Crop Insurance Basics: Specialty Crops

When you think of farming, you might first think of fields of corn sprawled across the Midwest. But America’s farmers grow many different types of fruits and vegetables, requiring a crop insurance program that is as diverse as the crops it protects.

Crop insurance is a customizable tool that allows America’s farmers and ranchers to create a risk management plan tailored to their needs. That means growers can be covered:

Crop insurance has become the cornerstone of the farm safety net and provides every farmer with access to an affordable risk management tool. A new report from the Economic Research Service (ERS) at the U.S. Department of Agriculture found that over the past two decades, the value of specialty crops protected by crop insurance has tripled. Total specialty crop liabilities have grown from $7 billion in 2000 to $21 billion in 2020. As ERS points out in their report, all farmers face risks, “but the nature of specialty crop production and marketing may heighten exposure to some of these risks.”

Crop insurance has expanded and improved over time, particularly for specialty crops or growers not adequately served by other risk management tools. For example, the 2014 Farm Bill included a new policy specifically meant to expand coverage options for diversified farming operations: Whole-Farm Revenue Protection. The introduction of Whole-Farm Revenue Protection offers diversified farmers – such as fruit and vegetable growers, and organic growers – more flexible, affordable risk management options.

Brian Campbell is a diversified produce farmer in Pennsylvania who credits crop insurance and the protection afforded by Whole-Farm Revenue Protection for his success. “If it wasn’t for whole farm revenue protection today, you know, I may not be at the size that I am,” Brian told National Crop Insurance Services.

Across the country, Lupe Guzman in California also relies on crop insurance to protect his family farming operation, which includes 1,300 acres of certified organic crops, such as avocados, lemons, mandarins, and Valencia oranges.

“By having the crop insurance, we’re able to guarantee that if for some reason we do have a bad freeze, we’ll be able to fall back on that insurance so that we can keep farming the following years,” Lupe said.

Another organic grower, Michael Sahr in Michigan, agrees that crop insurance is important to protecting his farm and our food supply. “Without crop insurance, we’d have so much devastation that the farmers would go out of business, and you would be paying a lot more money for your food,” he said.

“You could have a beautiful crop one day, and the next day, a big weather event happens, and you don’t have that anymore,” Michigan blueberry grower Shelly Hartmann said. “Crop insurance is really a big tool that we use here to help us offset any unexpected weather events.”

An untimely freeze, for example, can destroy a crop of table grapes growing at the Kirschenmann Brothers Farming Company in California. “Crop insurance gives us a little safety net,” Kenneth Kirschenmann said. “It doesn’t solve all the problems if we had a 100 percent wipeout, but it does keep us in business.”

California grower Devon Yurosek farms several tree crops, including pistachios, cherries, and pomegranates. The nature of these crops means that Devon and his family have one shot to make a good crop each year, stay in business, and keep their workers employed.

“We have to be able to pay the bills. In bad years, it’s difficult to do if you don’t have a crop on the trees. That’s where crop insurance has been a huge help to us,” Devon explained.

Produce and other specialty crops aren’t the only non-traditional crop that is covered by crop insurance. Pasture, rangeland, and forage (PRF) insurance helps farmers when they don’t receive the expected rainfall needed to keep their pastures productive for feeding livestock.

Pennsylvania farmer John Ligo turned to his PRF policy when a drought reduced his grass yield on the acres he uses to help feed his 600 head of cattle. “One of those things that we can do to manage crop production risk is crop insurance,” he said.

Farmers trust crop insurance to help them manage the highly specialized risks of farming they face today.

Crop Insurance Basics: Historic Drought Loss

It has been an exceptionally difficult crop year for many of America’s farmers and ranchers as drought conditions in the West and northern Plains have distressed crops and grazing lands. Approximately 210 million acres of crops are experiencing some level of drought conditions.

Millions of farmers trust crop insurance to help manage their risks, including drought, and farmers have already spoken out about the importance of the farm safety net and crop insurance during years like these.

“Many of our risk management programs, like crop insurance, will be vitally important this year for those producers,” National Association of Wheat Growers Executive Director Chandler Goule said after touring drought-stricken wheat fields in the Dakotas and Minnesota. “Most of the producers we’ve talked to…I’m not going to say they were optimistic but very thankful they had crop insurance programs.”

