TODAY. Crop Insurance in 2020 CROP. Systematic Risk. Educating Adjusters VOL. 44, NO. 4 NOVEMBER 2011 PUBLICATION OF NATIONAL CROP INSURANCE INSURANCE

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1 PUBLICATION OF NATIONAL CROP INSURANCE SERVICES VOL. 44, NO. 4 NOVEMBER 2011 CROP INSURANCE TODAY Systematic Risk Crop Insurance in 2020 Educating Adjusters

2 Here for the future. NOW MORE THAN EVER, YOU AND YOUR PRODUCERS NEED STRENGTH AND EXPERIENCE YOU CAN RELY ON. GO TO RCIS.COM TO LEARN MORE. We grow stronger every day together SM Rural Community Insurance Agency, Inc., D/B/A RCIS. RCIS is an equal opportunity provider Rural Community Insurance Agency, Inc. All rights reserved.

3 TODAYPRESIDENT S MESSAGE Primum Non Nocere Laurie Langstraat, Editor TODAY IS PROVIDED AS A SERVICE OF NATIONAL CROP INSURANCE SERVICES TO EDUCATE READERS ABOUT THE RISK MANAGEMENT TOOLS PRODUCERS USE TO PROTECT THEMSELVES FROM THE RISKS ASSOCIATED WITH PRODUCTION AGRICULTURE. TODAY is published quarterly February, May, August, and November by National Crop Insurance Services 8900 Indian Creek Parkway, Suite 600 Overland Park, Kansas If you move, or if your address is incorrect, please send old address label clipped from recent issue along with your new or corrected address to Laurie Langstraat, Editor, at the above address. NCIS Website: NCIS EXECUTIVE COMMITTEE Steve Rutledge, Chairman Ted Etheredge, Vice Chairman Tim Weber, Second Vice Chairman NCIS MANAGEMENT Thomas P. Zacharias, President P. John Owen, General Counsel James M. Crist, CFO/COO Frank F. Schnapp, Senior Vice President Mike Sieben, Senior Vice President Creative Layout and Design by Graphic Arts of Topeka, Inc., Kansas Winner of The Golden ARC Award Printed on recycled paper. Or as they say in the Latin, First, do no harm. I am not exactly sure when this President s message will hit the street, but I know as we go to press that both House and Senate Ag Committees and their staffs have been working feverishly preparing Farm Bill options for the Joint Select Committee on Deficit Reduction. Our Congressional leadership and their staffs should be applauded for their efforts to reconcile the difficult choices we face as a nation, and the implications of these choices on U.S. agriculture. The past several weeks have seen a flurry of Farm Bill activity in preparation for the statutory deadlines facing the Joint Select Tom Zacharias, NCIS President Committee on Deficit Reduction. We have known this was coming, so in one sense, the flurry of activity and Inside the Beltway turbulence simply met expectations. The news at this stage is a fragilely negotiated reduction of approximately $23 billion to Agriculture s baseline. This will no doubt be old news by the time this issue of TODAY is published. However, as we in the crop insurance industry attempt to understand these options, and respond to them, the fundamental maxim of medical ethics, First, Do No Harm, should be our guiding metric. So, what exactly does one mean by primim non nocere in the context of crop insurance s increasing role in agricultural policy? Throughout the 2011 crop season, we have reiterated time and time again the Essential Strengths of Crop Insurance. These twelve essential strengths define the attributes of the current crop insurance delivery system and include the following: 1) Producers share in program costs. 2) Producers take personal responsibility for their risk management choices. 3) Producers can individualize their risk management strategies. 4) Producers receive indemnities in a timely fashion. 5) The Crop Insurance Program is self-correcting and can be quickly adjusted. 6) Payments are not in excess of losses. 7) Protection can be used as collateral for loans. 8) Crop Insurance complements pre-harvest marketing strategies. 9) Producers are not subject to payment limitations. 10) Producers benefit from the efficiencies of private sector delivery. 11) Crop Insurance can be compatible with World Trade Organization requirements. 12) The Crop Insurance Industry has contributed significantly to deficit reduction. These characteristics of the crop insurance industry have served us well, particularly during the 2011 season which has seen extensive early-season flooding in the Midwest Continued on page 38 CROP INSURANCE TODAY 1

4 VOL. 44, NO. 4 NOVEMBER 2011 CROP INSURANCE TODAY Table of Contents 1 Primum Non Nocere 4 Systematic Risk: Crop Insurance in Retrospect and Prospect 4 10 The State of U.S. Livestock Insurance 15 Crop Insurance in Dr. Wally Nelson Receives Siehl Prize 19 High Temperature Effects on Corn: How high is too high? 22 In Memory of Kenneth M. Peterson 23 Educating Adjusters for Over Three Decades 26 On the Road Step 4-Setting Personal and Business Goals What do I want to accomplish? Visit 23 Copyright Notice All material distributed by National Crop Insurance Services is protected by copyright and other laws. All rights reserved. Possession of this material does not confer the right to print, reprint, publish, copy, input, transform, distribute or use same in any manner without the prior written permission of NCIS. Permission is hereby granted to Members in good standing of NCIS whose Membership Class (and service area, if membership is limited by service area) entitles them to receive copies of the enclosed or attached material to reprint, copy or distribute such NCIS copyrighted material in its present form solely for their own business use and solely to employees, adjusters or agents who are under contract with them, and as a condition to receiving such copies, such employees, adjusters and agents agree that they will not reprint, copy or distribute, or permit use of any such NCIS copyrighted material to or by any other person and/or company, or transform into another work such NCIS copyrighted material, without prior written permission of NCIS National Crop Insurance Services, Inc.

