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11
PRODUCTION RISKPRODUCTION RISK
Risk Faced by Small Scale ProducersRisk Faced by Small Scale Producers
March, 2008March, 2008
Dr. Laurence Crane National Crop Insurance Serviceswww.ag-risk.org
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Today’s Discussion Today’s Discussion
Risk profile of Rhode Island farmersRisk profile of Rhode Island farmers Special concerns of small farmersSpecial concerns of small farmers Risk management prioritiesRisk management priorities Discussion of production risksDiscussion of production risks
Control or minimizeControl or minimize Reduce variabilityReduce variability Transfer to someone elseTransfer to someone else
Brief overview of crop insuranceBrief overview of crop insurance
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Special Concerns of Small FarmsSpecial Concerns of Small Farms
Limited WORKFORCE
Rely on family members for labor and management
Major business disruption if: Disability Disagreement Divorce Death
Stress and fatigue add to risks
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Special Concerns of Small FarmsSpecial Concerns of Small Farms
Limited TIME to study and make decisions
Good record keeping takes time Following the market takes time Comparing options takes time Attending meetings/workshops takes time Decision-making takes time
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Special Concerns of Small FarmsSpecial Concerns of Small Farms
Limited FINANCIAL RESOURCES
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”
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Special Concerns of Small FarmsSpecial Concerns of Small Farms
Difficulty TRANSFERRING the farm
Overlapping decision making Overlapping income requirements Competing goals
Farm purchase vs retirement income Expansion purchases vs reducing debt
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Special Concerns of Small FarmsSpecial Concerns of Small Farms
Lack of HEALTH insurance
Disability and life insurance are both important No or inadequate health coverage Long-term care
Can become very expensive Drain on limited time
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Special Concerns of Small FarmsSpecial Concerns of Small Farms
Older EQUIPMENT and FACITITIES
Increased breakdowns Cost of repairs Lost opportunities and product quality
Safety risks are increased
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Risk Management PrioritiesRisk Management Priorities
Minimize safety risks—nothing is more important than safety!!
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
Age appropriate tasks Friends and visitors
1010
Risk Management PrioritiesRisk Management Priorities
Use good agricultural practices
Follow industry and university standards IPM, nutrient management, rotational grazing, herd
health, chemical & fertilizer application rates, etc.
Record and maintain adequate records Documentation required for some chemicals Limit legal liabilities in some cases Required for insurance purposes Improves management skills and decisions
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Risk Management PrioritiesRisk Management Priorities
Support your neighbors
Develop a strong network of friends Share labor, equipment, knowledge
Reduces costs Increases satisfaction
Make emergency plans in case of illness, etc. Write down procedures so someone else can follow
Create study group/club
1212
Risk Management PrioritiesRisk Management Priorities
Property, liability, and health insurance
Review policies and know their terms 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
1313
Risk Management PrioritiesRisk Management Priorities
Attention to business management
Analyze in writing the impact of decisions What, how, why, expectations, results
Maintain orderly records Keep and file receipts Keep and file ownership manuals and paperwork Create “memory aids”
Document, Document, Document
1414
Production RiskProduction RiskWhat is it?What is it?
Any production related activity or event Any production related activity or event that is uncertainthat is uncertain
Variability in production caused by Variability in production caused by weather, disease, pests, genetic variation, weather, disease, pests, genetic variation, machinery failure, timing, etc.machinery failure, timing, etc.
