Crop Insurance Coverage Frequently Asked Questions in Times of Drought or Floods

Contributed by Charles BrownFarm Management Specialist, Iowa State University Extension and Outreach, crbrown@iastate.edu, 641-673-5841

In 2018, again some Iowa farmers are suffering the extremes of drought in the Southeast and floods in the North and Northeast. Both losses due to drought and flooding are an insurable loss under multi-peril crop insurance. Another dynamic added to the mix this year is yield loss due to chemical drift or misapplication, which is not a covered loss under multi-peril crop insurance. Especially in Southeast Iowa, due to drought conditions, again there will be claims for losses on corn and soybeans.

Important Point: Do not destroy a crop, comingle grain from previous years or different owners or harvest for silage before contacting your insurance agent. Bins must be measured before comingling grain. When in doubt call your agent.

Question: How many of Iowa’s corn and soybean acres are covered by crop insurance?

Iowa farmers planted 23.2 million acres of corn and soybeans in 2018. Approximately 90% of those acres have been insured using Revenue Protection (RP) multi-peril crop insurance. These insurance policies can guarantee various levels of a percentage of the farm’s average yield times the higher of the projected price (average futures price in the month of February) or the harvest price (average futures price during the month of October), using the November 2018 futures contract for soybeans and the December 2018 futures contract for corn. Most farm operators carry a guarantee of their APH from 65% to 85% level of coverage. The projected prices (futures average prices in February 2018) were $3.96/bu for corn and $10.16/bu for soybeans, respectively.

Question: What should an insured farmer do once a crop loss is recognized?

  1. Notify the insurance agent within 72 hours of the discovery of damage, but not later than 15 days after the end of the insurance period. A notice of loss can be made by phone, in writing or in person. Although drought loss is not immediate, farmers should contact their agent as soon as they feel a loss is present.
  2. Continue to care for the crop using “good farming practices” and protect it from further damage, if possible.
  3. Get permission from the insurance company, also referred to as your Approved Insurance Provider (AIP), before destroying or putting any crop to an alternative use.

Question: Who will appraise the crops and assess the loss?

The crop insurance company will assign a crop insurance adjuster to appraise the crop and assess the loss. The insured farmer must maintain the crop until the appraisal is complete. If the company cannot make an accurate appraisal, or the farmer disagrees with the appraisal, the company can have the farmer leave representative sample areas.

These representative sample areas of the crop are to be maintained – including normal spraying if economically justified – until the company conducts a final inspection. Failure to maintain the representative sample areas could result in a determination that the cause of loss is not covered. Therefore no claims payment to the producer.

Once appraised the crop can be released by the company to be:

  1. Destroyed – through tillage, shredding or chemical means; or
  2. Used as silage or feed.

Question: Once released, may I harvest my corn as silage for feed?

Check with your crop insurance company. In a county where corn can be insured as grain only, the corn will be released, or harvested as silage and/or sold as feed. Any grain will be counted as production for your claim. In a county where corn can be insured as silage, the harvested silage will be counted as production.

Question: What is the difference among insurance units?

Many farmers have chosen to insure their crops using enterprise units in order to pay less expensive insurance premiums. Under enterprise units, losses are calculated by crop by county. Therefore all the corn planted by a farmer is a given county would be added together to determine a loss. If a farmer has chosen optional units, then losses are calculated by crop by field unit. Premiums are typically higher if choosing optional units, but a good yield on one field does not cancel out the loss on another field.

Question: When will farmers be receiving indemnity payments for their crop insurance losses?

Adjusters will be busy with the increase in losses in Southeast Iowa. As soon as you are finished harvesting notify your insurance agent and an adjuster will be assigned to you. Insurance companies cannot defer payments to the next tax year, but claims adjusted late in the year may not be paid out until the following year.

Question: What is the maximum price that the harvest time indemnity price (average October futures price) can reach?

The maximum harvest indemnity price values for 2018 are twice of the projected price; or $7.92/bu for corn and $20.32/bu for soybeans, respectively.

Question: Can indemnity payments for drought be deferred for income tax purposes until 2019?

A taxpayer using the cash method of accounting claims the income in the year they receive the payment. The insurance company will send the insured a 1099 showing the amount and tax year to report the income.