While the full extent of drought damage is yet to be revealed, crop insurers are already engaged with farmers and ranchers on the ground to help them navigate this historic drought. Currently, more than 90 percent of America’s row crop farmland is protected by crop insurance, and we stand at the ready to keep America growing – no matter the size or scope of the disaster.

So, how does crop insurance respond to a historic drought? We don’t need to look very far back in the history books to find the answer.

In 2012, drought gripped America’s heartland, leaving most of the country reeling from at least some level of drought. It was one of the worst disasters to hit American agriculture in decades.

“Going out in the fields… is a thoroughly depressing experience,” Illinois farmer David Andris told National Crop Insurance Services at the time. “If we didn’t have crop insurance…this year might be the end of it for me.”

The decrease in corn production per acre in 2012 was the largest caused by a drought since 1988.

Farmer Robert Geddes emphasized the importance of having crop insurance during 2012 for the “nasty years like this.” Growers in his area had invested a lot into growing the best crop possible, only to see it lost to drought. If farmers didn’t have the safety net provided by crop insurance, “they’d truly be hurting.”

Thankfully, crop insurance performed extremely well. It quickly and efficiently delivered aid to rural America – exactly as Congress designed.

The public-private partnership of crop insurance meant that farmers weren’t left waiting for years for some form of ad-hoc disaster assistance. Private-sector insurance adjusters quickly assessed damage in the field and crop insurance companies worked swiftly to finalize more than one million claims. This gave farmers the certainty to plan for the next planting season.

Not only did crop insurance help farmers and ranchers weather the drought of 2012, ensuring the security of our food and fiber supply, but crop insurance had a positive impact throughout the rural economy.

An economic study commissioned by Farm Credit Services of America found that in Iowa, Nebraska, South Dakota, and Wyoming alone, crop insurance indemnities from the 2012 drought generated enough off-farm income to save 20,900 non-farming jobs.

Our thoughts are with the farmers and ranchers who are currently dealing with this devastating drought. But history shows us that we will face this challenge together – just as we have before.

Crop Insurance Basics: Moral Hazard

Moral hazard is a phrase commonly used in the business community that simply means people act or perform differently when they are fully insulated from risk. An entry on the topic in Investopedia.com explained it like this:

We encounter moral hazard every day – tenured professors becoming indifferent lecturers, people with theft insurance being less vigilant about where they park, salaried salespeople taking long breaks, and so on…

The idea of a corporation being too big or too important to fail also represents a moral hazard. If the public or management of a corporation believe that the company will receive a financial bailout to keep it going, then the management may take more risks in pursuit of profit.

The term frequently surfaced during the Great Recession, with the Federal Reserve Chairman even noting, “As we try to make the financial system safer, we must inevitably confront the problem of moral hazard.”

Of course, moral hazard doesn’t just apply to investors. The concept is at the core of insurance products, including crop insurance. A driver with great insurance, a cheap premium and no deductible, for example, might drive more aggressively and be willing to file repair claims on every little scrape or ding.

That’s why auto insurance policies have deductibles and why previous accidents and claims are factored into future premium rates.

Crop insurance customers similarly share in the cost of premiums, receive rates based on past production and shoulder deductibles as a deterrent to risky behavior.

Farmers who know they will lose money by planting a crop not suitable to a specific soil or climate, will not plant that crop. Instead, they plant the best crops for their regions and work hard for a bountiful harvest while purchasing insurance protection to offer some assistance in the event that disaster strikes.

In short, farmers have little moral hazard because they share in the cost of their own safety net. And the American public appreciates this cost-sharing structure.

A recent public opinion poll of 1,000 U.S. voters found that nearly three-quarters of Americans believed that “farmers should help fund farm policies so that taxpayers are not paying the full cost.”

When respondents found out how much of the crop insurance tab farmers paid, they were also pleased. Nearly seven in 10 voters either said that farmers were being asked to pay too much or were paying the right amount of their premiums. Similarly, eight in 10 felt that the average loss deductible of 25 percent that farmers shoulder before receiving aid is about right or even too high.