1515
Production RiskProduction RiskExamplesExamples
Variability in crop yieldsVariability in crop yields Animal weaning weightsAnimal weaning weights Product qualityProduct quality Animal rate of gainAnimal rate of gain Death lossDeath loss Machinery breakdownMachinery breakdown Excessive rain or droughtExcessive rain or drought
1616
Production RiskProduction RiskPrimary SourcesPrimary Sources
Adverse weatherAdverse weather Disease and pestsDisease and pests Input availability and Input availability and
qualityquality Technological Technological
advancesadvances Mechanical failureMechanical failure Agricultural Agricultural
industrializationindustrialization
1818
Production RiskProduction RiskPrimary ResponsesPrimary Responses
1.1. Control or minimize risk through management Control or minimize risk through management practicespractices
2.2. Reduce production variabilityReduce production variability DiversificationDiversification FlexibilityFlexibility Vertical IntegrationVertical Integration Apply technologyApply technology Contingency planningContingency planning
3.3. Transfer risk to someone elseTransfer risk to someone else ContractingContracting InsuranceInsurance
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1. Control or Minimize1. Control or MinimizeExamplesExamples
Use irrigation to offset droughtUse irrigation to offset drought Increase herbicide use to control weedsIncrease herbicide use to control weeds Increase pesticide use to control pestsIncrease pesticide use to control pests Be more timely in performing functionsBe more timely in performing functions Monitor more closely to detect problems Monitor more closely to detect problems
before they become seriousbefore they become serious Practice preventative maintenance Practice preventative maintenance
2020
2. Reduce Variability2. Reduce Variability Diversification TypesDiversification Types
Additional EnterprisesAdditional Enterprises Different Mix of EnterprisesDifferent Mix of Enterprises Differentiated ProductDifferentiated Product
Specific attribute produceSpecific attribute produce Value-added productValue-added product
Non-farm income and investmentsNon-farm income and investments
2121
2. Reduce Variability2. Reduce Variability Diversification IssuesDiversification Issues
Product form and Product form and specificationsspecifications
Market location and Market location and availabilityavailability
Yield variabilityYield variability Price variabilityPrice variability Price discovery Price discovery Credit availabilityCredit availability
Size/scale restrictions Size/scale restrictions and requirementsand requirements
Product volume Product volume constraintsconstraints
Special management Special management skillsskills
Production Production practices/technologypractices/technology
2222
Flexibility is the ability to adjust to uncertainty and Flexibility is the ability to adjust to uncertainty and
has three components:has three components:
Time flexibilityTime flexibility
Cost flexibilityCost flexibility
Product flexibilityProduct flexibility
Flexibility easier to obtain in marketing and financing, Flexibility easier to obtain in marketing and financing,
than in productionthan in production
2. Reduce Variability2. Reduce Variability FlexibilityFlexibility
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2. Reduce Variability2. Reduce Variability Vertical IntegrationVertical Integration
Includes all of the ways that output from Includes all of the ways that output from one stage of production is transferred to one stage of production is transferred to anotheranother
Accomplished by the mix of enterprises Accomplished by the mix of enterprises the farm is engaged inthe farm is engaged in
More common in livestock and specialty More common in livestock and specialty crop industries than in field cropscrop industries than in field crops
2424
2. Reduce Variability2. Reduce Variability Vertical Integration—ExamplesVertical Integration—Examples
• Backgrounding feeders from a cow-calf operation is integration within the cattle industry
• Joining a cooperative is integration across functions
Corn and Corn and hay raised and fed to dairy cows ishay raised and fed to dairy cows is integratiointegrationn across crop and livestock productionacross crop and livestock production
2525
2. Reduce Variability2. Reduce Variability Vertical Integration—IssuesVertical Integration—Issues
Record keeping very importantRecord keeping very important Production contracts can reduce risk, but Production contracts can reduce risk, but
may also reduce production controlmay also reduce production control Benefits are greatest in industries with Benefits are greatest in industries with
complex production/marketing complex production/marketing interrelationshipsinterrelationships
Management skill is requiredManagement skill is required
2626
2. Reduce Variability2. Reduce Variability Apply TechnologyApply Technology
Includes high tech and biotechnologyIncludes high tech and biotechnology Can improve management and production Can improve management and production
efficiencyefficiency The need to specialize increases as The need to specialize increases as
technical knowledge increasestechnical knowledge increases Need to compare benefits to costsNeed to compare benefits to costs May reduce production risk but increase May reduce production risk but increase
overall farm riskoverall farm risk
2727
2. Reduce Variability2. Reduce Variability Apply Technology—Examples Apply Technology—Examples
Computerize record keeping and Computerize record keeping and analysisanalysis
Plant Roundup Ready soybeansPlant Roundup Ready soybeans Plant seedless watermelonsPlant seedless watermelons Drip irrigation systemsDrip irrigation systems Minimum or no-till practicesMinimum or no-till practices Mechanical butterbean Mechanical butterbean
harvestingharvesting
2828
2. Reduce Variability2. Reduce Variability Apply TechnologyApply Technology
PositivesPositives
+ Reduce costReduce cost
+ Enhance yieldEnhance yield
+ Enhance qualityEnhance quality
+ Enhance PriceEnhance Price
+ Provide market accessProvide market access
+ Save timeSave time
+ Provide management Provide management informationinformation
NegativesNegatives
– Increased costsIncreased costs
– Increase riskIncrease risk
– Increased managementIncreased management
– Applicability based on Applicability based on size and scalesize and scale
– Consumer rejectionConsumer rejection
– Environmental riskEnvironmental risk
– Reduced flexibilityReduced flexibility
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2. Reduce Variability2. Reduce Variability Contingency PlanningContingency Planning
Whole farm business planningWhole farm business planning Budgeting Budgeting
Enterprise, partial, whole-farmEnterprise, partial, whole-farm Transition planningTransition planning
FeasibilityFeasibility Start-up costsStart-up costs Additional credit needsAdditional credit needs Cash flow requirementsCash flow requirements