A farmer, if they are using the cash method of accounting for reporting taxes, can elect to defer crop insurance payments if the loss is due to yield loss and they normally sell more than 50% of their crop the year following harvest. They cannot defer any loss that is due to price loss. Farmers that are using the accrual method of accounting for reporting taxes cannot defer crop insurance payments.

Question: Will I be asked to provide proof of my bushels this year for crop insurance verification?

All multiple peril crop insurance users are subject to production verification on a random basis. If a claim that exceeds $200,000 is filed for an individual crop and policy, verification of production is automatically required by regulation. This also requires a 3 year audit.

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Flood damaged crops, crop insurance payments, and lease contracts

William Edwards, retired extension economist, on issues from flooding regarding crop insurance, rented acres and looking ahead to 2017.

edwardswm_finalSome Iowa corn and soybean producers are facing substantial if not complete crop losses due to flooding. Fortunately, nearly 90 percent of Iowa’s corn and soybean acres are protected by Multiple Peril Crop Insurance (MPCI).

Crop insurance

Most Iowa producers purchase crop insurance policies with a 75 to 85 percent level of coverage. This means that if crops are a total loss, the producer must withstand the first 15 to 25 percent of the loss. However, in 2016 nearly 90 percent of the crop acres insured in Iowa were covered under Revenue Protection policies, which offer an increasing guarantee if prices increase between February and October. So far, this has added about $.80 per bushel to soybean guarantees, while the current corn futures price is actually below the February average. Moreover, since Revenue Protection (RP) policies are settled at the average nearby futures price during the month of October, rather than local cash prices, farmers receive a bonus equal to the fall grain basis in their area.

Producers with crops that have been totally destroyed by flooding will not have to incur the variable costs of harvesting. This could save around $20 per acre for soybeans and perhaps $50 per acre for corn, depending on potential yields and drying costs. Nevertheless, even producers who carried insurance at a high coverage level could be looking at net revenues near or below those obtained from normal yields this year.

2016 flooded bean field

Potential losses

For example, assume an insured tract has an expected corn yield and insurance proven yield of 175 bushels per acre. A normal crop marketed at $3.00 per bushel would bring $525 per acre. The insurance indemnity payment for an 80 percent RP guarantee, zero yield, and a February futures price of $3.86 would equal 175 bu. x $3.86 x 80% = $540. Saving $50 in harvest costs would give an equivalent of $590 per acre, or $65 above the value of a normal crop.

For soybeans, assume both the expected yield and the proven yield are 60 bushels per acre, and the crop could be marketed at $9.00 per bushel. Gross income for a normal crop would be $540 per acre. The insurance payment for a complete crop failure and a $9.65 October futures price would be 60 bu. x $9.65 x 80% = $463. Savings of $20 in harvesting costs brings the equivalent of $483 per acre, or $57 below the value of a normal crop.

In many cases, of course, flooded acres will make up only a portion of the insured unit, so production from non-flooded acres will be averaged in with the zero yields from the flooded acres.

The real question is how much will it cost to clean up fields and bring them back into production next year? Most Iowa farmers have not had experience with fields being under water for extended periods of time, so effects are difficult to estimate. Problems will range from physically removing debris to leveling eroded areas to restoring fertility.

Flooded field, 2016

Rental contracts

What do these questions imply for rental contracts? A great deal of uncertainty, for one thing. Lease agreements in Iowa continue in effect for another year under the same terms if they were not terminated on or before September 1.

Landowners will have to bear the burden of mitigating flood damages – that goes with owning property. But, a better solution may be for renters and owners to work together to repair the damage and bring the land back into production. Farm operators may have access to machinery that can help accomplish the job that owners do not. In return, tenants should be compensated for their efforts, either directly, through a significant discount on the 2017 rent, or with a long-term lease.

Next year

In some cases there may be doubt as to whether land flooded this year can even be planted next year. Risk Management Agency rules state that land must be physically available for planting to be insurable. Land that cannot be planted due to weather events that occurred before the sales closing date (March 15 in Iowa) is not eligible for prevented planting payments. When operators report their 2016 production, they can request that their 2016 yield histories reflect a value equal to 60 percent of the county “T-yield” rather than a zero or very low yield.

