Crop Insurance – An Important Risk Management Tool

As we begin 2012, the persistent drought is on the minds of most Texans.  Those who depend on rainfall for their livelihoods (farmers and ranchers) are quite concerned as cattle herds have been reduced significantly due to lack of standing forage and very short hay supplies, while farmers debate when and if to apply fertilizer to their fields, wondering what crop they will be able to plant, depending on when and if the rains do finally come.

Rainfall recorded in 2011 only amounted to about 11 inches in the Coastal Bend, meaning that we are roughly 20 inches below normal.  Most of our deep soil moisture is gone, used up by last year’s crops.  With projections for continued below normal rainfall, the crop potential for 2012 looks rather poor.

With these poor soil moisture conditions, farmers should take advantage of an important risk management tool—crop insurance.  If you have not already established a relationship with a crop insurance agent, it’s time to make that a high priority. The sales closing dates for South Texas Crop Insurance for corn, cotton, grain sorghum, sunflower, and sesame is January 31, 2012.

Many crop insurance options are now available to help producers manage risks associated with their particular crop. 

Take cotton as an example.  In 2011 we saw some important changes to the crop and revenue insurance programs. A range of products like multi-peril crop insurance (i.e., the old APH yield policy) and the revenue insurance products that applied to cotton (e.g., Crop Revenue Coverage, Revenue Assurance, and Income Protection) were basically repackaged by USDA-RMA, with a common mechanism for price discovery and rating. 

In short, the price that will be used to value insured cotton will be based on the average of futures prices at defined periods of the year. This approach is new for yield insurance, but similar to how CRC coverage was priced in years past, according to Dr. John Robinson, Texas Extension Economist - Cotton Marketing.

Speaking of insurance options, the repackaged program is known as the COMBO program. Instead of separate insurance products to insure cotton yield, or cotton gross revenue, cotton growers have a wide range of choices within one package. The first set of choices involves whether the grower wants to insure only yield (similar to the old multi-peril, APH yield policy, and is now simply called Yield Protection), or gross revenue (known as Revenue Protection, or RP, and similar to the old CRC product using the higher of planting or harvest time futures prices to value the coverage) or gross revenue without the harvest time price valuation (known as Revenue Protection Harvest Price Exclusion, or RPHPE, and similar to the old RA or IP products). The three new product choices vary in cost as they provide differing levels of protection.

Beyond the choice of a product, growers have to decide the level of coverage—60 percent or 65 percent or whatever. All things being equal, the cost of your insurance premium will be higher at higher levels of coverage. 

Cotton growers have additional choices to make. The most notable one is the cottonseed endorsement, which provides additional coverage for the value of lost cottonseed in the event of an insurable loss in lint yield.

Like I mentioned earlier, growers have many options to consider, so they might need to consult a crop insurance agent soon to determine which crop insurance option is most appropriate and applicable for each farming operation.  Additional information regarding crop insurance can be found through the USDA-RMA website at http://www.rma.usda.gov/