2015 Business of Farming Conference: Risk Management Options: Crop Insurance and Accessing Credit

Risk Management Options
James Robison -- RAFI-USA
Charles Zink -- USDA Farm Service Agency
Molly Nicholie --ASAP

Welcome and Introductions (Molly Nicholie- 5 minutes)
2

Five primary sources of risk
—
Production Risks
Marketing Risks
Financial Risks
Legal Risks
Human Resource Risks
3

Managing Risk: Diversification

Managing Risk: Market Opportunities

Managing Risk: Regional Branding

Managing Risk:
Know your strengths
Know your weaknesses
Recognize opportunities as they arise
Understand threats

Whole Farm Revenue
Protection
James Robinson, Research and Policy Associate

The Rural Advancement Foundation International (RAFI)
combines on-the-ground services with policy and market advocacy in order to ensure
that farmers have the opportunity to make the right choices for their farm and families
and that these are also the right choices for the environment and farming
communities.

Sections
1. Crop Insurance Overview: Why does RAFI work on crop
insurance?
1. Whole Farm Revenue Protection (WFRP): An Overview
1. The Nuts and Bolts of WFRP: How does it work?
• Crop Insurance 101
• Application Process
• Claims Process
• Model Farm Premiums

Crop Insurance
Overview: Why Does
RAFI Work on Crop
Insurance?

How many have considered crop
insurance?
How many of you have crop
insurance?

What comes to mind when you hear…
“crop
insurance”

A farm’s risk management strategy
and overall level of risk is directly
linked with what financial concept?
Credit Worthiness

The structure of lending and crop insurance programs drives investment and
production decisions long before a disaster takes place.
Farmer Decisions
• Specialty crops?
• More diverse cropping
systems?
• Other production-
based risk
management
practices?
Creditors
• Limited recognition of
production-based risk
management, like crop,
and income diversification
• So, creditors reduce risk by
requiring crop insurance
Crop Insurance
• Historically not designed
for specialty crop, diverse,
or livestock producers
Farmers Find
Limited Credit
Opportunities for
Specialty Crop,
Diversified and
Livestock
Operations

What does this mean for specialty
crop, diversified, and livestock?
• If obtaining credit is difficult for specialty crop and diversified
producers, then it is:
• Harder to access land,
• More likely producers farm under production contracts,
• And harder to expand operations.

1.Whole Farm
Revenue Protection
(WFRP): An
Overview

Why is WFRP Important?
• Multi-peril Insurance
• Pest related losses
• Weather related losses
• Losses in price caused by “natural” events
• Incentivizes Diversification
• Insures multiple crops without requiring a producer to purchase multiple
policies
• Premiums reduced for growing up to 7 additional crops
• Covers crops and livestock

What’s Covered by WFRP?
• Crops
• Any agricultural product established or produced on your farm
operation, except timber, forest, and forest products, animals for
sport, show or pets
• Covers livestock up to 35% of revenue or $1 million
• Events
• Insures against loss of approved revenue due to unavoidable natural
causes that occur during the insurance year
• Includes declines in both crop yield and price as long as the decline
can be linked to a natural cause (i.e., weather-related)
• “Decline in local market price will be presumed to be from unavoidable
natural causes unless the Company or FCIC is able to specifically identify
a man-made cause that resulted in a measurable change in the price.”

What’s Not Covered by WFRP?
• Yield
• Negligence, mismanagement, wrongdoing
• Act of person rather than nature (chemical drift, fire)
• Water contained by dam or reservoir
• Damage to machinery or equipment
• Breakdown in irrigation equipment or practices when not related to
natural cause
• Theft and vandalism
• Price
• Quarantine, boycott or refusal of anyone to accept commodities
• Lack of labor
• Deterioration of commodities in storage, unless due to unavoidable
natural cause

Why Did Prior Whole Farm Revenue
Crop Insurance Policies Not Work?
• Adjusted Gross Revenue (AGR) & Adjusted Gross Revenue-
Lite (AGR-Lite)
• Geographically Limited- Policies were not available in some major farming
states
• Coverage- limited to 72% of average adjusted gross revenue
• Expensive- Producers frequently reported the policy was not cost-
effective
• Difficulty Expanding Coverage- producers were required to show a history
of crop expansion in prior years before being able to expand coverage
• Low Liability Limit- $1 million liability limit
• Only 3 policies sold in NC each of the last three years

WFRP Comparison
WFRP AGR-Lite AGR
Type of Coverage Revenue Revenue Revenue
5-year Tax History Yes- Schedule
F
Yes- Schedule
F
Yes-
Schedule F
Diversification
Incentive
Yes Yes Yes
Coverage Level 50%-85% 65%-80% 65%-80%
Payment Rate 100% 75%-90% 75%-90%
Maximum Subsidy 80% 59% 59%
Covers Post Production
Expenses
Yes, on-farm,
post-production
expenses that do
not add value
No No
Liability Limit $8.5 Million $1 million $6.5 million

Additional Needed Reforms
• Beginning farmers do not have
access to WRFP until 7th year of
farming
• 5 years of Schedule F tax records
• Plus 1 lag year
• No option to build a history using
transitional-yields
• How can we reform the policy
during the pilot phase to increase
access for beginning farmers?