3030
3. Transfer Risk3. Transfer RiskMethodsMethods
Production contracts can be used to Production contracts can be used to
transfer specific risks associated with transfer specific risks associated with
production to someone elseproduction to someone else
Insurance can be used to transfer Insurance can be used to transfer
certain risks to otherscertain risks to others
3131
3. Transfer Risk3. Transfer Risk What is a Contract?What is a Contract?
A written or oral agreement between two A written or oral agreement between two or more parties involving an enforceable or more parties involving an enforceable commitment to do or refrain from doing commitment to do or refrain from doing somethingsomething
In agriculture, contracts usually specify:In agriculture, contracts usually specify: Production and/or marketing conditions,Production and/or marketing conditions, Price,Price, Quantities to be produced, and, Quantities to be produced, and, Services to be providedServices to be provided
3333
Why Would Farmers Want Why Would Farmers Want Insurance?Insurance?
Protection against losses due to natural Protection against losses due to natural disastersdisasters
Facilitates business planningFacilitates business planning
Loan securityLoan security
Forward market crops with assuranceForward market crops with assurance
3434
Insurance PrinciplesInsurance Principles
Insurance is the pooling/combining of enough Insurance is the pooling/combining of enough small unpredictable risks so that over time the small unpredictable risks so that over time the losses for the combined group become losses for the combined group become statistically predictable.statistically predictable.
Basic purpose of insurance is to provide Basic purpose of insurance is to provide protection against economic loss arising from protection against economic loss arising from adverse events.adverse events.
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Insurance PrinciplesInsurance Principles
To be insurable, risks must meet this criteria:To be insurable, risks must meet this criteria: Loss would result in economic hardship.Loss would result in economic hardship. Sufficient number/quality of units must be Sufficient number/quality of units must be
exposed to the same peril.exposed to the same peril. Occurrences must be accidental/unintentional. Occurrences must be accidental/unintentional. Definite in time/place and measurable with Definite in time/place and measurable with
reasonable accuracy.reasonable accuracy.
3636
Crops Insurable in Rhode IslandCrops Insurable in Rhode Island
ApplesApples CornCorn Fresh Market CornFresh Market Corn Cranberries Cranberries NurseryNursery PeachesPeaches PotatoesPotatoes
An additional 100+ other crops insurable as An additional 100+ other crops insurable as part of Adjusted Gross Revenue Lite planpart of Adjusted Gross Revenue Lite plan
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Crops Insurable in Rhode IslandCrops Insurable in Rhode Island
COUNTYCOUNTY
ADJUSTEDADJUSTED GROSS GROSS
REVENUE*REVENUE*
APPLESAPPLES
CORNCORN
CRANBERRIESCRANBERRIES NURSERYNURSERY PEACHESPEACHES POTATOESPOTATOES AGRAGR AGR-AGR-
LiteLite CornCorn Fresh Fresh MarketMarket
BristolBristol (P)63(P)63 6161 90,4490,44 5050 5050
KentKent (P)63(P)63 6161 8686 90,4490,44 5050 9090 5050
NewportNewport (P)63(P)63 6161 8686 90,4490,44 5050 9090 5050 9090
ProvidenceProvidence (P)63(P)63 6161 8686 90,4490,44 5050 9090 5050 8686
WashingtonWashington (P)63(P)63 6161 8686 90,4490,44 5050 5050 9090
90 (APH) Actual Production History44 (CRC) Crop Revenue Coverage50 (DO) Dollar Amount of Insurance86 (GYC) Grower Yield Certification61 (AGR-L) Adjusted Gross Revenue Light63 (AGR) Adjusted Gross Revenue (P) Pilot program
*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.
3838
Why a Government Program?Why a Government Program?
Weather tends to impact a large areaWeather tends to impact a large area
Losses are correlated, insurance works best Losses are correlated, insurance works best when losses are not correlatedwhen losses are not correlated
Without federal subsidies premiums would be Without federal subsidies premiums would be too high for most farmers to participatetoo high for most farmers to participate
Without federal reinsurance, federal capital Without federal reinsurance, federal capital requirements would be too high for most requirements would be too high for most companies to participatecompanies to participate
3939
Basic Components of the ProgramBasic Components of the Program
Insurance Sales Agents(Most agents work for more than one company)
Responsible for Sales and Premium Collection of the Farmer-paid Portion
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)
Private Insurance CompaniesResponsible for Reinsurance and Delivery of the Program
Contribute to Policy Development
Farmers
4040
What Does the Federal What Does the Federal Government Do?Government Do?
