One form of insurance that is an excellent idea for primary producers is crop insurance. Crop insurance allows agricultural producers to insure their plantation against all kinds of natural disasters including floods, hail, drought as well as a sudden decline in agricultural commodities prices on the market. So if the price of wheat suddenly plummets due to a bumper crop in other parts of the world, the farmer is insured for the losses they may have.
Crop insurance is divided into a couple of broad categories: Crop Yield Insurance and Crop Revenue Insurance.
Crop Yield Insurance
There are two main categories of crop yield insurance, Crop hail insurance and Multi-peril crop insurance.
Crop Hail Insurance is available from private insurers and is considered a very specialised insurance because hail damage only occurs in certain areas. The payouts from insurance companies for this kind of insurance are somewhat limited due to the event usually being limited in scope. This kind of insurance was first established in the early 19th century with farmers in France and Germany buying it for their crops. Hail tends to damage certain crops more so than others, and many vineyards found this kind of insurance a necessity because hail damage is particularly bad on grape vines.
Multi-peril crop insurance (MPCI) covers a wider variety of risks to crops including hail, drought and excessive rain that can destroy crops. In some of these insurance packages, specific kinds of diseases and insect infestations can also be included, so if your crop was attacked by locusts you would be covered. Because this kind of damage can affect a much larger number of crops (a drought can affect an entire country) it is difficult for private insurers to carry the risk, so governments step in to provide this insurance. The government can also help cover the cost for this kind of insurance as well.
In the United States, the Department of Agriculture implemented a Multi Peril Crop Insurance program in 1938 and The Risk Management Agency is currently responsible for assessing the probability of crops failing due to one of the covered perils.
Crop Revenue Insurance
Crop revenue is calculated by the simple equation, Crop yield multiplied by Crop price. So if either the crop yield or crop price plummets, the crop revenue will suffer. Crop revenue insurance looks at the farmer’s crop revenue and if it deviates significantly from the mean, it will cover the losses.
The insurer looks at the futures market to determine the price that the crop should sell for and can offer farmers insurance at that rate. If the commodity market collapses for whatever reason and the price of the commodity falls, the farmer can recoup losses. The insurer uses the farmers average production level to determine the approximate expected crop yield.
The insurance only covers losses while the farmers crop is going, from unexpected declines in crop revenue. However it does not cover losses between seasons, because the price of produce fluctuates due to a number of reasons and the futures market can be unreliable.
Federal Crop Insurance
The United States has a federally subsidized insurance program which is organized by the Risk Management Agency (RMA). The program covers more than 100 kinds of crops, however some crops are not eligible for various reasons. Private insurance companies can sell this kind of insurance and receive a part of the premium for their role in the service provision.