Risk Management

Outline

I. Risk Management in Agriculture

II. Federal Disaster Assistance Programs for Agriculture

III. Crop Insurance Program for Agriculture

IV. Important Links


I. Risk Management in Agriculture

Risk is an integral part of agriculture. Each day, farmers confront different types of risk but changes in the risk environment and available tools available to manage the risk make it a compelling reason to engage in risk management education. The five primary sources of risk in agriculture are as follow:

– Production risk – includes weather, insects, disease, technology and any other events that directly affect production quantity and quality.
– Price risk – uncertainty in the market for your commodity, such as changes in the prices of inputs and/or outputs.
– Financial risk – the method in which capital is acquired and financed and the firm’s ability to pay financial obligations.
– Institutional risk – changes in governmental and/or legal policies and standards that affect agriculture.
– Personal risk – risk common to all businesses such as death, divorce, or injury to the proprietor.

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II. Risk Management Strategies

Some of the major sources of production risks are weather, pests, diseases, technology and its interaction with farm and management characteristics, genetics, equipment and quality of factor inputs. In order to reduce production risks, some of the risk management strategies recommended are as follow:

1. Enterprise Diversification.
2. Crop Insurance.
3. Contract Production.
4. Evaluating New Technologies.

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1. Enterprise Diversification

One effective way to reduce income variability on the farm is to diversify the enterprise by combining different production processes. Diversification can include different crops, combinations of crops and livestock, different end points in the same production process (e.g. different weights) or different variations in the same crop (e.g. red, yellow and green tomatoes).

Diversification can also be achieved through different income sources, such as ag-tourism or off-farm employment for smaller farms. Effective diversification occurs when low income from one enterprise is simultaneously offset by satisfactory or high incomes from other enterprises.

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2. Crop Insurance

Management of yield or price risk through the purchase of crop insurance transfers risk from one farmer to others for a price, which is stated as an insurance premium.
Crop insurance is an example of a risk management tool that protects against losses but also offers the opportunity for more consistent gains.

Crop insurance provides two important benefits. It ensures a reliable level of cash flow and allows more flexibility in the marketing plan. With some level of production insured, the crop could be forward-priced with greater certainty, creating a more predictable level of revenue.

The Federal government subsidizes the premiums for most crop insurance policies. Subsidies tend to benefit those producers most who invest in higher levels of coverage. Crop insurance is available only through private crop insurance agents. Coverage for a crop must be arranged before its sales closing date.

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3. Contract Production

Contract production occurs when an agribusiness coordinates all aspects of a product from production to retail. Contract production is common in the poultry and livestock industries. The agribusiness provides feed and other inputs to the producer, who manages the grow-out process.

With this production contract, the agribusiness commits the producer to deliver a specific quality and quantity of the final product. The producer must comply with the firm’s quality specifications and must manage yield risk with insurance and sound management practices.

Before committing to a production contract, a farmer must consider the tradeoffs. A major advantage for the producer is that a market for the output is guaranteed a favorable price. Likewise, a disadvantage is that the producer loses the opportunity of benefiting form upside price potential, since the sale of the product is fixed by conditions of the contract. The loss of flexibility and profit opportunities in the market place is offset by the cost of receiving a predictable cash flow.

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4. Evaluating New Technologies

Genetically altered seeds and precision farming are two examples of evaluating new technologies in agriculture production. Some seeds are genetically modified to provide resistance to specific herbicides, thereby facilitating improved weed control. Other seeds are genetically modified to provide resistance to diseases or insects.

Precision farming controls the rate of application of crop inputs such as seed, fertilizer and pesticides in the field on a per acre basis. The conventional approach, by contrast, applies the same rate across an entire field. The method of farming allows yields to be measured for each acre so that output is measurable against crop inputs. The benefits associated with adopting new technologies include lower input costs, higher crop yields due to improved pest control and more cost-effective use of factor inputs.

The USDA Risk Management Agency, which oversees the federal subsidized crop insurance program, is planning to expand its product offering in Hawaii by an additional eight tropical crops. Consequently, we hope to raise Hawaii farmers’ awareness and understanding of crop insurance, and to encourage their participation in the subsidized program to manage production risk. The utilization of appropriate tools for risk management by Hawaii agribusinesses would ensure the continuing viability of diversified agriculture in Hawaii.