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6 TODAYcrop insurance Systematic Risk Crop Insurance in Retrospect and Prospect By Harun Bulut, Frank Schnapp, and Keith Collins, NCIS Systematic risk has been an appealing concept for justifying government involvement in crop insurance markets. It is also the basis for the design of alternative plans of insurance and farm programs. This article revisits the concept by reviewing the related agricultural economics literature. The review focuses on the period since the Federal Crop Insurance Act of 1994 when the crop insurance program went through major changes such as increased participation, the adoption of biotechnology, rating and data improvements and the introduction of revenue plans in crop insurance and farm programs. In crop insurance literature, the term systematic risk (or catastrophic risk) is typically understood as the common portion of underlying risk when losses among insurance units are positively and spatially correlated. 1 Figures 1-3 illustrate no correlation, partial positive correlation and perfect positive correlation between a farmer s and a county s yield. Depending on the level and distribution of positive correlation, a relatively large segment of the insured units may be affected by a common cause of loss, such as widespread adverse weather effects of drought, flood and freeze, as opposed to almost mutually independent events seen in other lines of insurance, such as auto accidents (Miranda and Glauber, 1997; Skees and Black, 1997; Duncan and Myers, 2000; and Chambers and Quiggin, 2002). Price risk also contributes to the insurer s systematic risk due to the high correlation across producers of the same crop. Despite the natural hedge between yield and price movements, in some years, such as 2008, a sharp reduction in price at harvest without major production loss can result in losses on a large number of crop insurance revenue protection policies at the same time. In the next two sections, systematic risk is first considered from the perspective of Approved Insurance Providers (AIPs or insurers) and then from the perspective of farmers. The last section provides concluding comments. Systematic Risk from the Insurers Perspective With very few exceptions, the existence of an insurance market is based on the concept of the law of large numbers. If exposures are independent, the law of large numbers implies that the insurer s risk over its entire book of business is relatively small, with gains on many policies offsetting the losses on a few. On the other hand, if exposures are correlated, then the insurer s risk can be considerable. Simulations conducted by Miranda and Glauber for the 1993 year estimated that the crop insurance portfolios of the ten largest AIPs were 20 to 50 times riskier relative to a hypothetical portfolio consisting of independent crop insurance losses. 2 Facing such a high systematic risk, crop insurance companies would seek reinsurance. The consensus in the literature is that private insurance and reinsurance markets do not provide adequate coverage at a reasonable premium rate for the systematic risk in crop insurance markets. Various proposals have emerged in the literature to address systematic risk in crop insurance markets including: 1) government provided subsidized reinsurance (Duncan and Myers), 2) government provided reinsurance through area insurance (Miranda and Glauber), and 3) options markets, futures markets and forward marketing (Grant, 1985; Chambers and Quiggin). These proposals will be reviewed in the following section. Government Provided Reinsurance through the Standard Reinsurance Agreement (SRA) Based on a theoretical model, Duncan and Myers study the question of whether, in the presence of systematic risk, a private 1 The terms systematic risk or systemic risk have been interchangeably used in the literature. In recent years, systemic risk has commonly been used to refer to events that are so severe that they can potentially devastate the entire economy - such as a financial meltdown in In referring to non-diversifiable risk, Fabozzi and Modigliani use the term systematic risk, whereas Miranda and Glauber; Mason, Hayes and Lence; Skees and Black use the term systemic risk. Duncan and Myers adopt the term catastrophic risk instead of the term systemic risk. In this article, we choose to use the term systematic risk. 2 The analysis was done for the 1993 crop year. The authors made simplifying assumptions such as every farmer chose 65 percent coverage with the yield protection policy. They modeled only the joint distribution of farm-level yields and left out modeling of the joint distribution of price and yield. They combined eight years of farm level data with the county level data which went back 30 years from The farm level data covered corn, soybeans and wheat farmers who were enrolled in the program in The sample consisted of 15 percent of the all farmers enrolled in the program in november 2011

7 crop insurance market can be established so that crop insurance companies obtain an adequate return and farmers obtain adequate coverage levels at affordable premium rates. The authors recognize that the accumulation of risk across a crop insurance portfolio due to systematic risk creates a challenge for the private insurance market since investors generally require a return commensurate with the risk they take. While it might be possible to set the rates at a level that compensates insurers for their high degree of systematic risk, those rates might discourage farmers from participating in the program. If the risk premium is sufficiently high, it may even lead to the complete break-down of the market. They find that reinsurance (private or government provided) will help only if there is a somewhat functioning private crop insurance market to begin with. In case of complete market failure, only subsidized reinsurance can help facilitate the market. In that case, a higher subsidy amount further improves the market outcome in the form of lower premiums, higher coverage and participation levels. Duncan and Myers note that whether the cost of subsidized reinsurance outweighs the resulting benefits is an open question. Consistent with the Duncan and Myers analysis, and to ensure participation of private insurers in crop insurance by limiting their exposure to systematic risk, the U.S. government acted as reinsurer under terms specified in various SRAs since The SRA is a risk-sharing agreement in which insurers give up a portion of underwriting gains in low loss years in order to be able to transfer a portion of underwriting losses to the government in high loss years. The SRA allows private companies to cede the bulk of the risk to the government on a certain share of policies they sell, while the policies they retain are allocated into different risk-sharing funds with varying exposure to risk. This facilitates the government s objective of making crop insurance available to all eligible producers, including producers who would otherwise find it difficult to obtain coverage in the private market due to their underwriting characteristics, while simultaneously transferring most of the risk of these producers to the government. Farm Yield Farm Yield Figure 1. Example County and Farm Yields with No Systematic Production Risk Figure 2. Example County and Farm Yields with Some Systematic Production Risk County Yield County Yield In the early 1990s, Miranda and Glauber criticized the government-provided reinsurance through the SRA by arguing: 1) it does not provide good incentives to companies to monitor adverse selection and moral hazard problems at the farm level, and 2) it provides a rather excessive rate of return on retained premium (above 18 percent). These criticisms were made following a time period, the 1980s and early 1990s, during which the actuarial performance of the crop insurance program had been dismal (Glauber, 2004). The Federal Crop Insurance Act of 1994 and the Agricultural Farm has the same expected yield as the county but their yields are independent. Farm has the same expected yield and variance as in Fig.1, but now its yield is partially correlated (0.6) with the county yield. Risk Protection Act of 2002 (ARPA) increased the participation of low risk producers in the program through increased premium subsidies under the expectation that increased participation would lead to less adverse selection and lower, more accurate, premium rates. Consistent with that expectation, the crop insurance program s actuarial performance has improved over time. In regard to the first point raised in Miranda and Glauber, one has to recall that the crop insurance industry is highly regulated compared to other lines of insurance. CROP INSURANCE TODAY 5