The Nuts and Bolts:
WFRP in Action

Crop Insurance 101
• Past records → On average, you earn $1,000 in revenue on the farm, so
expect to earn this in 2015
• You decide to buy a policy that insures 85% of your expected revenue:
• $1,000 * 85% = $850
Hail hits a week before
harvest, wiping out 50% of
the crop and leaving you
with only $500 in revenue
for the year.
$1,000 expected revenue
$500 actual revenue
$350 Pa
$850 coverage level
$350 indemnity

Crop Insurance 101
• Past records → On average, you earn $1,000 in revenue on the farm, so
expect to earn this in 2015
• You decide to buy a policy that insures 85% of your expected revenue:
• $1,000 * 85% = $850
Minor flooding in a single
field brings your revenue
down to $900 in 2015.
$1,000 expected revenue
$900 actual revenue
$350 Pa
$850 coverage level
NO INDEMNITY

Application Process: Tax
Records
• Requires 5 consecutive years of Schedule F
• Sales of products raised on your farm for sale (or bought for resale),
such as livestock, produce, or grains
• OR you may use another person’s tax returns if you
purchased, inherited, or leased 90% of their farm operation
• Prices must be from verifiable sources and come with
documentation

Approved
revenue
Coverage
level
Actual
revenue
Application Process: Calculating
Approved Revenue

• The lower of historic and expected revenue
• Historic revenue from 5 years of Schedule F
calculated using Allowable Revenue and
Expense Worksheets
• May include adjustment for recent or future
growth
• Expected yield based on expectations for the
coming year and the Farm Operation Report
Approved
revenue
Coverage
level
Actual
revenue

Year Revenue
2009 $5,608
2010 $6,789
2011 $4,578
2012 $3,567
2013 $7,890
5-Year Average = $5,686
*Can also expand by 10% with approval of insurance provider
Calculating historic revenue
Approved
revenue
Coverage
level
Actual
revenue

Approved
revenue
Coverage
level
Actual
revenue
Calculating expected revenue
• Farm Operation Reports
• Submitted at sales closing date for each insurance year
• Detailed information for each commodity you intend to produce
or purchase for resale on your farm
• what the farm can reasonably produce during the insurance year
• expected revenue for each commodity, reflecting expected sale
price in markets where the crop is normally sold
• 3 Versions
• Intended and Revised – Submitted before season begins and
before coverage level is finalized, used to calculated expected
revenue
• Final – Submitted after season is closed, reflects actual
production and sales

Farm Operation Report - Sample

Commodity
Name
Method
of Estab. Yield/Acre Expected Value
Expected
Value/Ac
Intende
d
Quantity
Expected
Revenue
Cucumbers Acres 425 carton $20/40 lb carton $8,500 0.10 $850
Greens Acres 800 carton $16/20 lb carton $12,800 0.10 $1,280
Strawberrie
s
Acres 1,750 cont $17/8 lb
container
$29,750 0.10 $2,975
Total Expected Revenue $5,105
Calculating expected revenue
Approved
revenue
Coverage
level
Actual
revenue
• Expected values must be realistic and consistent with available local market
information, supported by verifiable records and take into account current
local markets, cycles and trends.
Historic revenue = $5,686
Expected revenue = $5,105
What is the
approved revenue?

Approved
revenue
Coverage
level
Actual
revenue
• Approved revenue = $5,105
• 50% to 85% in 5% increments available
– 85% level is only available if you have 3 or more crop
– Higher coverage=higher premium cost
$5,105 * 50% = $2,553
$5,105 * 85% = $4,339

Approved
revenue
Coverage
level
Actual
revenue
Commodity
Name
Expected
Revenue
10% Loss,
Actual
Revenue
40% Loss,
Actual Revenue
Cucumbers $850 $746 $900
Greens $1,280 $990 $1,400
Strawberries $2,975 $2,858 $763
Total
Revenue $5,105 $4,594 $3,063