Subsidize insuranceSubsidize insurance Pay delivery reimbursementPay delivery reimbursement Pay premium subsidyPay premium subsidy Offer reinsuranceOffer reinsurance
Set ratesSet rates Establish insurance policy provisionsEstablish insurance policy provisions Regulate the insurance companiesRegulate the insurance companies
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Risk Management AgencyRisk Management Agency
Administers Federal Crop Insurance Act for Board Administers Federal Crop Insurance Act for Board of Directors of FCICof Directors of FCIC
Headquartered in DC, major presence in Kansas Headquartered in DC, major presence in Kansas CityCity
10 Regional Service Offices10 Regional Service Offices(Rhode Island in the Raleigh, NC Region)(Rhode Island in the Raleigh, NC Region)
6 Area Compliance Offices6 Area Compliance Offices(Rhode Island is in the Eastern Regional Compliance (Rhode Island is in the Eastern Regional Compliance Office headquartered in Raleigh, NC)Office headquartered in Raleigh, NC)
4242
Crop InsuranceCrop Insurance 2002 Subsidy Schedule2002 Subsidy Schedule
Coverage LevelCoverage Level Subsidy %Subsidy % Producer Premium %Producer Premium %
CAT—50/55CAT—50/55 100100 00
50/10050/100 6767 3333
55/10055/100 6464 3636
60/10060/100 6464 3636
65/10065/100 5959 4141
70/10070/100 5959 4141
75/10075/100 5555 4545
80/10080/100 4848 5252
85/10085/100 3838 6262
4343
Multiple Peril Crop InsuranceMultiple Peril Crop Insurance Limited Resource Farmer Fee WaiverLimited Resource Farmer Fee Waiver
Limited resource farmers may be exempt Limited resource farmers may be exempt from paying the administrative fee for CAT from paying the administrative fee for CAT or additional coverage.or additional coverage.
Producer must sign waiver when applying Producer must sign waiver when applying for insurance. for insurance.
4444
RevisedRevised Waiver Statements for Waiver Statements for Limited Resource FarmerLimited Resource Farmer
I certify that I:I certify that I:(1)(1) Am a person with direct or indirect gross farm sales not more than 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 $100,000 in each of the previous two years (to be increased starting in fiscal year 2004…); and a total household income at or starting in fiscal year 2004…); and a total household income at or below the national poverty level… or less than 50 percent of below the national poverty level… or less than 50 percent of county median household income in each of the previous two county median household income in each of the previous two years…; oryears…; or
(2)(2) Was insured prior to the 2005 crop year, or for the 2005 crop Was insured prior to the 2005 crop year, or for the 2005 crop year, and administrative fees were waived… because I qualified year, and administrative fees were waived… because I qualified as a limited resource farmer under the… definition in effect at the as a limited resource farmer under the… definition in effect at the time, and that I remain qualified…time, and that I remain qualified…
4545
Determining Limited Resource Determining Limited Resource Farmer StatusFarmer Status
The Limited Resource Self Determination Tool may be The Limited Resource Self Determination Tool may be used to determine if an insured qualifies as a limited used to determine if an insured qualifies as a limited resource farmer.resource farmer.
See http://www.lrftool.sc.egov.usda.gov/ See http://www.lrftool.sc.egov.usda.gov/ for the actual dollar amount adjusted for inflation. for the actual dollar amount adjusted for inflation.
(Example:) Washington County Rhode Island 2008:(Example:) Washington County Rhode Island 2008: Gross farm sales Gross farm sales << $116,800 $116,800 Total Household Income Total Household Income << $31,301 $31,301
(Example:) Kent County Rhode Island 2008:(Example:) Kent County Rhode Island 2008: Gross farm sales Gross farm sales << $116,800 $116,800 Total Household Income Total Household Income << $28,067 $28,067
4747
What Does the Company Do?What Does the Company Do?