8 Farm Yield Figure 3. Example County and Farm Yields with No Idiosyncratic Production Risk County Yield Private insurers must accept the premium rates and underwriting provisions as set by government. Instead, they compete only in the quality of their service. In addition, once a company decides to operate in a given state, it has to offer all plans of insurance that are approved for sale (except pilot programs) to every farmer in that state. To mitigate the loss potential because of this, companies can cede a portion of their policies they deem highly risky to the Assigned Risk Fund (ARF), where they retain a relatively lower proportion of the premium and its associated risks compared to other reinsurance funds. Nevertheless, ceding to ARF is done as a proportion of the entire reinsurance fund rather than on an individual contract basis. That is, each company retains at least some liability on every policy it underwrites. This is in contrast to flood insurance where the government takes all the risk and the companies bear none. Since the 1980s, successive SRAs have steadily increased the risk retained by the companies. For example in the SRA, the government assumed 100 percent of the losses for which the loss ratio exceeded In the 2011 SRA, the government assumes 100 percent of the losses for which the loss ratio exceeds 5.0. Because crop insurance companies maintain substantial skin in the game, they have ample incentives to rigorously adjust losses. Farm has the same expected yield as the county, but now its yield is perfectly correlated with the county yield. In regard to the second point raised in Miranda and Glauber, an historical perspective can be useful. In terms of potential returns, the basic structure of SRA did not change in the late 1990s. The main change between the 1998 SRA and the 2005 SRA was the introduction of net book quota share (NBQS). NBQS requires that companies cede five percent of their cumulative underwriting gains or losses to the Federal Crop Insurance Corporation (FCIC). Because companies obtain underwriting gains more often than losses, the reinsurance provided by NBQS tends to benefit FCIC more so than the companies. Vedenov et al. (2006) find that the expected returns to companies would be decreased due to NBQS by 1.1 percent after adjusting for the companies behavioral response. Another change in the 2005 SRA was an increase in cession limits, but Vedonov et al. calculate that companies would increase gross premiums ceded to the ARF only in a limited number of states. In the 2011 SRA, NBQS is increased to 6.5 percent, and if there is an underwriting gain, the additional 1.5 percent is to be distributed back to companies operating in under-served states. Finally, the 2011 SRA introduced alternative risk sharing provisions based on groupings of states to reflect differing underwriting gain potential among states, further decreasing the companies expected returns. Systematic Risk from the Farmers Perspective The conventional thinking has been that systematic risk lies at the core of farmers risk exposure and it is quite uniform and common across farmers in a given area and even across counties in a given state or region. Such a view has been instrumental for the introduction and development area yield or revenue insurance plans and area revenue farm programs. Area Yield or Revenue Insurance Plans Group Risk Protection (GRP) Insurance and Group Risk Income Protection (GRIP) are area based plans protecting against yield and revenue shortfalls at the county level, respectively. GRP started out as a pilot program for soybeans in 1993 and expanded to other major crops the following year. GRIP was proposed as a pilot by the private sector in Starting in 2004, GRIP also began to offer the harvest price option (GRIP-HPO), which sets the insurance guarantee at the higher of planting or harvest prices. Farmers have had little demand for GRP and GRIP in most areas, as these plans accounted for less than four percent of the total MPCI program premium in In crop year 2011, the Risk Management Agency (RMA), introduced the Common Crop Insurance Policy (Combo Policy) replacing the previous individual insurance plans with the goal of unifying and simplifying the Federal crop insurance program. To bring the area plans in line with the Combo Policy changes, FCIC proposed a rule to replace GRP Insurance, GRIP Insurance, and GRP-HPO Insurance with new plans called Area Yield Protection Insurance (AYP), Area Revenue Protection Insurance with Harvest Price Exclusion (ARP-HPE), and Area Revenue Protection Insurance (ARP), respectively. These new area plans collectively are referred to as ARPI. Area Revenue Farm Programs The 2008 Farm Bill emphasized the revenue protection goal for farm programs and introduced new programs such as 6 november 2011

9 Supplemental Revenue Assistance Payments (SURE) and Average Crop Revenue Election (ACRE). This was despite the fact that the premium of revenue insurance products, which provide protection against revenue shortfalls as a share of total U.S. crop insurance premium, is about 80 percent. Farmers have been receiving such protection since the 1990s. SURE is a whole farm program and makes payments based on individual producer losses over an entire farm. ACRE protects against revenue shortfalls for a crop at the state level. Using a farm level data obtained from Illinois and Kansas Farm Management Associations (for corn, soybeans, and wheat in Illinois and for corn, sorghum, soybeans, and wheat in Kansas) over the time period from 1978 to 2008, Zulauf (2011) finds that the systematic component of the losses appears to be mostly shallow losses, while deeper losses pertain to the idiosyncratic component and that the pattern for shallow versus deep losses differs across states. Zulauf argues that a reason for the introduction of different programs such as ACRE and SURE, in addition to crop insurance could be to accommodate different loss patterns in different states. The duplication of coverage and overlap between ACRE and crop insurance appears to be modest (Zulauf, Schnitkey, and Langemeier, 2010). They are separate programs whereas in order to receive a SURE payment, the farmer has to purchase crop insurance. Net crop insurance indemnities are counted against the SURE guarantee which eliminates duplication of payments between the two. Both ACRE and SURE are subject to payment limits while crop insurance is not. The program complexity and slow payment of claims have been major issues for both ACRE and SURE. Overall the participation has been low and selective by region and crop with ACRE. Using a theoretical model, Bulut, Collins, and Zacharias (2011) study a riskaverse farmer s relative coverage demand for area versus individual insurance. Assuming that the farmer s losses are imperfectly and positively correlated with area losses, they show that under actuarially fair premium rates, farmers would pur- CROP INSURANCE TODAY 7

