5 Factors You Should Consider in Your Next Crop Insurance Policy

Sep 7, 2023

As you continue to evaluate and improve your farming operation, it’s important to keep your crop insurance policy top-of-mind. 

Even when you make the best planting decisions and streamline your irrigation, crop protection, and fertilizer applications, Mother Nature can be, well…a mother. A crop insurance policy that meets your needs and provides necessary coverage can make the difference between a quality operation and one that’s on the ropes.

Here are some key factors you should consider when choosing your next crop insurance policy. 

The Great Divide: understanding the two major crop insurance programs

(For experienced farmers, this section may be a bit of a review. So feel free to scroll down to the next section and skip this part.)

Crop insurance is divided into two major categories:

By far the most popular program, federally subsidized multiple-peril crop insurance (MPCI) provides affordable insurance to cover the potential for widespread catastrophic losses associated with agricultural production. It serves three functions:

  • Protect farmers’ income against crop failure or price collapse

  • Protect consumers against shortage of food supplies and extreme prices

  • Assist businesses and employment by providing an even flow of farm supplies and establishing stable farm buying power

MPCI covers a broad range of perils, including:

  • Drought

  • Excessive moisture

  • Freeze

  • Disease

Note that MPCI only applies to crops, not damages to on-farm structures, like grain bins and livestock barns. 

To qualify, farmers must purchase this program before planting begins. They will sign with a company that has their own contract with the Federal Crop Insurance Commission (FCIC), which then establishes the terms and conditions of the agreement. 

By contrast, the private market offers crop/hail insurance that’s regulated by state insurance departments. It covers a narrower range of perils, which does expose the farmer to more risk. However, there is generally a greater availability of crop/hail programs, it can be purchased at any time during the growing season, and isn’t subject to the same rigorous reporting as MPCI. 

How is crop insurance structured?

There are two broad ways to structure crop insurance: yield-based and revenue. Let’s take a look at the two in more detail.  

Yield based crop insurance

Yield-based crop insurance policies provide coverage only if the actual yield obtained during production becomes less than the expected yield. Under this broad umbrella there are some different options:

  • MPCI, as discussed above, works where farmers choose the volume of yield to be insured—anywhere from 50-85%—based on the historical data of the individual farmer

  • Group risk plans use the county yield index to determine the reference yield, rather than the individual farmer’s history

Revenue insurance

The other broad category of crop insurance is revenue insurance, which provides protection against a decrease in generated revenue resulting from loss of production, market price of crops, or both. 

Some of the more common revenue insurance policies include:

  • Crop revenue coverage (CRC), which makes use of two varied prices—the price projected at the season’s onset, and the price calculated just before harvesting

  • Revenue assurance (RA) includes the grower choosing a monetary sum to be covered that lies 65-75% of anticipated revenue

  • Group revenue insurance policy provides protection if and when the average county revenue under insurance drops below that selected by the grower

READ MORE: What key crop insurance deadlines should farmers know?

5 factors to consider when choosing a crop insurance policy

When the time comes to actually select a crop insurance policy, here are some of the major factors you should consider. 

1. Risk protection need

The first, and most obvious, factor to consider is your need for risk protection. Obviously, this will vary greatly depending on your geographical location, as weather conditions, diseases, and likelihood of drought or freeze vary by state.

Another factor influencing risk protection need is the crop(s) you’re growing. Certain crops are more subject to price fluctuations than others, and specialty crops that require special equipment may also be more expensive to replace if the equipment is damaged. 

Then there’s the overall financial position of your operation. Are you in a place where you can absorb moderate risk, or would a single incident set the operation back too far? The answer to that question will also depend greatly on your own risk tolerance. 

As we described earlier, there’s significant variability in the product offerings and coverage levels. Understanding your own risk protection need can help you choose the right policy option. 

2. Unit structure

Unit structures will impact the size of the premium that you’re responsible for paying. Different unit structures are more or less advantageous depending on your operation.

For most crop insurance unit structures, different parcels (or units) of land are insured separately from others. This means that an individual farm may be divided into several units based on:

  • Ownership or lease arrangements

  • Management practices

  • Location

There are four types of unit structures available under various types of crop insurance coverage:

  • Basic units insure a farmer’s operation by share

  • Optional units enable you to claim a loss in one unit, even if the others are unaffected

  • Enterprise units cover all insurable acres of a given crop within the county

  • Whole farm units enable farmers to combine their units and insure the operation

There are pros and cons to each of these approaches, and the one you choose depends heavily on your risk tolerance, operational structure, and the availability of these unit structures from your policyholder. 

3. Correlation with area production

Some farmers opt for group insurance policies like Area Risk Protection Insurance (ARPI). These can provide a lower-cost alternative to traditional crop insurance policy.

ARPI policies pay indemnities based on county production averages, rather than individual farmers’ yield histories. This can be a helpful option for newer farmers, as well as farmland with low yield histories. 

4. Integration with overall crop marketing strategies

It’s also important to consider how your crop insurance product may complement or substitute your crop marketing strategies, especially when it comes to price protection. Revenue insurance products, for example, provide some level of price protection. Yield-based insurance, however, does not. 

5. Farm-specific needs

Every farm is unique, which means you may need to consider special features for your operation. These can include provisions related to:

  • Prevented planting

  • Replanting

  • Irrigation

  • Double cropping

Many specialized farming practices aren’t covered under traditional crop insurance policies, which means you have to ensure they’re added in. Otherwise, you’ll expose yourself to undue risk. 

Final thoughts on crop insurance policy questions 

Choosing a crop insurance policy is a juggling act between high protection and high premiums. The right balance is going to vary by operation. That’s why it’s important to understand the ins and outs of the various policies available—as well as the ins and outs of your land.

Interested to learn more about CommonGround Insurance Group’s dedication to bringing your operation the most comprehensive insurance products? Contact Crop Specialist, Trevor Froehling, 815-883-1033 or trevor@commonground.io.

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