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Important Links:
– National Ag Risk Education Library: http://www.agrisk.umn.edu/
– National Agriculture Safety Database (AgSafe): http://www.nasdonline.org/document/2125/d000101/agsafe-agricultural-safety-training-materials.html
II. Federal Disaster Assistance Programs for Agriculture

The USDA Farm Service Agency (FSA) is charged with assisting farmers and ranchers that are affected by drought and other natural disasters. Assistance is provided after an affected area is declared a disaster zone.
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  • Noninsured Crop Disaster Assistance Program
    Provides financial help to producers of non-insurable crops affected by natural disasters.Eligible crops:
    – include crops which are grown for food or fiber that cannot be insured; and
    – Other crops, determined by statute, including:
    § Forage and grazing;
    § Aquaculture;
    § Floriculture;
    § Ornamental Nursery;
    § Christmas Trees;
    § Honey/Maple Sap; and
    § Sod.Eligible Loss:
    – must be due to damaging weather or natural disaster, including the following:
    § Drought;
    § Hail;
    § Excessive heat;
    § Excessive moisture;
    § Freeze;
    § Tornado;
    § Hurricane;
    § Excessive wind;
    § Volcano;
    § Flood;
    § Earthquake;
    § Insect damage; and
    § Disease.Coverage:
    – losses in excess of 50% or prevented planting losses.
    – 55% payment rate.Cost:
    – Service Fee: $100 per crop per county.
    – Not to exceed $300 per county.
    – Not to exceed $900 per producer.Cost Waiver:
    – May be waived for a limited resource producer.
    § $20,000 or less is derived from all sources for each of the prior two years.

    – All of the following apply:
    § Less than 25 acres for all crops.
    § Majority of income from farming.
    § Annual gross income from farming does not exceed $20,000.

    Application:
    – Must apply by the application closing dates.
    – Producers must annually report:
    § Loss within 15 days;
    § Acreage; and
    § Production.

    Grazed Forage:
    Loss based on –
    § County determined loss percentage for each pasture/range.
    § Acreage report.

    Payment:
    – No quality provisions.
    – Payments limited to $100,000.
    – Producers not eligible if qualifying gross income exceeds $2.0 million.

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  • Legislated Crop Disaster Programs – Authorized by Ad hoc Legislation.
    – Losses must be due to damaging weather or natural disaster.
    – For all crops.Back to Top
  • Emergency Conservation Program
    Provides up to 64% cost-share for:
    – Rehabilitating land damaged by natural disaster.
    § water conservation measures and water source improvements during drought.
    § Area must be approved.
    § Funds used for debris removal, livestock water, fence restoration, land restoration, restoring water conservation structures, and water conservation.Back to Top
  • Farm Loan Programs

    Designed to help family farmers who are temporarily unable to obtain private, commercial credit.Farm Ownership Loans
    Used to purchase land, construct buildings or improvements, and soil and water conservation.Direct Loans:
    – $200,000 maximum.
    – Interest as low as 5%.
    – Up to 40-year term.

    Guaranteed Loans:
    – $762,000 maximum.
    – Interest rate not to exceed those charged to the lender’s average farm customer.
    – Up to 40-year term.
    – May be used to refinance.
    – Operating Loans

    Used for operating and family living expenses. May be used for purchase of livestock, equipment, supplies, conservation measures, minor building improvements and refinancing.

    Direct Operating Loans:
    – $200,000 maximum.
    – Interest as low as 3.25%.
    – 1 to 7 year term.

    Guaranteed Operating Loans:
    – $762,000 maximum.
    – Interest rate not to exceed those charged to the lender’s average farm customer.
    – 1 to 7 year term.

    Rural Youth Loan:
    – $5,000 maximum.
    – For youths in a rural community, 10-20 years old.
    – For projects sponsored by 4-H, FFA, others.
    – Emergency Loans

    Help farmers who have suffered physical or production losses in federally-declared disaster areas:
    – 100% loss amount, not to exceed $500,000.
    – 3.75% interest rate.
    – Must apply within 8 months of the disaster designation date.

    Term:
    – 1-7 years for non-real estate.
    – Up to 40 years for physical losses on real estate.

    § Farm Loan Funding Targets

    I. Socially Disadvantaged Applicants
    – Asian Americans and Pacific Islanders.
    – Women.
    – Native Americans.
    – African Americans.
    – Latinos.II. Beginning Farmers/Ranchers
    – Not farmed for more than 10 years.
    – Substantially participates in the operation.