10 chase individual insurance only. In addition, if area-insurance is underpriced while individual insurance is fairly priced, separate area and individual plans are substitutes and demand for area insurance increases whereas demand for individual insurance decreases as the correlation between farmer and area losses increases. Furthermore, whenever individual insurance becomes overpriced while area insurance is fairly priced, some additional demand for area insurance will be created. The model can be useful to explain the pattern of actual coverage in counties where ACRE participation is low or high. From the farmers perspective, the risk management needs of the producer are best met with individual crop insurance under actuarially fair rates along with the use of forward marketing. References: Concluding Comments This article discusses the systematic risk issue in crop insurance markets by reviewing the related agricultural economics literature. After examining the issue from both insurers and farmers perspectives, the review raises the following points. From the insurer s perspective, systematic risk is best addressed through a fairly negotiated SRA agreement. The alternative idea of providing reinsurance through area plans has not been appealing to companies. A fair negotiation must recognize and emphasize the contribution of the privatepublic partnership in creating the success of the crop insurance program as seen today. The focus of such negotiations should be on whether the program operates effectively and achieves the objectives set for it by Congress by ensuring effective and efficient delivery, creating new insurance opportunities for farmers, keeping premiums affordable, and expanding crop insurance coverage. From the farmers perspective, the risk management needs of the producer are best met with individual crop insurance under actuarially fair rates along with the use of forward marketing. Coverage restrictions imposed in individual insurance against moral hazard concerns can result in a limited indemnity or shallow loss issues. In that context, a partial role for area farm programs or insurance plans to cover deductibles and therefore to improve risk protection is possible. Even then, the individual plan must be the base product while the area plan is stacked on top of individual insurance. Multi-year price risk is a component of systematic risk and can be addressed through actuarially based multiyear insurance policies or farm programs. Even though justification can be found for government s role in crop insurance markets as a reinsurer, the funding cuts in the 2008 Farm Bill, the 2011 SRA and the proposals for further cuts to address the Federal budget deficit and premium rate changes have amplified insurers regulatory risk concerns. Regulatory risk adds to the systematic risk companies are facing and further increases the necessary riskpremium for their involvement in crop insurance markets. Editor s Note: To read an extended version of this article, please go to and click on Publications. Barnett, B.J., J.R. Black, Y. Hu, and J.R. Skees Is Area Yield Insurance Competitive with Farm Yield Insurance? Journal of Agricultural and Resource Economics. 30(2): 285: 301. Bulut, H., K. Collins, and T. Zacharias Optimal Coverage Demand with Individual and Area Plans of Insurance. Selected paper for presentation at the 2011 Annual Meeting of the Agricultural and Applied Economics Association, July 24-26, 2011, Pittsburgh, Pennsylvania. Coble, K.H. and B.J.Barnett Implications of Integrated Commodity Programs and Crop Insurance. Journal of Agricultural and Applied Economics. 40(2): Chambers, R.G. and J. Quiggin Optimal Producer Behavior in the Presence of Area- Yield Crop Insurance. American Journal of Agricultural Economics. 84(2): Duncan, J. and R. M. Myers Crop Insurance Under Catastrophic Risk. American Journal of Agricultural Economics. 82 (4) Fabozzi, J.F and F. Modigliani Capital Markets: Institutions and Instruments. 3rd Edition. Prentize Hall, New Jersey. Glauber, J. W Crop Insurance Reconsidered. American Journal of Agricultural Economics. 86 (5): Gao, X. and C.G. Turvey, R. Nie, L.Wang and R. Kong Crop Insurance Rate Making in the Absence of Crop Yield Data: Subjective Assessments and PERT Distributions in Shaanxi China. Paper presented at SCC-76 Group Annual Meeting, Atlanta, GA, March. Grant, D Theory of the Firm with Joint Price and Output Risk and a Forward Market. American Journal of Agricultural Economics. 67(3): Grant Thornton, LLP Federal Crop Insurance Program: Profitability and Effectiveness Analysis 2010 Update. January 13. Available online at SpecRPTS/GrantThornton/Grant_Thornton_ Report-2010_FINAL.pdf Mahul, O Managing Catastrophic Risk Through Insurance and Securitization. American Journal of Agricultural Economics. 63(3): Mason C., D.J. Hayes and S.H. Lence Systemic Risk in U.S. Crop and Revenue Insurance Programs. CARD Iowa State University Working Paper 01-WP 266. Miranda, M.J. and J.W. Glauber Systemic Risk, Reinsurance, and the Failure of Crop Insurance Markets. American Journal of Agricultural Economics. 79 (1): Skees, J.R. and B.J. Black Conceptual and Practical Considerations for Sharing Catastrophic/Systemic Risks. Applied Economic Perspectives and Policy. 21(2): U.S. General Accounting Office Crop Insurance Program Has Not Fostered Significant Risk Sharing by Insurance Companies. Report to the Chairman, Committee on Agriculture, Nutrition, and Forestry, U.S. Senate, Washington DC, GAO/RCED-92-25, January. Zulauf, C., G. Schnitkey, and M. Langemeier Average Crop Revenue Election, Crop Insurance, and Supplemental Revenue Assistance: Interactions and Overlap for Illinois and Kansas Farm Program Crops. Journal of Agricultural and Applied Economics, 42(3): november 2011

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12 TODAYcrop insurance The State of U.S. Livestock Insurance By, Dr. Keith Collins, NCIS Editor s Note: Dr. Collins made a presentation on the state of U.S. livestock insurance products at the Congress of the International Association of Agricultural Production Insurers in early October. His presentation, in article format, is below. U.S. farm sales of livestock products are expected to total over $160 billion in But the total insured value of livestock under Federal crop insurance is only a little over $1 billion. This article discusses why livestock insurance coverage is low, how livestock plans of insurance have performed and prospects for the future. U.S. Livestock Producers have a Number of Risk Management Options Producers face many risks in producing and marketing of livestock. Weather may impair or kill livestock. Animal diseases may cause death or reduced productivity (mortality and morbidity). Feed supply, quality and price may affect productivity and production expenses. Selling prices depend on animal quality and uncertain global markets. Fortunately, producers have options to reduce the many risks they face. Farm management. Proper management of breeding and raising livestock (husbandry) is a primary form of risk management. Possible losses of income, assets, or the farm business are strong incentives to follow proper animal health and biosecurity practices. Government disease management programs. There are many government programs to detect, control and eradicate animal diseases. They involve 10 november 2011 inspecting and testing animals in transit and when entering the food chain, preventing diseases from entering the country and eradicating diseases through testing and depopulating. The Animal Health Protection Act requires indemnification of producers whose livestock are depopulated as a result of a disease meriting eradication. USDA s Animal and Plant Health Inspection Service (APHIS) compensates owners of depopulated animals at a level that is less than or equal to the fair market value less compensation received, including salvage value or payments from states or other sources. Livestock insurance indemnities would reduce the APHIS payments. Compensation may include costs for cleaning, disinfection and disposal but does not cover costs related to business interruption, such as lost demand. Private insurance. Private insurance is available for livestock producers for many perils ranging from fire and lightning to hurricanes, drowning, attack by wild dogs, building collapse, and so on. Mortality insurance which pays for death loss due to disease has generally been used only for limited animal types, such as horses, pets, and valuable breeding stock. Farm income support and disaster assistance programs. Several USDA farm programs have helped livestock producers mitigate risk. The Emergency Loan Program helps producers recover from production losses due to drought, flooding, other natural disasters or quarantine. Loans are for up to 7-years, have low interest rates and must be backed by collateral. Two programs created by the 2008 Farm Bill also aided producers. One, the Emergency Assistance for Livestock, Honey Bees and Farm Raised Fish (ELP), provided payments for feed assistance as a result of natural disasters and for death loss due to disease not adequately covered by other programs. Another, the Livestock Indemnity Program (LIP) provided payments for death loss due to adverse weather in excess of normal mortality. The legal authority for ELP and LIP expired on September 30, Reauthorization of these two programs will be a 2012 Farm Bill issue. Forward selling. Futures and options contracts exist for feeder cattle, live cattle, lean hogs, frozen pork bellies, and milk which can hedge market risk. Feed costs may be hedged with corn, soybean, soybean meal and wheat futures and options. Futures and options use by producers is limited by: brokerage fees, the need to meet margin calls when a contract is in a loss position, basis risk, the large fixed quantity in the exchange s contracts and producer knowledge. Many farmers prefer forward contracts which can be better tailored to their business. Production contracts, common in the poultry industry, have increased in other areas, such as hog production. Under a production contract, the farmer raises the livestock, may be provided some inputs, and is paid for other input costs and a return for labor and management, while the integrator owns and markets the animals. Federal crop insurance for feed production, quality and prices and for