Sounds like Congress got it right when lawmakers made crop insurance the centerpiece of modern-day farm policy in the 2014 Farm Bill.

Crop Insurance Basics: Risk Mitigation and Risk Management

Risk mitigation and risk management are two sides of the same coin when it comes to improving agricultural outcomes and promoting climate-smart decisions.

On the front of the coin, we have risk mitigation. This side represents all the steps farmers and ranchers take to reduce the amount of risk they face. For example, farmers utilizing precision ag technology, new seed varieties, or conservation practices like reduced tillage and cover cropping can increase their resiliency by improving yields and soil health.

On the back of the coin, we have risk management. This side represents all the steps farmers and ranchers take to manage the costs and impacts of the many uncontrolled risks they still face. Agriculture’s primary risk management tool is crop insurance, which is delivered by private-sector insurers and is partially funded by farmers through premiums.

For optimal effectiveness, these two sides should work in concert, not conflict, to encourage conservation while ensuring the ability of farmers and ranchers to continue operating after a disaster.

Crop insurance must be flexible enough to embrace the newest tools, technologies, and techniques being used to improve the land, conserve resources, increase operating efficiencies, and mitigate risk. Conversely, new conservation efforts must be consistent with the economics that underpin crop insurance’s widely successful risk management strategy.

These facts were reinforced by a recent study published in the renowned peer-reviewed Journal of Environmental Management. It noted that crop insurance is not a barrier to the adoption of conservation practices and is key to helping farmers maintain healthy soil.

The public-private partnership of crop insurance has evolved over the years to become the cornerstone of America’s farm safety net policy. And it has stood the test of time because of built-in flexibility responding to any situation that Mother Nature presents.

Specifically, the system is built on constant data analysis, up-to-date good farming practices, and actuarial soundness, which means premiums for coverage generally cover expected indemnities over the long term.

Crop insurance encourages smart farming practices on the most productive land through a self-correcting premium rating and underwriting system. In short, farmers who have a strong Actual Production History (APH) get better premium rates and thus lower premiums relative to their higher yields. Lower premiums motivate farmers to mitigate risk and build strong production histories with higher yields.

Crop insurance is also constantly improving, which is imperative as farmers deal with the ill effects of extreme weather. Section 508(h) of the Federal Crop Insurance Act allows for the private submission of crop insurance policy ideas and sets forth clear criteria for policy approvals by the Federal Crop Insurance Corporation Board of Directors.

The U.S. Department of Agriculture also works to continually improve crop insurance through the development of new policies. For example, the new Hurricane Insurance Protection – Wind Index Endorsement coverage arrived just in time to help offset devastating losses from the string of hurricanes that occurred during 2020. This new option was quickly added to fill a need in the agricultural community, and in its first year of implementation, it helped farmers rebound from eight significant wind events.

The new hurricane program – just like insurance products covering more than 130 crops in this country – works because it is rooted in sound science and economic principles.  These fundamentals of actuarial soundness will be essential as policymakers look for ways to encourage farmers to adopt more and more conservation practices. Policymakers must not lower insurance premium rates without proper justification – to do so would only place the entire risk management system in jeopardy and arbitrarily punish the farmers it serves.

Instead, incentives should reward farmers for their actions without upending actuarial soundness. State governments in Iowa, Indiana, and Illinois have found a way to do this with local programs that help offset a portion of farmers’ insurance costs.

In other words, the two sides of the coin must continue working together as they are designed to do.

Crop Insurance Basics: Incentives

When policymakers prioritize specific behaviors or actions, they usually turn to incentives to jumpstart the process.

For example, the U.S. government has long promoted the benefits of homeownership to individual families and the economy as a whole. Hence, lawmakers introduced mortgage interest deductions on income tax filings to make homeownership more affordable and attractive.

In the world of agriculture, the public-private crop insurance system is often used as an incentive vehicle.

It’s helpful to think of crop insurance incentives in two buckets. The first bucket is using reductions in a policy’s premium rate to incentivize desired behavior. But with insurance, the key is not to incentivize in a way that upsets the delicate actuarial balance of the system, which could inadvertently do more harm than good.

