Crop Insurance Education for Michigan’s Beginning Ag Producers

Crop Insurance Education for Michigan’s

Beginning Ag Producers

Custom Ag Solutions

United States Department of Agriculture

Risk Management Agency (RMA)

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Program Sponsorship, Coordination, and Delivery

•USDA / Risk Management Agency (RMA)– Oversees $62B Federal Crop Insurance Program– Springfield, IL, Regional Office– Around 500 Employees – Main Offices in Washington, DC, and Kansas City, MO

•Custom Ag Solutions– Crop Insurance Education Programs– Risk Management Tools– Rural Appraisals– Technology Development

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Think “Chance”

Think “Bad”

and

What is Risk?

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Chance

Bad

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Are You a Risk Taker?

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Are You Risk Averse?

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Risk Taker?

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Are You Risk Averse?

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Risk Taker?

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Not All Risks Are Equal

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Some Risks Can Be Managed

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Some Risks Can’t

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Some Risks Bring Rewards

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Some Risks Bring Losses

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1. Market Risk

2. Production Risk

3. Financial Risk

4. Human Risk

5. Legal Risk

Five Categories of Agricultural Risk

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Risk ManagementChoosing Among Alternatives to

Balance Risk and Reward

A B C

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How Can We BalanceRisk and Reward in Agriculture?

• Management Practices

• Diversification

• Flexibility

• Transfer Risk to Someone Else (e.g., Crop Insurance)

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• You now own the Green Jeans Nursery, and you will operate it for five years.

• Your profitability could vary dramatically depending on uncontrollable chance and the risks you choose to take.

Green Jeans Nursery

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• Try to Earn $400,000 or more

• Try to Earn $150,000 to $400,000

• If your cash balance falls below -$10,000 at any time during the five years, the bank forecloses on your operation, and you are out of the game.

Green Jeans Nursery Risk vs. Reward

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Green Jeans Nursery - Year 1

• You have just inherited two 10,000 square foot greenhouses configured for bedding plant production.

• Because of volatile production and market situations, bedding plants have more potential to make money and lose money than landscape trees and ornamentals.

• Landscape trees and ornamentals generate lower average returns, but are less likely to lose money in the long run.

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Expected Net Income from Bedding Plants and Landscape Trees is as Follows:

Units Price Expenses ProfitHigh 3.25 $6.60 237,000$ 192,000$

Average 2.50 $5.54 237,000$ 40,000$ Low 1.75 $4.60 237,000$ (76,000)$

Units Price Expenses ProfitHigh 237.00 $80.00 86,500$ 103,100$

Average 194.17 $60.00 86,500$ 30,000$ Low 150.00 $40.00 86,500$ (26,500)$

Landscape Trees

Bedding Plants

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• You could sell one of your greenhouse units to a neighbor and buy 5 acres of landscape trees from another neighbor.

• If you raise both bedding plants and landscape trees you are 25% less likely to go bankrupt than if you raise only bedding plants.

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• You could also sell both of your greenhouse units and buy 10 acres of landscape trees that your neighbor is selling.

• You can make this change for no money out of pocket.

• If you raise only landscape trees you are less likely to reach $150,000 in five years, but you are also 75% less likely to go bankrupt than if you just produce bedding plants.


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Green Jeans Nursery - Year 1Expected Net Income:• Two greenhouse units (bedding plants) • 10 acres of landscape trees • One greenhouse unit and 5 acres of

landscape trees

Minimum Average MaximumBoth (50,000)$ 35,000$ 145,000$ Bedding Plants (76,000)$ 40,000$ 192,000$ Landscape (26,500)$ 30,000$ 103,000$

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Your Year 1 Choices:

1. Stick with bedding plants only

2. Diversify to raise both bedding plants and landscape trees

3. Convert your entire operation to landscape trees


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Transfer Risk to Someone Else

• Contracting– Production– Pricing

• Hedging– Futures– Options

• Crop Insurance

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• It’s December, and a buyer has offered to buy half of your bedding plants or landscape trees or both this fall.

• He is offering $45/tree for 1,000 landscape trees, and $5.45/unit for 25,000 units of bedding plants. These are wholesale prices.

• Assuming average production, this means you are almost certain to make your expected average net income.


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• Prices vary by as much as 50% from year to year, and your net income could be significantly higher if you allow the market to dictate prices.

• On the other hand, prices can just as easily drop, and a soft market could put you out of business quickly.


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1. Take the buyer’s offer, and establish your prices today

2. Sell all of your product retail

Green Jeans Nursery - Year 2Your Year 2 Choices:

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• The real estate market is hot and you are considering selling your farm to a developer.

• With the money from the sale you could buy a nursery operation further out in the country and operate without a mortgage, thereby significantly reducing your annual expenses.

• However, the new farm is also farther from the city and your customer base. Customer traffic and resulting sales are likely to be less certain in the new location.


