue is only $4.0 million due to an insured peril, Global Ag Risk Solutions would cover the difference of $3.5 million for that farm.”

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