For example, it would be inappropriate or unsound to arbitrarily discount premiums to promote an action without actuarial and financial justification – doing so could negatively affect coverage levels and/or drive up premiums for other farmers to offset resulting losses.

So, policymakers designed crop insurance with a self-correcting feature that naturally discounts premium for any producer who improves their performance. This catch-all incentive rewards any behavior that increases yields and reduces risk for farmers and taxpayers.

Take conservation for example. Farmers are turning to conservation practices like no-till more and more because those practices lower production costs and improve soil health which over time can lead to increased yields.

Through crop insurance’s incentive known as Actual Production History or APH, those farmers with above average yields are naturally rewarded with lower premiums.

The second incentive bucket works differently. In it, policymakers don’t adjust or discount premium rates. Instead, they offset a higher percentage of the farmer’s overall share of the premium costs.

This protects the actuarial soundness of the crop insurance system while providing additional financial incentives to help farmers who are willing to adopt preferred behaviors.

In recent Farm Bills, Congress wanted to encourage people to get into farming. To do this, the government agreed to offset a higher percentage of insurance premiums for new and beginning farmers as well as military veterans looking to break into farming.

Some states offer this second kind of incentive, too. In Iowa and Illinois, growers can get additional help paying their insurance premiums if they agree to plant cover crops – a conservation practice that helps sequester carbon, reduce soil runoff, and improve soil health.

These state pilot programs – although small – have proven to be very popular with farmers and have achieved the states’ goal of adding cover crop acreage.

Best of all, once this cover-cropping technique starts improving overall farm yields, it is rewarded with a higher APH and lower premium rate, falling within the first-bucket incentive, which will only encourage even higher levels of participation.

Crop Insurance Basics: Actual Production History

One of crop insurance’s defining attributes is its self-correcting nature.

That is, farmers who exhibit more risk pay more than those who exhibit less – much in the same way that car insurers reward safe drivers.

This is done by collecting and analyzing a producer’s Actual Production History (APH), which takes into account a grower’s actual yields over a period of time. It also compares performance to other farms within the county and surrounding communities.

Growers with a higher APH are able to get lower insurance premiums, saving both themselves and taxpayers money.

In this way, the APH formula serves to reward farmers for adopting new technologies and techniques that enhance efficiency and productivity.

For example, some agronomists, conservationists, and policymakers are currently promoting conservation practices – e.g., reduced till and cover cropping – explaining that these practices not only help the environment but can boost a farm’s bottom line.

When these conservation practices show dividends through higher-than-average yields, then the producer will be financially rewarded for adoption through cheaper insurance premiums.

This structure is one reason why a new peer-reviewed study in the renowned Journal of Environmental Management recently credited crop insurance with encouraging the adoption of conservation practices.

Conversely, higher premiums under the APH system act as a deterrent to farmers taking on more risk – for example, by not adopting the latest tools and techniques like their neighbors, planting the wrong crop for the geographic region, or farming on marginal land.

Such deterrents are of particular importance as farmers and ranchers must optimize efficiency to deal with extreme weather and the effects of climate change.

With a clear APH history record, farmers can more accurately select insurance policies that help them manage their unique risks and benchmark their performance.

The APH system provides growers with a clear incentive to constantly improve.

Crop Insurance Basics: Available to All

In the everyday insurance world, coverage may sometimes be hard to come by.

That can be true if you’ve had a disaster – such as a fire in your home – or live in an area at high risk for disaster. Car insurance coverage may be more expensive or even denied if you are a very young or very old driver, even if you’ve never had to file a claim.

Crop insurance is different.

Under the crop insurance system that has become the centerpiece of America’s farm policy, private-sector insurance providers must offer insurance to growers who are eligible for coverage and want it – regardless of a farm’s size, location, or cropping choice.

Additionally, crop insurers don’t have control over premium setting. A farmers’ rates are calculated and published by the USDA and, unlike other lines of insurance coverage, prices will not fluctuate between insurance providers.

Crop insurers compete on customer service, not price. And they cannot choose to simply do business with well-established farmers from areas that have a history of lower risk crops.