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Green Jeans Nursery - Year 3Profitability Comparison between the two farms:

Green Jeans Minimum Average Maximum

Both -$50,000 $35,000 $150,000

Bedding -$76,000 $40,000 $190,000

Landscape -$26,000 $30,000 $100,000

New Minimum Average Maximum

Both -$ 70,000 $40,000 $180,000

Bedding -$100,000 $45,000 $220,000

Landscape -$ 40,000 $35,000 $130,000

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• The new farm is zoned for agricultural production, and you can produce landscape trees, bedding plants, or both.

• If you buy the new farm, you will produce the same products you currently produce.


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Green Jeans Nursery - Year 3Your Year 3 Choices:

Green Jeans Minimum Average Maximum

Both -$50,000 $35,000 $150,000

Bedding -$76,000 $40,000 $190,000

Landscape -$26,000 $30,000 $100,000

New Minimum Average Maximum

Both -$ 70,000 $40,000 $180,000

Bedding -$100,000 $45,000 $220,000

Landscape -$ 40,000 $35,000 $130,000

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Crop Insurance 101

What is Insurance?Insurance is purchased protection against a specific loss over a defined period of time.

What is Crop Insurance?Crop Insurance is purchased protection against specific crop losses over a defined period of time.

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How Does Crop Insurance Work?

Risk Transference (pooling):Risk is Transferred from Many Individuals to the Federal Crop Insurance Corporation and Participating Insurance Companies.

Law of Large Numbers: The Larger the Pool, the More Predictable the Losses.

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Federal Crop Insurance Programs

• Multiple Peril Crop Insurance (MPCI)

• Catastrophic (CAT)

• Crop Revenue Coverage (CRC)

• Income Protection (IP)

• Group Risk Plan (GRP)

• Revenue Assurance (RA)

• Adjusted Gross Revenue (AGR)

• Livestock Risk Protection (LRP)

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• Insurable Interest

• Levels of Coverage

• Deductible

• Underwriting

Crop Insurance 101 - Terms

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• Rating

• Premium

• Loss Event

• Indemnity

Crop Insurance 101 - Terms

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Year Revenues Premium Indemnity Net Revenues

1 $ 100

2 $ 50

3 $ 150

4 $ 25

5 $ 175

Avg. $ 100

Basic Crop Insurance Example

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1 $ 100 - $ 25

2 $ 50 - $ 25

3 $ 150 - $ 25

4 $ 25 - $ 25

5 $ 175 - $ 25

Avg. $ 100


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1 $ 100 - $ 25 $ 0

2 $ 50 - $ 25 $ 50

3 $ 150 - $ 25 $ 0

4 $ 25 - $ 25 $ 75

5 $ 175 - $ 25 $ 0

Avg. $ 100


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1 $ 100 - $ 25 $ 0 $ 75

2 $ 50 - $ 25 $ 50 $ 75

3 $ 150 - $ 25 $ 0 $ 125

4 $ 25 - $ 25 $ 75 $ 75

5 $ 175 - $ 25 $ 0 $ 150

Avg. $ 100 $ 100


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UNITED STATESIn 2007, RMA insured over $62 billion in crop value across 1 million policies, 250 million acres, and 100 commodities.

MichiganIn 2007, RMA insured nearly $1 billion in crop value across 3,600 policies, 3.6 million acres, and 20 commodities.

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Michigan Commodities Covered by Federal Crop Insurance Programs

•Apples•Barley•Blueberries•Cabbage•Cherries•Corn•Dry Beans•Grapes•Green Peas•Hybrid Seed Corn

•Oats•Onions•Peaches•Popcorn•Potatoes•Processed Beans•Soybeans•Sugar Beets•Tomatoes•Wheat


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• For $2,000 you can buy RMA’s nursery insurance, which protects against damage from wildlife, fire, and irrigation system failure.

• Losses from these events are rare, but they can be catastrophic when they do occur.

• On the other hand, every dollar counts in this game.


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1. Buy nursery insurance

2. Take your chances

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AGR-Lite Based on a producer’s average historical

adjusted gross revenue. Protects against many causes of loss. Premiums are subsidized up to 56 percent.

Federal Risk Management(Crop Insurance) Programs

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1. Buy AGR-Lite

2. Take your chances with the market


For $2,000, you can purchase an AGR-Lite policy that guarantees you an adjusted gross revenue of at least 80% of your average revenues.

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Summary

Risk is the “Chance” of a “Bad” Outcome.Some Risks Can be Managed; Some Can’t.Risk Management Involves the Concept of

“Balancing Risk and Reward.”We Can Sometimes Transfer Risk to Others

Using Tools such as (Crop) Insurance.Federal Crop Insurance Programs are

Subsidized to Promote Grower Participation

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Thank You

Documents

Crop Insurance Education for Michigan’s Beginning Ag Producers