13 livestock prices, margins and revenue. The Federal government provides crop and limited peril livestock insurance for farmers and ranchers. Crop insurance protects against losses of production, prices and quality for a range of animal feeds. Livestock insurance protects only against price or margin (the difference between livestock price and feed costs) losses and whole farm revenue losses. This list indicates livestock producers have many alternatives to manage risks, which probably explains why Federal livestock insurance has not expanded like crop insurance. Also, there have not been many outbreaks of communicable diseases that have caused large livestock production losses, such as the damage caused to crops by major droughts. For example, the United States has been free of foot and mouth disease since Many livestock producers see marketing risk as more critical than production risk. Another factor may be that farm programs for livestock have not existed to the degree they have for crops. This independence from farm programs may reflect livestock producers desires to manage their own risks, rather than seek government support. Available Livestock Plans of Insurance are Limited Federally supported livestock insurance is managed by the Federal Crop Insurance Corporation (FCIC) and USDA s Risk Management Agency (RMA) as part of the Federal crop insurance program. The limited authority to offer livestock products first became available with the Agricultural Risk Protection Act (ARPA) of 2000, which states: the Corporation may conduct a pilot program... providing insurance protection against losses involving... livestock poisoning and disease... (Sec 523(a)(3)(B)). Another provision states: the Corporation shall conduct two or more pilot programs to evaluate the effectiveness of risk management tools for livestock producers, including the use of futures and options contracts and policies and plans of insurance that... provide livestock producers with reasonable protection from the financial risks of price or income fluctuations inherent in the production and marketing of livestock; or protection for production losses (Sec 523(b)(2)). FCIC has not offered a pilot program for Figure 1. Estimated Insured Liability, 2011 Crops versus Livestock Bil. $ Mil. $ 1, Crop Figure 2. Total Liability of LRP & LGM 1, livestock disease or production insurance. However, under this authority, FCIC has approved plans of insurance to protect against livestock price and revenue risks. The law limits total livestock A&O payments and premium subsidies to only $20 million per year. Livestock Risk Protection (LRP). LRP was the first livestock pilot program proposed after enactment of ARPA and was first sold in mid The plan covers fed cattle, feeder cattle, swine and lambs. The peril covered is a decline in the price of the animal. Sold daily, the producer submits a onetime application and after acceptance may 1.1 Livestock Dairy Lamb Cattle Swine purchase endorsements covering the number of animals expected to be marketed at an expected weight near the end of the insurance period, which may be of varying lengths. The number of animals covered by each endorsement annually is limited. The producer selects a coverage price (a percentage of the expected ending value or futures price), ranging from percent, depending on the species. An indemnity is paid if the actual ending value is less than the coverage price and is based on the number of head expected to be marketed times the expected weight. Actual head marketed, weights and sales prices are not CROP INSURANCE TODAY 11

14 used in the calculation. Premiums are paid before the insurance period. FCIC provides a premium subsidy of 13 percent, pays insurance companies administrative and operating expenses (A&O) and provides reinsurance. Livestock Gross Margin (LGM). LGM, first sold in mid-2002, covers cattle, swine and dairy cattle (milk). The peril covered is a decline in expected margin: for cattle, cattle price minus the cost of feeder cattle and corn; for swine, lean hog price minus the cost of corn and soybean meal; and for milk, milk price minus the cost of corn, soybean meal and other feeds in corn and soybean meal equivalents. Margin formulas use futures prices and differ by type of enterprise. Sales start the last business Friday of each month and run into the next day, with 12 insurance periods per year. The insurance period covers 11 months for cattle and dairy and six months for swine, with the first month not covered. The expected gross margin is the sum over the insurance period of the quantity of animals (number times weight) or milk expected to be marketed each month (target marketings) multiplied by that month s expected margin. Insurance attaches after the producer reports target marketings. The number of animals and quantity of milk covered in each insurance period and for the year are limited. Producers can choose a dollar deductible up to a limit. An indemnity is paid when the expected gross margin less the deductible exceeds the actual gross margin, which is the sum of each month s target marketings multiplied by the month s actual margin. A high return in one month can offset a low return in another month. Actual head marketed, weights, feed fed, and sales and purchase prices are not used in the calculation, but producers must submit a report in the event of loss, and indemnities are prorated if actual marketings are below 75 percent of target marketings. Premiums are due when the policy is purchased for cattle but not until the end of the insurance period for swine and milk. There is no premium subsidy for cattle and swine, but FCIC initiated a premium subsidy for milk in December 2010, which ranges from 18 percent for no deductible to 50 percent for the highest deductible. FCIC pays insurance companies A&O and provides reinsurance. Like LRP, LGM provides protection tailored to the producer s Figure 3. No. of Head Covered in LRP & LGM Excluding Dairy, ,000 head Cattle Swine Lambs Figure 4. LRP & LGM Coverage of U.S. Cattle Inventory, Hog/Lamb Slaughter, Milk Production Percent Fed Feeder herd size over a range of time periods and there are no brokerage commissions or margin calls. Adjusted Gross Revenue (AGR) and Adjusted Gross Revenue-Lite (AGR-Lite). There are two similar whole-farm plans of insurance that cover livestock, AGR and AGR-Lite, which cover revenue losses from natural disasters and market risks. AGR-Lite was developed after AGR as a simpler version designed for smaller operations. Both plans use revenue data from historical Internal Revenue Service Schedule F or equivalent tax forms and a farm report for the upcoming year to establish the 17.4 LRP LGM 2.4 Cattle Swine Lambs Milk LRP & LGM for 2011; U.S. cattle inventory for Jan. 2011; hog, lamb slaughter for 2010; estimated milk production for 2011 approved expected farm revenue. For AGR, the producer must have a liability of $6.5 million or less and no more than 35 percent of revenue may be from livestock. For AGR-Lite, liability may not exceed $1 million, and there is no cap on the share of revenue that may come from livestock. AGR is sold in a limited number of states, mostly on the west coast and northeast, reflecting its original purpose of protecting diversified specialty crop farms. AGR-Lite is more widely available, covering 35 states. For both plans, the producer picks a revenue guarantee which ranges, depending on the number of commodities covered, 12 november 2011