Approved
revenue
Coverage
level
Actual
revenue
Review
• Approved revenue is the lowest of 5-year
historical revenue from Schedule F or
expected revenue from Farm Operation
Report
• Coverage level is up to farmer, based on
premiums and perceived risk

1. Timeline: What to do after experiencing a loss?
1. Documentation: What forms will I need to file a claim?
1. Claims Calculation Process: How is my indemnity calculated?
1. Miscellaneous Claims Information: When am I eligible for a
replant payment? What happens if I amend tax forms after a
payment is received? What happens if I’m audited?
Claims Process

Timeline
• 72 hours after initial discovery to
notify insurer of loss
• 60 days after farm tax
forms filed

Required Documentation
Claim Year
Updated
Application
forms
• Allowable Expenses Worksheet
• Allowable Revenue Worksheet
• Final Farm Operation Report
Additional
Forms
• Inventory and Accounts Receivable
• Market Animal and Nursery Inventory if applicable
• Replant Payment Worksheet if applicable
Claim for Indemnity Form

Claims For Indemnity Form
Approved Revenue * Coverage Level =
Allowable revenue with
adjustments =
Insured
Revenue
Revenue-to-
count

Insured Revenue – Revenue-to-Count =

Insured Revenue – Revenue-to-Count =
I bought coverage for $140,000. My farm’s actual
revenue was $130,000. What’s my claim?

Insured Revenue
What you bought insurance for,
expected revenue during application process
• Claim = Insured Revenue – Revenue-to-Count
• Insured Revenue
- Approved Revenue * Coverage Level
- Both from application process
- Approved revenue based on farm’s history
- Coverage level elected by farmer
• Potential adjustment for crop losses

Revenue-to-Count
• Claim = Insured Revenue – Revenue-to-Count
• Allowable revenue from claim year Schedule F
- As determined by Allowable Revenue and
Allowable Expenses worksheets
• Adjustments with forms for changes in
- Inventory
- Accounts receivable & payable
- Market animal and nursery inventory
- Other
What actually happened?

Inventory grows
(End > Beginning)
Add to revenue-to-count Lowers claim
Inventory falls
(End < Beginning)
Subtract from revenue-to-count Increases
claim
Claim = Insured Revenue – Revenue-to-Count
Inventory Report

Inventory grows
(End > Beginning)
Inventory falls
(End < Beginning)
claim
Claim = Insured Revenue – Revenue-to-Count
Inventory Report
WFRP only covers revenue from
commodities produced within the
current tax year

Accounts receivable grows
(End > Beginning)
Accounts receivable falls
(End < Beginning)
claim
Accounts Report

Market Inventory and Other
Adjustments
• Market animal and nursery inventory
• Other
- Revenue loss from uninsured cause of loss
▪ Quarantine, neglect, etc.
- Abandoned acreage
- Other indemnity payments
- Gains from hedging
- Anything else discussed by insurer and farmer

Approved Revenue * Coverage Level =
Allowable revenue with
adjustments =

Model Farm Examples
• What is Diversification?
• WFRP offers a premium discount for more diverse
operations
– But what does this mean?
• Crop Diversification
– Count of crops grown
• Income Diversification
– How much farm income comes from each crop
RMA WANTS BOTH

But How Much Does it Cost?
• It depends!
– How much revenue you want to insure
– The premium level
– The specific crops you grow and how they interact
– How many crops you grow (more diversity = lower
premium!)
• Ultimately, this must be settled with your agent
• For your own purposes, http://tinyurl.com/USDA-
WFRP

Crop Revenue % of Revenue
Cucumbers $400,000 33%
Bell Peppers $400,000 33%
Tomatoes $400,000 33%
85% 80% 75% 70% 65% 60% 55% 50%
Total $71,808 $40,090 $24,300 $19,992 $16,692 $14,256 $12,012 $10,200
Per
Acre $334 $186 $113 $93 $78 $66 $56 $47
• Mid-scale specialty crop commercial operation:
– $1.2 million in revenue, 215 acres
Model Farm Example
Producer-Paid Premium

Crop Diversification
Tomatoes $390,000 32%
Watermelons $30,000 3%
85% 80% 75% 70% 65% 60% 55% 50%
Total $72,706 $40,646 $24,660 $20,160 $16,848 $14,256 $12,276 $10,440
Differenc
e $898 $556 $360 $168 $156 $0 $264 $240

Income Diversification
Tomatoes $500,000 42%
85% 80% 75% 70% 65% 60% 55% 50%
Total $78,091 $43,709 $26,460 $21,840 $18,096 $15,264 $13,068 $11,160
Differenc
e $6,283 $3,619 $2,160 $1,848 $1,404 $1,008 $1,056 $960

