February 7, 2007 | By: Laura Skillman
OWENSBORO, Ky.,

While prices may have farmers excited about their 2007 crop, good managers know that this year, like all years, contains risks that need to be managed to ensure success.

“This is part of the reality,” said Jerry Skees, a policy and risk management specialist with the University of Kentucky College of Agriculture. 

Skees spoke to farmers during the annual Ag Expo in Owensboro about risk management tools available to them through crop insurance. There are a myriad of policies available to farmers. Some policies insure against yield losses while others are based on losses in revenue. Some policies are based on countywide yield averages while others use individual farm data. Cost varies depending on type of policy, coverage and level of federal premium subsidy.

“It comes back to what worries you the most in 2007,” he said. “Think like a portfolio manager who’s managing stocks and try to figure out and manage what’s going to happen on the downside. That’s what risk management should be.

“Farmers need to decide what is going to worry them,” Skees said. “If you know prices are going to be high, and they are going to be really high if we have a drought, then what worries you the most – yield. It is complicated. What you have to do is come back and ask yourself this fundamental question, what worries you the most this year. What is the worst case scenario, where you would have a serious problem, then go from that basis to think what the best choices might be.”

Farmers need to have a basic understanding of crop insurance and then work with an agent to determine what is best for their individual operation. To help farmers with the basics, Skees highlighted a county-based revenue product, Group Risk Income Protection, which is also a part of national farm legislation discussion.

Under Group Risk Income Protection, any payments are based on county yields and change in national price based on market prices in February to calculate expected county revenue. Changes in that expected county revenue are what trigger payments. For example, if the county yield for corn is 143.7 bushels per acre and the price for corn is $3.94, the expected county revenue would be $566 per acre. If a farmer purchases a policy that will pay when county revenue is below 90 percent of that level, then the “trigger” revenue is $510 per acre. If the fall harvest price times the actual county yield is below $510, payments begin. 

Some advantages of this program are less paperwork, relatively low cost and an individual yield history is not needed. It is important that a farmer’s yields track well with the county yields under this program. However, the program protects farmers only when yields are low all over the county or national prices are low enough to trigger a low county revenue, not when isolated problems hit an individual’s crops.

Understanding how the county-based product works is important on many levels because it will help farmers have a better understanding of all the different insurance choices available, Skees said. It is a good starting point because it is much easier to understand and a producer can start with county data then stack the product up against others in terms of price and protection.

“I hope farmers think about it as portfolio management – where you have the most risk and where you could use your risk management dollars in the most effective way to take care of your largest concerns of what can go wrong,” he said. 

Also, the better farmers understand the county-based revenue product, the better they are going to understand the debate that is emerging about the 2007 farm bill and whether this is a reasonable choice for basing risk management as a part of national farm programs.

Crop insurance decisions for the year must be made by March 15.

Contact: 

Jerry Skees, 859-257-7262