15 Figure 5. Livestock Plan Loss Ratios, All Plans: : : 0.48 from 65 to 80 percent of the approved expected revenue. The producer also selects a payment rate, which is 75 or 90 percent of the difference between the covered revenue and the actual revenue. Claims are paid after taxes are filed for the calendar year. FCIC provides a premium subsidy, A&O payments and reinsurance. Livestock Plans have Low Participation but Good Actuarial Performance The table on page 14 summarizes the LRP and LGM business over the past three reinsurance years. Data on livestock in AGR and AGR-Lite are not available. Premium. Total LGM and LRP premium in 2011 was $34.2 million, up from $6.2 million in 2010, and far below MPCI crop premium of $11.5 billion. Dairy LGM rose from $0.78 million to $25 million. Feeder cattle LRP also had a large increase, rising from $2.3 million to $5.3 million. Insured liability. The insured liability under LRP and LGM is only $1.1 billion in 2011, compared with crop liability of over $110 billion (Figure 1). Total liability for LRP and LGM before 2011 averaged less than $200 million per year with premium of only $4-6 million (Figure 2). The low liability is due to lack of interest by producers and cannot be blamed on the $20 million per year cap on livestock program costs, as the cap was never reached until this year. Dairy changes. The changes in the LGM dairy policy made in late 2010 made the plan much more attractive, especially making the premium due at the end of the LRP Feeders LRP Swine LRP Lambs LGM Cattle LGM Swine LGM Dairy Excludes LRP cattle due to low sales insurance period rather than up front, increasing the maximum deductible and initiating premium subsidies. The policy was made more flexible to allow alternative feed cost formulas for different stages of dairy cattle. The changes and 2009 s low milk prices spurred the sharp sales increases in Number of head covered. Almost all cattle insured are under LRP, and most are feeder cattle (Figure 3). Feeder cattle are mainly forage based, so the primary market risk is price. Neither price nor margin insurance is popular with cattle feedlots, as most use other forms of price protection. While more head of swine and lamb are covered than cattle, their premium has been about half that for cattle. For swine, LGM is much more popular than LRP, as producers like the ability to hedge against feed price changes. Share of the U.S. livestock industry covered. The share of the U.S. cattle inventory and swine slaughter covered by LRP and LGM are tiny, about 0.1 percent for cattle and 0.4 percent for swine (Figure 4). However, lamb LRP covers about 17 percent of lambs slaughtered. LGM dairy covers an estimated 2.4 percent of U.S. milk production. Loss ratios. Livestock loss ratios (indemnities divided premiums) have varied greatly (Figure 5). The cumulative loss ratio for LRP and LGM for is Adding in preliminary data for 2011, it drops to 0.48 due to the increase in dairy premium and few losses. It is no surprise that 2008 and 2009 had the largest loss ratios over the period, reflecting the run up in livestock and grain prices in 2007 and 2008 and then declines in 2008 and For example, swine LRP projected ending values fell from $75 per cwt in mid 2007 to the mid $60s in 2008, but actual ending values fell much further over that period, down to $50 per cwt. AGR and AGR-Lite. In 2011, there are an estimated 870 policies earning premium compared with over 1.1 million crop policies. The total liability and premium for AGR and AGR-Lite are very small, about $470 million and $18.6 million, respectively, and are only slowly trending up (Figure 6). Most participation is in Washington, Oregon and California and not in large traditional feeder cattle and swine producing states. The conclusion is that AGR and AGR-Lite are simply very lightly used by livestock producers. $20 million cap. Each year, the $20 million cap is apportioned across livestock species, and policies are sold on a first come, first served basis until the species cap is reached. Then, if possible, unused funds are reallocated across species. In 2011, after reallocation, the dairy funding limit was reached and dairy sales were suspended in April Sales are expected to resume in October 2011 with the start of the 2012 fiscal year and new funding of $20 million. A&O and reinsurance. Eleven approved insurance providers offer LGM and LRP and receive A&O payments equal to 22.3 percent of premium and reinsurance with FCIC. Policies are assigned to the commercial fund but 5 to 65 percent of premium may be designated to a private fund. For the commercial fund, companies may cede up to 65 percent of premium to FCIC. For the retained premium, FCIC takes 90 percent of the losses on a loss ratio between 150 and 500 percent, and FCIC takes 100 percent for losses exceeding 500 percent. Companies pay a fee of 4.5 percent of premium. Companies may use private reinsurance but may not offset risk using options, futures or other such products. Future Prospects Point to Limited Growth for Most Current Plans Until dairy producers increased purchases of LGM in 2011, U.S. livestock producers showed little interest in price and margin CROP INSURANCE TODAY 13