Close communication and cooperation between owners, crop insurance agents and renters can be a “win-win” strategy in the long run, but recovery may take several years.

Additional information about managing flood damaged cropland will be available from Iowa State University Extension and Outreach as the waters recede and the situation is assessed. Keep in mind, dealing with issues from flooding can be stressful. Reach out to resources such as the Iowa Concern Hotline, with trained staff who are available to listen.

Iowa Concern –All calls, chats, and emails are free and confidential. Language interpretation available.

  • 24/7 Phone Support – Trained staff take your calls via a toll-free hotline at 1-800-447-1985.
  • Live Chat Services – Live chat for online, one-on-one support.
  • Email an Expert – Send your questions related to legal issues, finance, stress and crisis or disaster to our staff.

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2014 Farm Bill: Noninsured Crop Disaster Assistance Program

Contributed by Kristen SchulteFarm Business Management Specialist, Iowa State University Extension and Outreach, kschulte@iastate.edu, 563-547-3001

schultek_finalThe 2014 Farm Bill extended the Noninsured Crop Disaster Assistance Program (NAP), and the program expanded its coverage by allowing producers to purchase additional coverage. Producers have the opportunity to make this change for policies set for the 2015 crop year until January 15th, 2015.

What does NAP cover?

  • Crops (not livestock) that are commercially produced for food and fiber for which catastrophic coverage under Federal Crop Insurance is not available.
  • Losses due to damaging weather (drought, hurricane, freeze, etc.), adverse natural occurrences (volcanic eruption, flood, etc), and other adverse natural occurrences (ex. excessive heat, insect infestation, ect.).

Signing up for NAP?

  • Producers must apply by application closing date; application is completed with form CCC-471. Application closing dates may vary by crop.
  • To be eligible for NAP, producers must report crop type and variety, location of acres, producers and related shares of crop, growing practice, crop planting date, and intended use of crop commodity. After planting or harvest, producers must also report acres planted, quantity of harvest, and disposition of crop. Production records may be required by FSA.
  • Application must also include service fee. Service fee is $250 per crop or $750 per producer per administrative county. Premiums are also due if electing buy-up coverage.
  • Beginning, limited resource, and traditional underserved farmers are eligible for a waiver of the service fee and 50% premium reduction (file form CCC-860).

What are the NAP coverage levels?

  • Catastrophic Coverage (CAT) covers losses greater than 50 percent at 55 percent of the commodity price.
  • Additional coverage, with premium, is available from 50 to 65 percent in 5 percent increments for production loss at 100 percent of average market price.
  • Premiums for additional coverage is equivalent to 5.25 percent of calculated crop covered value (accounts for share of crop, eligible acres, approved yield, coverage level, and average market price)

Crop losses and NAP?

  • When a loss occurs, notify the FSA office within 15 days of the natural disaster occurrence, prevented planting due to natural influences, date damage is apparent, or normal harvest date (whichever date comes first).
  • For hand-harvested crops that require a timely assessment of loss before deterioration, notify FSA of losses within 72 hours for certain crops.
  • Losses must be verified by the producer by completing form CCC-576, additional documentation/evidence may apply.
  • Average market values are used. At the state level, FSA may set separate market prices for a crop based on represented farming practices or sales to different markets within the state.
  • Retroactive pay for 2012 NAP assistance is available for losses to fruit crops (trees or bushes) in counties that had Secretarial disaster designations due to frost or freeze are available.

Additional Information

  • Grazed acres can only participate in NAP at the CAT level; however, these acres can only participate in either NAP or Livestock Forage Disaster Assistance Program
  • Annually, payments are limited to $125,000 per individual or entity.
  • Additional information can be found at fsa.usda.gov/nap.
  • A decision tool is available through FSA and collaborating universities, http://fsa.usapas.com/

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Final Harvest Prices for Crop Insurance Determined

Contributed by Steve Johnson, Extension Farm Management Field Specialist, sdjohns@iastate.edu.

Johnson_Steve_smHarvest prices determined in the month of October appear to be $4.39 per bushel for corn and $12.87 per bushel for soybeans. These are the average futures prices for December CME corn and November CME soybean contracts in the month of October. These final numbers are still to be verified by the USDA Risk Management Agency (RMA).