In fact, the crop insurance system must always look for ways to cover more and more farmers. Such inclusivity is a shared responsibility of the public and private sectors, which have partnered to bring additional public and privately augmented insurance options to the marketplace and keep pace with a constantly evolving agricultural sector.

While crop insurance was originally only available to major crops – such as corn, cotton, and wheat – it now offers coverage on 130 different crops, including most fruits and vegetables. Today, more than 1 million insurance policies provide $100 billion in protection to nearly 400 million acres – including about 90 percent of U.S. crop acreage.

And more policies and options are regularly being added through the USDA’s program to encourage new product development, where insurers work along-side farm leaders and researchers to create new and unique policies for everything from alfalfa seed to all-encompassing whole farm revenue protection.

Furthermore, this partnership teams up to deliver in-depth training services across the country for small and socially disadvantaged farmers to strengthen and broaden their familiarity with the inner workings of business planning and risk management strategies.

It’s a system that has married the best of the private sector with the best of government, and the result has been the most effective, popular farm safety net in the history of agriculture.

Crop Insurance Basics: Good Farming Practices

Suppose you’re a homeowner who intentionally neglects your property, refusing to make basic repairs and even creating unsafe conditions like exposed wires or leaky pipes. Now suppose your house, not surprisingly, is damaged from a resulting fire or flood.

Are you entitled to a full homeowner’s insurance payout?

Of course not. A homeowner’s policy has exclusions and conditions to ensure the homeowner acts responsibly and is not neglectful. Otherwise, fraud could become more commonplace and responsible homeowners would wind up paying more in premiums to offset others’ losses.

Crop insurance is no different and requires responsible stewardship. A farmer who starves a crop of nutrients and water, plants late, or farms in a manner that jeopardizes the insured property would be ineligible for indemnities when the crop fails.

Fortunately, America’s farmers are the most efficient and productive in the world. They are honest and determined to take care of the land that takes care of them. And they do the job right.

Doing the job right in agriculture is officially known as Good Farming Practices, which are defined by the USDA’s Risk Management Agency and required as a condition of insurance.

Good Farming Practices, or GFPs, are constantly evolving to keep pace with new technologies and changes in the market, weather, and land management. These practices are rooted in science and data and are based on regional research. In other words, GFPs must be proven to work.

GFPs are the production methods that farmers follow to cultivate a crop and allow it to make normal progress to maturity, ranging from the timing of planting and harvest to using the best crop rotations, crop inputs, and farming techniques in the area.

Farmers follow GFPs when they choose the right variety of seeds to grow a good crop with high yield potential and a good market price. GFPs also include properly preparing the field, irrigating, fertilizing, and weeding during the growth period. Finally, GFPs mean collecting the mature crop from the field with harvesting methods that maximize output and minimize damage.

GFPs help ensure that production methods do not adversely affect the quantity or quality of production, and to keep up with the latest science and technology, they continually are monitored and improved. Local researchers, agronomists, and USDA extension agents are the keys to helping farmers keep pace with the latest and greatest in their area.

The GFP known as no-till is a great example.

The technique – which leaves crop residue in the field after harvest and a new crop planted using a drill or planter instead of first tilling the ground – is used on more than 65 million acres of farmland today. But it was rarely used until the late 1980s because farmers had long believed that tilling improved yields.

As more and more research showed the production and environmental benefits of no-till, including carbon sequestration and soil health, farmers were encouraged to change the way they farmed.

No-till is just one example. Other environmentally beneficial GFPs that have been adopted by agriculture and embraced by crop insurance in recent years include recognition of new drought-resistant seed varieties, more efficient irrigation systems, buffer strips, cover crops, and precision agricultural technology and equipment.

The flexibility within the insurance system helps expand the list of GFPs as farmers look to new proven technologies and techniques to tackle climate change, improve conservation practices, land management, soil health, water conservation, and any challenge tomorrow brings.

Crop Insurance Basics: Cost Sharing

Federal crop insurance is arguably the first farm policy in history that is financed, in part, by the farmers who benefit from it. Unlike farm policies of the past, which were 100 percent backed by taxpayers, modern-day farm policy requires growers to take an active role in sharing the financial costs of protecting America’s crops and livestock for a vibrant food supply.