16 Table 1. Summary of Business Perormance of LGM and LRP (as of 10/18/12) Policies Earning Policies Number of Head Liabilities Total Premium Subsidy Indemnity Loss Premium Indemnified (Milk in cwt) ($) (S) ($) ($) Ratio 2009 LGM , 24,667,223 1,333, ,115, LRP ,418 83,193,358 2,823, ,084 5,319, LGM ,073,476 49,529,127 1,894, , LRP , ,255,407 4,334, ,496 1,407, LGM 1, ,314, ,231,032 26,018,644 10,735, , LRP , ,627,167 8,112,559 1,054,652 3,319, Total , ,860,581 4,157, ,084 8,434, , ,498, ,784,534 6,229, ,496 2,108, , ,885,418 1,066,858,199 34,131,203 11, ,806, insurance. FCIC spending on livestock programs remains capped at $20 million, with the cap becoming a constraint for only the first time in The National Milk Producers Federation has proposed reform of the U.S. dairy program that includes margin product sold by the government, not private companies. If passed, that product would likely displace potential LGM dairy sales. At this point, the fate of dairy margin insurance may to be decided in the 2012 Farm Bill. The 2012 Farm Bill is being shaped by the Federal budget process. With agricultural programs to be cut to contribute to deficit reduction, it appears unlikely that Congress would approve a large increase in Figure 6. Total Liability of AGR & AGR-Lite Mil. $ the $20 million cap on livestock plans of insurance, and producers other than dairy, are not asking for an increase. Regarding livestock disease insurance, RMA contracted for a feasibility study of commercial poultry production insurance that was completed in The contractors concluded that due to limited insurable interest by growers, lack of data, and other reasons commercial poultry production insurance is presently not feasible. An earlier evaluation of LRP and LGM suggested that large sales increases are unlikely. Private researchers developed a livestock disease insurance product which has not been submitted to FCIC for approval for sale but is expected to be sold privately AGR-Lite AGR The tiny portion of livestock production value insured today suggests an enormous opportunity for increased livestock insurance business. However, the rarity of catastrophic disease outbreaks combined with other available risk management tools suggests little meaningful change in the prospects for increasing the livestock business in the existing plans of insurance, including LRP, LGM, AGR and AGR-Lite. References Koontz, S.R., Hoag, D.L., Thilmany, D.D., Green, J.W. and Grannis, J.L The Economics of Livestock Disease Insurance, Concepts, Issues and International Case Studies, CABI Publishing, Oxford, England and Cambridge, MA. USDA, Risk Management Agency. LGM Frequently Asked Questions, LRP Fact Sheets, Livestock Business Report, LRP Coverage Prices/Rates, LGM Expected and Actual Gross Margins. Accessed at USDA, Risk Management Agency. Fact Sheets for AGR and AGR-Lite, accessed at USDA, Risk Management Agency. Summary of Business On-Line, for Livestock and AGR. Accessed at USDA, Farm Service Agency. Emergency Assistance for Livestock, Honey Bees, & Farm-raised Fish Program, accessed at FSA/webapp?area=home&subject=diap&topi c=elap, Livestock Indemnity Program and Emergency Loan Program, accessed at area=newsroom&subject=landing&topic=pfs &newstype=prfactsheet. Watts and Associates Feasibility Research Report for Insuring Commercial Poultry Production, Deliverable 2. Final Feasibility Report, contracted report done for USDA, RMA, accessed at yfeasibility.pdf. 14 november 2011

17 TODAYcrop insurance Crop Insurance in 2020 By Tom Zacharias, NCIS At the 31st Congress of the International Association of Agricultural Production Insurers held in Athens Greece in September, I was asked to participate in a panel entitled Risk Management Instruments for Agricultural Production in the Year The moderator of the panel was Dr. Kurt Weinberger of Osterreichische Hagel. Other panel participants included: Karl Murr, Munich Re; Maciej Krzysztofowicz, European Commission; and, Ignacio Machetti, Agroseguro. When thinking about the U.S. crop insurance market and the program in the year 2020, it is perhaps useful to think about what our world will look like in Admittedly, one cannot predict this, but we can discuss the major trends we see today and sort them into two categories. First, what trends or factors will increase by the year 2020, and what will we have more of? Second and conversely, what trends or factors will be decreasing, that is, what will we have less of? From this, one can draw some conclusions regarding the future of the agricultural production sector and the demand for crop insurance as a tool to manage risk in the sector. Increasing Trends What will we have more of in the year 2020? 1) Population growth Barring any major global catastrophes or pandemics, we will surely observe increased population growth. The world population hit seven billion people on October 31st, and it is expected that we will easily exceed 8 billion in population by According to the United Nations, global population is likely to exceed 10 billion by This growth will put enormous pressure on our natural resource base and, of course, increase CROP INSURANCE TODAY 15

18 the demand for food and agricultural products. 2) Political Uncertainty and Government Fiscal Constraints Although we hope for the best for our nation and the world we live in, it is difficult, at present, to envision any reduction in political uncertainty for the short to intermediate term. Arab Spring, economic and political tension in the European Union, the rise of the emerging economies, and the partisanship of U.S. politics all seem to point to increased political uncertainty. Between now and 2020, the U.S. alone will have held three presidential elections. This international political uncertainty, coupled with the fiscal constraints faced by so many of the world s developed and developing economies, will ultimately impact agricultural policy in one form or another. 3) Climate and Weather Uncertainty the U.S. Climate Change Science Program s recent report on the impacts of climate change on U.S. agriculture and natural resources indicates that the U.S. warmed and became wetter overall during the last century, but those changes varied across regions. The report concludes that climate change will continue to have significant effects on U.S. agriculture, water resources, land resources, and biodiversity in the 21st century as temperature extremes begin exceeding thresholds that harm crop growth more frequently and precipitation and runoff patterns continue to change. No doubt, agricultural risk management will play a fundamental role in addressing the impacts of weather and climate uncertainty. 4) Demand from Emerging Economies Between now and 2020, it is most likely that we will continue to observe steady economic growth in the so-called emerging economies namely, Brazil, China, and India. A recent issue of The Economist magazine on world economic conditions said that China could overtake the U.S. economy in the next decade. Rising incomes and urbanization in developing countries will provide the main source of growth for world agricultural consumption and trade. This trend should steadily increase the value of agricultural products insured in the U.S. 5) Agricultural Technological Innovations The history of agriculture is the history of innovation and improved productivity. In part, this can be explained by the induced innovation hypothesis, attributable to the economist J.R. Hicks. The idea is that new technologies substitute for relatively expensive factors of production or resource constraints. In agriculture, a prime example is the use of improved crop genetics which increase yields per acre, allowing us to grow more food on the same amount of land. Decreasing Trends What will we have less of in the year 2020? 1) Arable Land It is an old adage...you cannot invent more land... Not only is the supply of land fixed, we may not be able to reclaim agricultural land that has been subject to either severe water or wind erosion, or the effects of urban sprawl. The potential loss of arable land coupled with increased demand for food will also put pressure on our existing agricultural resource base. 2) Quantity and Quality Water The 2011 United Nations Brief on world water quality indicates that declining water quality has become a global issue of concern as human population continues to grow, industrial and agricultural activities expand, and climate change threatens to cause major alterations to the hydrological cycle. According to the U.N., GDPs of developing countries can be altered by as much as five percent due to lack of major high value and/or poor quality water. The Crop Insurance Product One question that remains is what the mix of business products will look like in the next decade, for example, the use of individual coverage versus area or index plans. Still in development at NCIS is an economic model to examine a farmer s optimal use of area and individual crop insurance when area and individual losses are positively, but imperfectly correlated. Results of our work will indicate that if premium rates for both plans are actuarially fair, the farmer will purchase full individual insurance and no area insurance. If area insurance is free and individual insurance is offered at an actuarially fair rate, area insurance replaces a portion of individual insurance demand. These findings should help us come to a better understanding of how alternative plans will evolve in the market place. We must also increase coverage outside of that available for conventional field crops. The U.S. has high participation in the major growing areas, but lower participation among specialty crop producers for crops such as fruits and vegetables. A major challenge will be our ability to develop new crop insurance programs that provide effective coverage for farmers and at the same time provide the potential for underwriting gain for participating insurers. In summary, crop insurance is becoming the primary vehicle through which agricultural productive capacity is maintained in the U.S. Crop Insurance. Crop insurance allows farmers to finance and manage their risks from year to year. U.S. farmer and political support has never been stronger for crop insurance. Most farm groups support some form of crop insurance Farm Bill proposals. Although the specific nature of U.S. crop insurance in 2020 is impossible to predict, the trends and factors discussed here strongly suggest that crop insurance and the use of risk management tools will have an increasing role in production agriculture and agricultural policy. There will be short run challenges, no doubt, but our industry has a long and successful history of adapting to change, and meeting the demands placed upon it. 16 november 2011