This and the farm’s actual 2013 yields are the final pieces in determining the potential crop insurance indemnity claim for both corn and soybeans. Those final harvest prices suggest that crop insurance revenue policies on corn will trigger indemnity payments this year. This is especially true if the insured purchased a revenue policy at higher levels of coverage (80 or 85 percent). Farmers experiencing yields below their Actual Production History (APH) should keep good production records and report these to their crop insurance agent immediately upon completion of harvest.

It would take a significant drop in yields to trigger such an indemnity payment. For corn, the harvest price dropped by more than 22 percent from the projected price of $5.65 per bushel determined in February. Since revenue protection coverage guarantees yield times price, those higher levels of coverage will trigger if the actual harvest yields falls below the insured’s APH.

For soybeans, the harvest price is exactly the same at the projected price, $12.87 per bushel. That’s the average settlement price of the November CME soybean futures contract during February. To trigger an indemnity payment in soybeans, the actual yield will need to fall at least 15 percent below the APH for an 85 percent level of coverage. So a substantial yield loss on soybeans will have to occur before crop insurance indemnity payments would be triggered.

Since corn and soybean yields will vary across farms and many insureds use enterprise unit coverage, crop insurance indemnity payments will also vary. A farmer should contact their crop insurance agent with their estimated yields to determine the potential for an indemnity claim. Keep good production records and report the final production immediately upon completion of harvest. This will help expedite an indemnity claim for 2013 and help determine the APH for 2014 crop insurance decisions.

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Estimating Crop Insurance Indemnity Payments

Contributed by Steve Johnson, Extension Farm Management Field Specialist, sdjohns@iastate.edu.

Johnson_Steve_smHarvest prices determined in October will have a large impact on the size of the potential crop insurance indemnity payments for corn and soybeans. Current futures prices suggest that crop insurance revenue policies on corn will make indemnity payments on some farms, particularly those that purchased revenue policies at high coverage levels and are experiencing yields below their Actual Production History (APH). In Iowa, there’s a better chance for insurance indemnity payments on corn than there is for soybeans this fall. It would likely take a significant drop in soybean yields to likely trigger such a payment.

Crop Insurance Indemnity Payments

The 2013 projected price for corn is $5.65 per bushel. That’s the average settlement price of the December Chicago Mercantile Exchange (CME) corn futures contract during February. This projected price is used to set crop insurance guarantees and the premium paid by farmers. The harvest price is used to calculate revenue on which crop insurance indemnity payments are based. The harvest price for corn equals the average of settlement prices of the December CME corn futures contract during October. Settlement prices during the first 10 days of October suggest a harvest price of $4.40 per bushel. The final harvest price can vary before the end of the month, but this number provides a good starting point for evaluating corn payments.

An estimate of a $4.40 harvest price is 78% of the $5.65 projected price ($4.40 harvest price divided by $5.65 projected price = 78%). If actual yield equals the guarantee yield on revenue polices of an 80% level or greater coverage levels, it will likely trigger an indemnity payment. So an actual yield that falls 22% or more below the APH should command attention by the farmer. They will need to notify their crop insurance agent and make sure good records can verify this actual yield.

The projected price for soybeans is $12.87 per bushel. That’s the average settlement price of the November CME soybean futures contract during February. The first 10 days of settlement prices during October for November soybean futures suggest a harvest price of $12.75 per bushel. Similar to corn, the soybean harvest price is not yet known, but $12.75 is a useful starting point for evaluating a potential insurance indemnity payment on soybeans.

A $12.75 harvest price is 99% of the $12.87 projected price. Because 99% is above coverage levels offered by crop insurance revenue products, a yield loss has to occur before crop insurance indemnity payments would be made. Since corn and soybean yields will vary across farms and most farmers use enterprise unit coverage, crop insurance indemnity payments will also vary. A farmer should contact their crop insurance agent regarding the actual yield records necessary for an indemnity claim, updating their APH with this year’s harvest numbers or making their 2013 premium payment.

For farm management information and analysis visit Ag Decision Maker at www.extension.iastate.edu/agdm; ISU farm management specialist Steve Johnson’s site is at www.extension.iastate.edu/polk/farm-management.