Tomatoes $300,000 25%
Watermelons $300,000 25%
85% 80% 75% 70% 65% 60% 55% 50%
Total $69,564 $38,698 $23,580 $19,656 $16,380 $13,968 $12,012 $10,320
Differenc
e ($2,244) ($1,392) ($720) ($336) ($312) ($288) $0 $120
Combined Diversification

How Can I Calculate Premiums
for My Farm?
http://tinyurl.com/USDA-WFRP

3) Fill in Individual Coverage
How much is covered by other policies?
Historical, Schedule F, Revenue
Expected, Farm Output
Report, Revenue

4) Premium Estimates & Details

RECAP
• Sign-up for more info on sign-in sheet
• Talk to crop insurance agents, try out the tools
yourself and please please let us know how it goes
• WFRP – Completed application must be submitted
no later than the sales closing date specified in the
actuarial documents (corresponds to spring sales
closing dates for the county).
– February 28th, March 15th

THANK YOU.
Follow-up thoughts or questions?
James, james@rafiusa.org, 919-542-1396 ext. 209

USDA – Farm Service
Agency
Charles E. Zink
County Executive Director
Madison/Buncombe County FSA Office

Farm Number (Why)
• Voluntary.
• ID’s the land.
• Required to apply for USDA programs.
• Many NCDA and Soil and Water grants
and programs require a Farm Number.
• Other benefits depending on the
county.

Farm Number (How)
• Landowner file a request with local FSA
Office.
• Copy of the deed. (Address of property,
survey, tax maps, or adjoining property
owners helpful.)
• ID numbers and address for each
owner listed on the deed.
• Entities have additional requirements.

NAP
• Non Insurable Crop Disaster
Assistance Program
• Provides coverage for crop losses on
crops when crop insurance is not
offered.
• Covered losses are caused by natural
disaster.
• Apply for the program at your local FSA
Office.

Approved NAP Crops
CROP APPLICATION CLOSING
DATE
CROP APPLICATION CLOSING
DATE
Alfalfa 11/15/14 Millet 02/28/15
Apples 11/20/14 Oats 09/30/14
Artichoke 02/28/15 Okra 02/28/15
Asparagus 02/28/15 Onions 01/01/15
Barley 09/30/14 Peaches 11/20/14
Basil 02/28/15 Peanuts 02/28/15
Beans 03/15/15 Pears 11/20/14
Beets 01/01/15 Peas 02/28/15
Blackberries 11/20/14 Pecans 02/28/15
Blueberries 11/20/14 Peppers 02/28/15
Broccoli 01/01/15 Plums 11/20/14
Brussels Sprouts 02/28/15 Potatoes 01/31/15
Cabbage 02/28/15 Pumpkins 02/28/15
Caneberries 11/20/14 Radishes 02/28/15
Canola 09/30/14 Raspberries 11/20/14
Cantaloupes 02/28/15 Rutabaga 01/01/15
Carrots 01/01/15 Rye 09/30/14
Cauliflower 01/01/15 Sage - herb 09/01/14
Celery 01/01/15 Sorghum 02/28/15
Chinese Bitter Melon 02/28/15 Soybeans 02/28/15
Chives 01/01/15 Spinach 01/01/15
Cilantro 01/01/15 Sprite Melon 02/28/15
Corn (SWT, POP, TRO) 02/28/15 Squash 02/28/15
Cucumbers (FH) (Proc) 02/28/15 Strawberries 09/01/14
Dill 01/01/15 Sunflowers 02/28/15
Eggplant 02/28/15 Sweet Potatoes 02/28/15
Grapes 11/20/14 Tomatillos 02/28/15
Grazing (Grass/Mixed Forg) 11/15/14 Tomatoes 02/28/15
Greens 01/01/15 Triticale 09/30/14
Hay (Mixed Forage & Grass) (codes 0102 & 0296) 11/15/14 Turnips 01/01/15
Honey 11/20/14 Watermelons 02/28/15
Honeydew 02/28/15 Wheat 09/30/14
Kale 01/01/15
Kenaf 02/28/15
Kohlrabi 02/28/15
VALUE LOSS: Aquaculture, Christmas Trees, Ginseng, Turf Grass Sod,
Mushrooms, Floriculture & Strawberry Rootstock
09/01/14Korean Golden Melon 02/28/15
Leeks 02/28/15
Lespedeza 11/15/14
VALUE LOSS: Ornamental Nursery/Propagation Stock Nonornamental Nursery 05/01/14
Lettuce 01/01/15

NAP (Eligibility)
• Application and administrative fee must
be filed by sales closing date for the
crop.
• Eligible producer is a landowner,
tenant, or sharecropper who shares in
the risk of producing the eligible crop
and the individual or entity’s average
adjusted gross income (AGI) cannot
exceed $900,000.

