One good way for organic growers to manage risk

Crops grown organically were not always clearly eligible for insurance coverage. Mike Sciabarrasi, extension professor of agricultural business management with the University of New Hampshire Cooperative Extension, wants farmers who grow organically to know that insurance is available to them and why they should consider coverage.

What can be covered?

Losses from the usual factors—bad weather, nasty bugs, marauding wildlife, fire and failed irrigation systems—can be covered. When a revenue policy is included, drops in revenue due to a drop in price or a loss of market can also be covered. There are, of course, conditions. To be insurable, crops must be grown under recognizably “good farming practices.” Once defined only as those associated with conventional agriculture, the definition of good farming practices was expanded under the Agricultural Risk Protection Act of 2000 (ARPA) to include organic practices. Prior to this USDA ruling, crop insurance may not have covered losses when organic insect, disease or weed control measures did not produce the same results as those used in conventional agriculture. Acreage certified organic, transitional or buffer zone can now be included if it is identified as such in insurance documents. Not insurable is loss due to failure to comply with organic standards. Also not covered is contamination by drift of prohibited substances onto land where crops are being grown organically.

Pooling losses

Like other insurance, crop insurance works by transferring risk. For many individual farms, the risk of crop failure or farm revenue loss is transferred to both federal and private insurance companies. Within a defined time period, crop insurance protects against specific crop losses. Revenue insurance protects against farm revenue losses due to market fluctuations. Policy rates and procedures covering crops and revenue losses are written by the USDA’s Risk Management Agency (RMA). Policies are sold and serviced by private companies that also set payments in the event of a loss. Policy premium costs are subsidized by the federal government. When farm production, inventory value or revenue is less than the guaranteed amount specified in the policy and any or all of these is caused by an insured event, crop insurance pays an indemnity.

Three types of insurance programs

“Terms and coverages vary from state to state,” cautions Sciabarrasi, adding that it’s important to use the information in this article only as a guideline. In New Hampshire, for instance, organic growers have basic choices such as any type of crop insurance policy approved for specific crops or a whole farm revenue policy that covers all agricultural production on one farm.

Production Guarantee insurance is coverage based on average production history (APH), guaranteeing a percentage of five-year production history of a specific crop. Here are two examples of indemnity payment calculations, one for corn, the other for apples, based on a farm’s five-year production history for the crop:

Corn
Indemnity Payment Based on Five-Year APH

Five-year yield history = 100 bushels/acre

Acres insured = 50

Elected coverage level = 65 percent

Production guarantee = 100 bushels x 50 acres x 65 percent coverage = 3,250 bushels

Actual production = 55 bushels an acre = 2,750 bushels

Production deficit = 3,250 – 2,750 = 500 bushels

Price election = $3.55 a bushel

Indemnity payment = 500 x $3.55 = $1,775

Apples

Indemnity Payment Based on Five-Year APH

Five-year yield history = 500 bushels an acre

Acres insured = 40

Elected coverage level = 60 percent

Production guarantee = 500 bushels x 40 acres x 60 percent = 12,000 bushels

Actual production = 200 bushels an acre = 8,000 bushels

Production deficit = 4,000 bushels

Price election—fresh market apples = $12.15 a bushel

Indemnity payment = 4,000 x $12.15 = $48,600

Dollar Guarantee insurance is coverage that guarantees a dollar amount of revenue per acre. Here is an example of the calculation for an indemnity payment for fresh market sweet corn.

Fresh Market Sweet Corn

Indemnity Payment Based on Acres Planted

Acres insured = 25

Elected coverage level = 65 percent

Dollar amount of coverage = $1,244 an acre

Actual sweet corn yield = 55 containers per acre (1 container = 50 ears of corn).

Average grower retail price = $15 a container

Allowable harvest and marketing cost = $4.15 a container

Production to count = 55 x ($15 – 4.15) = $597

Dollar loss per acre = $1,244 – $597 = $647

Indemnity payment = 25 x $647 = $16,175

Examples of indemnity payment calculations used with permission of Professor Michael Sciabarrasi.

Revenue Guarantee insurance covers reported or anticipated farm revenue. Revenue policies may cover a farm’s adjusted gross revenue (AGR), adjusted gross revenue–Lite (AGR-Lite) or dairy livestock gross margin (Dairy-LGM). Both AGR and AGR-Lite use past average revenue reported on tax returns as a basis for coverage. Here is an example of the way an indemnity payment might be calculated under an AGR-Lite whole farm policy.

AGR-Lite Whole Farm Revenue
Indemnity Payment Based on Average Revenue Reported on Past Tax Returns

Adjusted Gross Revenue = $200,000

Elected coverage level = 75 percent

Revenue guarantee = $150,000 (75 percent x 200,000)

Actual farm revenue = $130,000

Loss = $20,000 ($150,000 – $130,000)

Elected payment rate = 90 percent

Indemnity payment = $20,000 x 90 percent = $18,000

Differences between conventional and organic

The application for insurance of organic acreage must be accompanied by written organic certification, and land being transitioned to organic must include a certificate indicating that an organic plan is in place. The location of each field and the acreage managed organically, as well as that not maintained under organic practices, must also accompany an application for crop insurance. Coverage is available, too, for buffer zones that separate crops grown organically from crops grown conventionally. Buffer zones are used to minimize unintended contact by prohibited substances or organisms. Damage caused by insects, disease or weeds is covered if recognized organic farming practices do not provide effective control, but losses due to failure to comply with organic standards are not covered. Losses attributable to fire, unsuccessful attempts to control wildlife, and the failure of an irrigation system are also covered.

While price elections and insurance dollar amounts are the same as those published by the USDA’s RMA for crops grown by conventional means, premiums for organic growers are adjusted upward because of perceived additional risk associated with organic farming practices.

Some deadlines

When applying for and maintaining crop insurance for organically grown crops, keep these deadlines in mind:

  • Sales closing date—The last day to apply for coverage. Sales closing date differs by policy and is set by the USDA’s RMA.
  • Final planting date—Unless insured for late planting, this is the last day to plant.
  • Acreage reporting date—If the acreage planted is not reported by this date, crop insurance will not be in effect.
  • Notice of crop damage—After damage, the time period during which the grower must file a claim. The actual date may be the earliest of the following times: the date the producer discontinues caring for the crop; a date prior to the beginning of harvest; immediately if the crop is damaged after harvest begins; the end of the insurance period.
  • End of insurance period—The last day of insurance coverage.
  • Payment due date—The last day to pay for the policy without being charged interest. In order to avoid tying up farmers’ funds, payment is generally (but not always) due at the end of the insurance period.
  • Cancellation date—The last day to request cancellation of a policy for the following year. Crop insurance policies may renew automatically.
  • Production reporting date—The last day to report production for actual production history (APH).
  • Debt termination date—The date an insurance company will terminate a crop insurance policy for nonpayment.

“While insurance coverage is a great way to minimize risk to you, your family and your farm business, crop and revenue insurance are never investments with guaranteed returns. However, they are designed to provide a financial safety net and the peace of mind that may bring,” says Sciabarrasi.

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Kathleen Hatt is a freelance writer and editor and a frequent contributor to Growing. She lives in Henniker, N.H.