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Iowa’s early planting dates: April 11 for corn, April 21 for soybeans

Contributed by Steve Johnson, Extension Farm Management Field Specialist, sdjohns@iastate.edu.

Early planting dates in Iowa are April 11 for corn and April 21 for soybeans. Acres planted before these dates are no longer eligible for replant coverage payments should it be necessary to replant. The maximum replant payments each year are equal to 8 bushels of corn and 3 bushels of soybeans. Multiply these bushels times the RMA projected price for that year, which is the February average futures price for December corn and November soybeans used to establish the value of the insurance guarantees that the producer purchases. For 2013 the projected prices are $5.65 per bushel for corn and $12.87 for soybeans, so the maximum replant payments are $45.20 or $38.61 per acre, respectively.

Any acres planted before the early planting dates lose replant coverage, even if the entire farm or insurance unit hasn’t been planted. However, early planting doesn’t affect a farm’s actual production history (APH) yield or revenue insurance guarantee, as long as all other good management practices are followed throughout the growing season. Once the crop is planted, that revenue guarantee is still in effect, and any indemnity payments will depend on the final harvested yield and the harvest price.

More information on important crop insurance dates can be found on the Ag Decision Maker website.

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Fall harvest prices & indemnity payments

Contributed by Steve Johnson, Extension Farm Management Field Specialist, sdjohns@iastate.edu.

The USDA Risk Management Agency (RMA) will release the final fall harvest prices for revenue protection crop insurance policies on November 1st. As of October 15th, those harvest prices are near $7.50 per bushel for corn and $15.38 per bushel for soybeans.

These final harvest price numbers are the final piece of information to finalize potential indemnity payments for Revenue Protection crop insurance coverage. Iowa farmers chose Revenue Protection on 92% of the insured corn acres and 91% of the insured soybean acres in 2012.

Many Iowa farms that suffered significant production losses in 2012 will receive indemnity payments over the next few months reflecting these harvest prices. Both the December corn futures price and the November soybean futures price have increased between the projected price (determined in February) and the harvest price (determined in October) periods. Should a production shortfall occur, that loss would be compensated at the higher harvest price. Farms that chose to insure their crops with a Yield Protection policy may also receive an indemnity payment for yield losses, but the loss will be paid at the February price level.

Many farmers use revenue protection coverage along with pre-harvest marketing strategies and commit a portion of their guaranteed bushels to delivery. This harvest price is critical if any lost production must be replaced at higher market prices for on-farm feeding or to fulfill delivery on a forward cash or hedge-to-arrive grain contract.

Shortfall of contracted bushels

Once farmers realize that they cannot deliver all the bushels they’ve contracted, they should work with the grain merchandiser on a strategy to make up the shortfall in bushels or pay the replacement value of those bushels.

To illustrate how indemnity payments are determined an example of Revenue Protection (RP) coverage for corn is featured.

2012 Revenue Protection (RP) example:

A loss occurs when the bushels of corn produced for the unit fall below the production guarantee as a result of damage from a covered cause loss. This example assumes 175 bushels per acre APH yield, 75-percent coverage level, and basic unit coverage.

175 bushels per acre X .75 = 131.3 bushel guarantee*

100 bushels per acre actually produced

131.3 bushels – 100 bushels = 31.3 per acre loss

31.3 per acre loss X $7.50 per bushel (harvest price determined in October) = $234.75 net indemnity*

* Figures shown on a per acre basis. Guarantees and losses are paid are on a unit basis. See individual policy provisions.

Summary

As long as the farmer did not commit to delivery of more than the 131.3 bushels per acre, he or she should have adequate fund to make up the shortfall in bushels or pay the replacement value of those bushels.

Delaying settlement beyond early November leaves farmers in a speculative position for those bushels that they were unable to deliver. Should the futures price move even higher beyond this time frame, the replacement cost would increase. Regardless, the need to work with the grain merchandiser is critical should you fall short on contracted bushels.

Adapted from USDA RMA’s 2012 COMMODITY INSURANCE FACT SHEET, Corn—Crop Revenue Coverage, January 2012.

Updated information on fall harvest prices will be posted on the AgDM blog and website as it becomes available.

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