Crop Insurance is complicated and ever-changing, much like farming, so it’s easy to get wrong. Most crop insurance products are subsidized by the Federal Crop Insurance Program, further complicating things. It takes years to get a good understanding of how crop insurance works, and decades of continuous learning to make it work in your best interest. Due to the complexities, many farmers still do not have adequate coverage.
Lucky for you, we’ve put in the decades and crunched the numbers six ways ‘til Sunday. In this article, we break down the most notable myths about crop insurance and how they might be hindering your farm’s success.
We hope this guide helps you make better decisions about your business, but we always recommend getting specific advice from a knowledgeable crop insurance agent.
Crop Insurance Basics
Before we start, let’s go over the basics of crop insurance.
Farmers, ranchers and landowners purchase crop insurance to protect their crops from things like natural disasters, diseases, insects and market pricing drops. There are two types of insurance: named-peril (or crop-hail insurance) which covers hail storm damage, and multi-peril crop insurance (or MPCI), which covers most other natural disasters as well as irrigation failures. Some MPCI policies may also offer price protection in the event of a dip in the market.
The main difference between the two types is that MPCI is subsidized under the Federal Crop Insurance Program and crop-hail is not. There are 13 private companies that provide coverage for the FCIP. All crop insurance products have set pricing based on past data.
The 7 Most Notable Myths About Crop Insurance
Myth #1: Crop insurance costs more than it pays.
Not even close–thanks to subsidies from the Federal Crop Insurance Program, the cost of crop insurance is very affordable and can even payout more than what you would have made selling your full harvest at premium prices. Where commercial private insurance ranges from just 2-to-7 percent of the liability, subsidized products cover 55 and 100 percent of the liability. In the long run, the cost of crop insurance coverage is quite low, especially considering how much you stand to lose when you don’t have it.
Myth #2: Crop insurance is like roulette.
Crop insurance is actually more of a numbers game that’s easy to win when you know all the inputs and do all the right calculations. When we help farmers understand their options, we look at every product from every angle and come up with an insurance plan that gives you the best possible return on your investment. You might not win every time, but if you’re consistent over multiple years, you will win in the long run.
Farming is the real casino. I can’t tell you how many times I’ve heard farmers say that farming is like going to the casino every day. Any number of unforeseen natural or man-made disasters can arise out of the blue and destroy your livelihood leaving you unable to recoup your losses. Even just small shifts in the market or weather can hinder your best-laid plans. With the right crop insurance plan, you will never have to worry about forces outside your control.
Myth #3: Crop insurance is only for the big guys.
There are dozens of different insurance products and thousands of ways to slice them in order to make them work for farms of all sizes and types. Even if a product isn’t offered in your county, a good crop insurance agent can appeal to the government on your behalf.
If you consistently make smart insurance decisions, it doesn’t matter how big you are, you should always come out on top, or at least as good as you would have been otherwise.
Myth #4: Crop insurance only covers natural disasters, which get free government aid.
Natural catastrophes are only one of the many types of loss covered by both private and federally subsidized crop insurance products. Other types of loss covered can include market price fluctuations, irrigation system damage, a reduction in yields due to smaller changes in weather patterns, and many other circumstances that disrupt your cash flow and ability to repay loans. In fact, many lenders won’t approve you without crop insurance.
Sure, you could qualify for disaster relief in some cases, but it can take years for the funds to reach your bank account. Crop insurance pays out within 30 days of filing your claim. Quite often, we turn in a claim in September (or sometime during the year) but the claim doesn’t get finalized until the crop is harvested, typically not until November or December. When it comes to apples, for example, we will turn in a claim in September, but the claim won’t be finalized until March when all the apples have been sold, then the payout comes within 30 days.
Myth #5: Crop insurance requires too much of my already limited time.
Yes, there is a lot of paperwork that must be done for crop insurance, especially for certain crops like apples, but your agent should do most of the grunt work for you. Just as important as filling out loan applications, tax filings, and Ag Census, crop insurance is vital to your business and will save you time (and heartache) in the long run.
Myth #6: Crop insurance is the same for every farm regardless of where you get it.
It is true that crop insurance policies are highly regulated by the government and therefore the same across the board. However, the levels and types of policies you choose can have vastly different outcomes for your farm. When you work with an independent agent, like us, you know that you are being sold a product because it’s in your best interest, not because it makes the insurer the most money.
Myth #7: Crop insurance can distort the market and supplant other risk-mitigating practices.
Extensive data mining, algorithms, and training programs for agents and adjusters all work to ensure crop insurance is being applied properly. Crop insurance always responds to market factors, not the other way around. Thorough checks on the programs ensure farmers are making decisions based on the market, not based on the crop insurance products available.
Crop insurance is a risk management tool that you can take to the bank, both to recoup losses and to borrow money at lower interest rates. That said, farmers should (and do) still use every tool at their disposal to manage their risk from crop rotation and cover crops to market hedging.
The Moral of the Story
If you’re still not convinced that crop insurance is a valuable tool that you can leverage to ensure your farm’s success, call us. We will come to your farm to answer all of your questions in terms you can understand and help you decide which products make the most sense for your farm and why. With this knowledge and the right policies in place, you can soothe your inner worrywart and get the much-needed sleep you deserve. Because good sleep is not a luxury for farmers, it is a necessity.