The concept may be new to farm policy, but it’s not new to insurance. From the earliest shipping insurance at Lloyds of London in the late 1600s to the modern auto policy acquired instantly via a smartphone app, the principle is the same.

A customer pays a premium to an insurance company based on the value of property and predicted risks to insure its worth. If the property is damaged, the customer absorbs a portion of the loss, called a deductible, and the insurance company covers the remainder through an indemnity payment.

The deductible acts as a deterrent to risky behavior and keeps the insurance policy intact for true disasters. Meanwhile, premium dollars paid by customers fund the system that provides peace of mind.

The larger the pool of customers, the more risk can be spread, and the less expensive coverage becomes for all. The same applies to crop insurance, which is why arbitrarily excluding some farmers from participation or adjusting premiums without research-backed justification is not only a bad idea, but economically and actuarially unsound.

Today, famers collectively pay between $3.5 billion and $4 billion a year out of their own pockets in crop insurance premiums. And they absorb hefty deductibles (on average, 25 percent of loss) when disaster hits. In other words, they have a financial stake in the system, which ensures farmers are avoiding unnecessary risk and incentivized to embrace new technologies and techniques that drive efficiency and mitigate losses.

Famers utilize crop insurance because it offers predictability for marketing and for borrowing capital, and because it gives them the opportunity to tailor protection to their farms’ unique needs. Taxpayers reap the benefits, too.

That’s because in addition to farmers helping to offset costs, private-sector insurers are also investing dollars into the system. Crop insurance companies, for example, invest millions in new technologies, training, research, data collection, analytics, and customer service to keep things running smoothly.

And when Mother Nature strikes, companies often dig into their own reserves to keep farmers whole. For example, insurers experienced a $1.3 billion underwriting loss during the 2012 drought because indemnities paid outstripped premiums received.

Put simply, farmers, insurers, and the government must work together to fund crop insurance and ensure it can meet the challenges of tomorrow – from climate change to volatile markets.

Crop Insurance Basics: Actuarially Sound

Unless you’re an economist, an insurance guru, or a pension fund manager, chances are good you’re not overly familiar with the term actuarial soundness.

In short, it’s a fancy way of saying “the math must work.”

For example, an actuarially sound pension fund will have enough money in the bank to meet future obligations. If not, and investments made by the fund are overly risky or too conservative – or expenses run amuck – then a whole slew of retirees could be left in the cold.

Federal crop insurance, by law, must be actuarially sound. This ensures that the amount of money in the system is sufficient to meet the costs of paying claims when disaster strikes – and to establish a small reserve for possible extreme losses in the future. To achieve this goal, premium rates are adjusted regularly to reflect current market and crop conditions – a process that requires constant number crunching and research.

This kind of diligence and regular adjustment becomes especially important for those areas where the weather is turning more and more extreme amid climate change. And on the flip side, adjustments can be made to reflect changing conditions that may indicate less risk.

By being actuarially sound, the crop insurance system has a loss ratio performance mandate of “not greater than 1.0” – meaning that over time, indemnity payments paid out to farmers should equal the total premiums invested into the system.

Actuarial soundness has helped the program survive extreme events like the devastating drought in 2012, the worst disaster to hit agriculture since the Dust Bowl. But the system was managed prudently in the preceding years meaning that insurers had reserves to help pay $17 billion in indemnities and keep rural America afloat. The same could be said for the flooding and string of hurricanes seen in recent years.

Things could have turned out much differently had crop insurance not been actuarially sound and historical premiums not been sufficient to cover long-term losses.

That’s why crop insurers invest in actuarial professionals, data collection and analytics. It’s also why decisions made by policymakers carry such huge ramifications for farmers’ most important risk management tool.

Lawmakers must guard against creating new policies that reduce premium rates below future anticipated indemnities, increase risk within the system, or negatively affect the coverage that can be offered. Such policies will likely upset the fine-tuned balance that defines the crop insurance system and makes it affordable, widely available, and economically viable.

In other words, the math must work.