NAP (Coverage)
• Basic Coverage guarantees 50% of normal
yield at 55% of established price
– Cost for basic coverage is $250 per crop.
– Not to exceed $750 per county.
– Not to exceed $1,875 total in all counties.
• Starting in 2015 you will have the option of
buy up coverage, up 65% yield guarantee
at 100% of established price.
– Cost for buy up coverage is 5.25% of
guarantee not to exceed $6,562.50.

NAP (Coverage)
• Producers who elect buy up coverage
must pay the administrative fee plus a
premium equal to:
– The producer's share of the crop; times
– The number of acres of the crop; times
– The approved yield per acre; times
– The coverage level; times the average
market price; times
– 5.25% premium fee.

NAP (Eligibility)
• Limited resource, traditionally
underserved, and beginning farmers
are eligible for a waiver of the
administrative fee and a 50% premium
reduction when they file form CCC-860,
Socially Disadvantaged, Limited
Resource and Beginning Farmer or
Rancher Certification.

NAP (Eligibility)
• Beginning Farmer – a person or entity
who:
– Has not operated a farm or ranch for more
than 10 years, and
– Materially and substantially participates in the
operation.
• For an entity to qualify as a beginning
farmer, all members must be related by
blood or marriage and each must be a
beginning farmer.

NAP (Eligibility)
• Limited resource farmer – a person or
entity that:
– Earns no more than $176,800 in each of the 2
previous tax years, and
– Has a total household income at or below the
national poverty level or less than 50% of the
county Median household income for the 2
previous years ($23,850 for most WNC
counties).
• Online tool located at
www.lrftool.sc.egov.usda.gov

NAP (Eligibility)
• Socially disadvantaged farmer – a person or
entity that consider their identity to be in one of
the following groups:
– African Americans;
– American Indians or Alaskan Natives:
– Asians or Asian Americans;
– Hispanics;
– Native Hawaiians or Pacific Islanders;
– Women
• For entity to qualify the majority interest must
be held by socially disadvantaged individuals.

NAP (Loss)
• Eligible crop losses include the
following;
– Damaging weather, such as drought,
freeze, hail, excessive rain, wind, etc.
– Adverse natural occurrences, such as
flood or earthquake
– Conditions related to damaging weather or
natural occurrences, such as excessive
heat, plant disease, or insect infestation.

NAP (Loss)
• Producers with NAP coverage must notify
FSA within 15 days of the earlier of:
– A natural disaster occurrence;
– The final planting date if planting is prevented
by the natural disaster;
– The date that damage to the crop become
apparent;
– The normal harvest date
– Hand-harvested crops and perishable crops
must notify FSA within 72 hours of when a
loss becomes apparent.

NAP (Loss)
• May report loss by:
– phone (follow up with office visit).
– Office visit.
• FSA will schedule an adjustor to visit
the farm or farms to determine if the
loss was due to natural disaster,
amount, and if the crop can be
salvaged.

NAP (Premium Calculations)
• Premium Calculator
– www.fsa.usda.gov

NAP (Crop Reporting)
• NAP producers are required to make crop
acreage reports each year. Must report by
crop reporting deadline (most crops July 15);
– Name and type of crop planted.
– Farm, field location and acreage.
– Who shares in the crop.
– Date crop is planted.
– Intended use.
• In most cases this requires an office visit
because the producer must identify the fields
on aerial photography.

NAP (Record Keeping)
• Producers are required to provide record of
production of the crop. Records must be:
– Verifiable - such as sales receipts with dates,
name of buyer, product sold, and amount.
– Reliable - such as pick records, farm book
keeping records.
– Records must be easy to read and
understand.
• Producers should contact FSA for
questions regarding acceptable production
records.

NAP
• Failure to make crop acreage report and
provide production information for NAP
covered crops may result in reduced or zero
NAP assistance.
• The acreage and production reports are used
to calculate the approved yield. The approved
yield is an average of the producer’s actual
production history (APH) for a minimum of 4 to
a maximum of 10 crop years.
• A producer’s approved yield may be calculated
using substantially reduced yield data if
acreage and suitable production records are
not provided.

FSA Loans
• FSA’s loan programs are designed to
help family farmers to start, purchase or
expand their farming operation.
• Several loan options are available and
each person’s needs are different so
visit our booth during lunch to get
detailed information.

2015 Business of Farming Conference: Risk Management Options: Crop Insurance and Accessing Credit

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2015 Business of Farming Conference: Risk Management Options: Crop Insurance and Accessing Credit