Insures farmerInsures farmer
Processes all paperworkProcesses all paperwork
Contracts agents and loss adjustersContracts agents and loss adjusters
Ensures all claims are fairly and promptly Ensures all claims are fairly and promptly paidpaid
Accepts risk on the insurance policiesAccepts risk on the insurance policies
Interacts with RMA/Agents/FarmersInteracts with RMA/Agents/Farmers
4848
Crop Insurance ProvidersCrop Insurance ProvidersIn Rhode Island in 2008In Rhode Island in 2008
1. ARMtech Insurance Services1. ARMtech Insurance Services800-335-0120800-335-0120www.armt.comwww.armt.com
2. Rain and Hail L.L.C.2. Rain and Hail L.L.C.800-776-4045 800-776-4045
www.rainhail.comwww.rainhail.com
3. Rural Community Insurance Services3. Rural Community Insurance Services800-451-3836800-451-3836www.rcis.comwww.rcis.com
4949
How Does A Farmer Get How Does A Farmer Get Insurance?Insurance?
Crop insurance is a contractual agreement Crop insurance is a contractual agreement between the farmer and an insurance company between the farmer and an insurance company brokered by an insurance agentbrokered by an insurance agent
Contacts an insurance agent who has a Contacts an insurance agent who has a contractual relationship with an insurance contractual relationship with an insurance company to sell crop insurancecompany to sell crop insurance
5050
Agent Delivery SystemAgent Delivery System
All crop insurance is sold by private insurance agents All crop insurance is sold by private insurance agents who: who: Are the company representative with the insured.Are the company representative with the insured. May represent multiple companies.May represent multiple companies. Are responsible to educate producer about products.Are responsible to educate producer about products. Are compensated by a percentage of premium.Are compensated by a percentage of premium.
Agent training requirements:Agent training requirements: State licensing requirements by insurance department State licensing requirements by insurance department
including annual continuing education hours. including annual continuing education hours. Additional RMA requirements to sell Federal products.Additional RMA requirements to sell Federal products. Competency testing every three years.Competency testing every three years.
5151
What Does the Agent Do?What Does the Agent Do?
Explains product options—quotes priceExplains product options—quotes price
Sells insurance contractSells insurance contract
Collects production and acreage reportCollects production and acreage report
Notifies company in case of lossNotifies company in case of loss
Informs farmer about changes to the Informs farmer about changes to the programprogram
Contact for farmer, local, professional, Contact for farmer, local, professional, trustedtrusted
5252
What Does the Adjuster do?What Does the Adjuster do?
Fact finding/data collection role.Fact finding/data collection role. Gather appropriate information.Gather appropriate information.
Visits the farm and physically appraises Visits the farm and physically appraises crop damage.crop damage.
Follows established procedures for Follows established procedures for determining extent of damage.determining extent of damage.
Documents farmer provided data.Documents farmer provided data. Assists policyholder in filing a claim for Assists policyholder in filing a claim for
indemnity.indemnity.
5353
Producer ObligationsProducer Obligations
Report acreage accurately.Report acreage accurately. Meet policy deadlines.Meet policy deadlines. Pay premiums when due.Pay premiums when due. Report losses immediately.Report losses immediately.
5454
Mistakes That Cost You MoneyMistakes That Cost You Money
Insurance mistakes that cost money:Insurance mistakes that cost money: Under-reporting planted acres per unit.Under-reporting planted acres per unit. Over-reporting planted acres per unit.Over-reporting planted acres per unit. Harvesting the crop in a manner other than Harvesting the crop in a manner other than
insured.insured. Destroying the insured crop without company Destroying the insured crop without company
consent.consent.
5555
How Does a Farmer Select an How Does a Farmer Select an Agent?Agent?
Q: Why do you select one agent Q: Why do you select one agent over over another? another?
A: Service!!!A: Service!!!
5656
Components of Good Agent Components of Good Agent ServiceService
1.1. Product KnowledgeProduct KnowledgeKnows what products are available and protection Knows what products are available and protection they offerthey offer
2.2. Provides GuidanceProvides GuidanceHelps find best product/farming operation fitHelps find best product/farming operation fit
3.3. Sends RemindersSends RemindersHelps insured meet deadlines and policy Helps insured meet deadlines and policy requirementsrequirements
4.4. Available for AssistanceAvailable for AssistanceAvailable to answer questions and provide Available to answer questions and provide assistanceassistance
5.5. Provide Gap MeasuresProvide Gap MeasuresGoes the extra mileGoes the extra mile
5757
Finding An AgentFinding An Agent
Ask other growers for recommendation.Ask other growers for recommendation. Check with insurance agency where you Check with insurance agency where you
purchase other types of insurance.purchase other types of insurance. Check with farm organizations you have a Check with farm organizations you have a
relationship with.relationship with. Use the USDA Risk Management Agency’s Use the USDA Risk Management Agency’s
Web site’s “Agent Locator.”Web site’s “Agent Locator.”
www.rma.usda.govwww.rma.usda.gov