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    Important Link:
    – Federal Disaster Assistance Programs for Agriculture (USDA-FSA): https://www.fsa.usda.gov/programs-and-services/disaster-assistance-program/
    – Hawaii State and Pacific Basin Farm Service Agency https://www.fsa.usda.gov/state-offices/Hawaii/index

    III. Crop Insurance Program for Agriculture

    Crop insurance is essentially a risk management tool. Risk is simply the possibility of suffering harm or loss. In agriculture today, some of the risk management tools include the following:

    – Knowing where you are at financially.
    – Knowing your cost of production.
    – Understanding your markets.
    – Knowing the RMA tools that are available and knowing how they work.
    – Seeking inputs through communication.
    – Developing a plan to set goals.
    – Learning how to transition farms from one generation to another.

    Features of crop insurance include the following:
    – Covers the value/yield of damaged crop.
    – Each crop is insured separately.
    – Coverage must be purchased before damage occurs.
    – More coverage costs more premium.
    – Coverage levels and subsidy.
    – Must file claim to collect indemnity.

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    Insurable Crops in Hawaii
    Macadamia Trees.
    Macadamia Nuts.
    Nursery.
    § In-ground.
    § Container.

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    Hawaii Proposed Pilot Crop Program
    Hawaii Tropical Trees
    § Atemoya Trees.
    § Banana Trees.
    § Coffee Trees.
    § Guava Trees.
    § Lychee Trees.
    § Mango Trees.
    § Papaya Trees.
    § Rambutan Trees.

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    Hawaii Tropical Fruits (Fresh or Processing)
    § Banana Trees (fresh market only).
    § Coffee Trees (cherries).
    § Papaya Trees (fresh only).

    Crop Insurance – What You Need to Know

    Benefits of Crop Insurance include the following:
    § Financial Stability;
    § Peace of Mind;
    § Higher Govt. Subsidy;
    § Lower Premium;
    § Equal Rate;
    § Ease in Application Sign Up; and
    § Choices of Coverage Level.

    Signing up for Crop Insurance
    § RMA does not sell crop insurance.
    – RMA administers the FCIC program
    § -Private companies advertise/sell
    – Local agents locator: http://www.rma.usda.gov/
    – Agent Locator
    – Crop Insurance Agent
    – Click on Hawaii
    – Enter County name in additional search tools
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    Amount of Insurance
    The amount of insurance is
    (Number of insurable trees x tree reference price) x Coverage Level
    where tree reference price is set to take into account planting and maintenance costs to return the tree back to production.
    The amount of insurance can also be expressed as
    (Number of insurable trees x tree reference price) – Deductible

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    Covered Losses
    o Adverse Weather;
    o Diseases;
    o Insects;
    o Wildlife;
    o Fire;
    o Earthquake; and
    o Volcano.

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    Additionally for nursery:
    § Value reduction due to delay in marketability; and
    § Failure of irrigation water supply.

    Please note that loss resulted from neglect or failure to follow good farming practices will not be covered.

    To receive a claim, the tree must be dead (100% damaged or destroyed) due to the following:
    – Insurable cause of loss, or
    – Authorized destruction to contain the spread of plant disease.
    When the percent of damage for the unit exceeds 80%, the unit is considered a 100% loss.
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    Coverage Level, Premium and Levels of Subsidy

    For different coverage levels, there are different premium levels and matching subsidies. The table below shows the different coverage levels and accompanying federal subsidies.

    Coverage Level CAT 50% 55% 60% 65% 70% 75%
    Subsidy 100% 67% 64% 64% 59% 59% 55%

    Producer Requirements
    In the event or at anytime insured suffered any crop loss, he or she must do the following:
    § Call the agent or notify the insurance company of the discovery immediately;
    § If he/she intends to stop caring for the crop;
    § Before removing any plants (obtain a written consent from the company);
    § Before you start to harvest by selling directly to consumers; and
    § Should you continue to care for the crop and if feasible, you intend to carry to harvest.
    · AGR-Lite.pdf

    Important Link:
    – Crop Insurance Program (USDA-RMA): http://www.rma.usda.gov
    – Crop Insurance Update: http://www.Rainhail.com