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Crop protection: Insurance: How much can you risk?

A primary tool for managing risk of any sort is insurance, and many Mississippi farmers have found that crop insurance remains an important component of their farming operations.

The most basic kind of entry-level crop insurance is catastrophic coverage, known as CAT. This insurance provides 50 percent coverage for average yields at 55 percent of the established price. CAT coverage costs $100 per crop per county in which the producer farms.

Use of CAT coverage varies by crop and by county, but more than 50 percent of the crops in several counties are covered by just this basic form of insurance.

A different form of coverage is Crop Revenue Coverage, or CRC, which is used to buy both yield and revenue protection. Because it also protects revenue, CRC is more expensive than CAT coverage and other forms of traditional crop insurance that provide a higher level of yield protection.

Gregg Ibendahl, agricultural economist with the Mississippi State University Extension Service, said crops need insurance to protect from loss just as do houses, cars and people.

“What kind of coverage you get depends on how much risk you can handle,” Ibendahl said. “Can you afford a total crop loss? The more diversified a producer is with crops and locations, the less risk you have of experiencing a total loss.”

The question for producers becomes how much risk can they handle versus how much are they willing to pay in insurance premiums.

“CAT coverage is basically a stop-gap measure. It's practically free, but it doesn't really cover a whole lot,” Ibendahl said. “CAT coverage ultimately pays at 27.5 percent in the event of a total loss. The traditional crop insurance product is a kind of an extension of CAT coverage, and the level of coverage depends on how much yield protection you want to buy up.”

In addition to providing some income when there is a crop loss, participation in most weather-related federal disaster assistance programs depends on the producer owning a crop insurance policy.

The Department of Agricultural Economics at MSU tracks the number of Mississippi producers using the various types of crop insurance as risk-management tools. They found that insurance rates and coverage levels vary by county and by crop. These numbers tend to vary year-by-year, depending on how the market has fluctuated.

Brent Brasher owns SouthCrop Insurance, an independent provider of crop insurance in Charleston, Miss. He said every producer should base crop insurance decisions on his or her particular situation. He encouraged farmers not to react to a bad year, but to plan carefully their overall risk management strategy, including their insurance purchases.

“The main thing for producers to consider is their financial strength. What is their position to self-insure?” Brasher asked. “From there, you kind of back into what you need. You evaluate what percentage you need to try to protect and at what percentage you can stand alone.”

Producers carrying a lot of debt tend to buy higher coverage, sometimes to meet the requirements of a lending agency. Others buy crop insurance to protect revenue, but Brasher said he thinks marketing tools such as futures and options are a less expensive way to do this.

“Crop insurance policies should be integrated into an overall risk management plan,” Brasher said. “The cycle of buying crop insurance is usually in response to the previous year and is reactive rather than proactive. But producers should evaluate their financial needs every year, not just after a bad year.”

Bonnie Coblentz writes for Mississippi State University Ag Communications.

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