19 ADM Crop Risk Services Give your customers and prospects what they want. connect 1902 Give them ADM Crop Risk Services. Your customers and prospects want more than crop insurance. They want the benefits that come from being connected to one of the world s largest agricultural companies. Benefi ts like ADM s worldwide network of grain elevators, trucks, barges, sea-going vessels and trains. Grain marketing services that help farmers get the best price for their crops. And Investor Services that provide professional risk management assistance. These are just a few of the many ways ADM Crop Risk Services can help make you a preferred resource for crop coverage and so much more. To learn more about becoming an ADM Crop Risk Services agent, visit admcrs.com. For customers around the world, ADM draws on its resources its people, products, and market perspective to help them meet today s consumer demands and envision tomorrow s needs ADMCRS Archer Daniels Midland Company ADM Crop Risk Services ADM Crop Risk Services is an equal opportunity provider. The products and services described here are written by ADM Insurance Company or American Alternative Insurance Corporation, both of which are reinsured to Agrinational Insurance. The insurance products described here are subject to availability and qualifications. Other terms, conditions, and exclusions may apply. ADM Insurance Company and American Alternative Insurance Corporation are not licensed in all states. Not all products are available in all states. This does not constitute an offer of any product in any jurisdiction.

20 TODAYcrop insurance Dr. Wally Nelson Receives Siehl Prize Excellence in Agriculture Dr. Wallace Wally Nelson, long-time superintendent of the Southwest Experiment Station in Lamberton, MN, was awarded the 2012 Siehl Prize for Excellence in Agriculture. This award recognizes individuals who have made extraordinary contributions to the production of food and alleviation of hunger in three separate categories: production, agribusiness, and knowledge. Dr. Nelson was awarded the Siehl prize for knowledge. For more than 40 years, Dr. Nelson has influenced agriculture in southwest Minnesota and at the University of Minnesota by guiding the Southwest Research and Outreach Center while profoundly affecting the farmers, agribusinesses and people in the community and beyond. Dr. Nelson played a major role in establishing the Southwest Research and Outreach Center in Lamberton and was superintendent there from its inception in 1959 until his retirement in During that time, the National Crop Insurance Association (NCIA), predecessor to NCIS, began corn and soybean research studies at the experiment station. Dr. Dale Hicks and Dr. Nelson designed the first crop-hail projects and were involved in planning and conducting the subsequent loss adjuster schools. Dr. Nelson and his team built an ice machine that was used to inflict damage on the growing crops. During the schools, adjusters would evaluate the damage using current industry loss procedures. The plots were later harvested and actual losses determined, based on harvested results. According to Dr. Hicks, adjusters were always within a few percent of the actual loss, which gave credence to the loss procedures. Through field days and meetings he organized at the center, Dr. Nelson developed a vibrant connection with farmers and agribusiness leaders. He was committed to making sure that faculty and scientists understood farmers real problems and that research outputs were focused on solving them. As former Regent Verne Long said, He seemed to have the uncanny ability to anticipate serious and important challenges that appeared on the horizon about a year before those challenges became real, serious problems. The Siehl Prize is named in honor of philanthropist Eldon Siehl, a successful Minnesota businessman who wanted to educate the general public about where their food came from and to provide recognition for the dedicated people who make it their life s work. For more information please visit 18 november 2011

21 TODAYcrop insurance High Temperature Effects on Corn How high is too high? By Dr. Peter Thomison, PhD, The Ohio State University When you produce over 30 percent of the corn in the world (12.1 billion bushels in 2010), anything that threatens that output can cause major concern for U.S. corn producers. Excessive heat puts corn crop at risk. How Long Can Corn Crop Withstand Heat Wave? Heat wave reduces crop harvest. These were just a few of the newspaper headlines that ran during the summer of 2011 when excessive heat and lack of moisture hit many of the country s corn fields during the height of pollination. With over 73 million acres of corn insured under the federal crop insurance program and valued at over $31 billion (2010), and an additional $12 billion insured under the private crop-hail program, the crop insurance industry also kept a watchful eye on how corn weathered the heat this year. The pollination and fertilization period is the most critical stage of development for the corn crop. Success during this stage goes a long way towards guaranteeing an abundant crop. Stress during pollen shed and silking can cause more yield loss than almost any other period in the crop s development. So how much heat is too much and how does it affect corn production? According to Dr. Emerson Nafziger, University of Illinois agronomist afternoon temperatures in the mid-90s are not a problem for corn if there is enough soil water available. In experiments, plant temperatures have been raised to 110 F or higher without causing direct damage to photosynthetic capacity. The level required to damage leaves depends on the temperature CROP INSURANCE TODAY 19

22 Figure 1. Corn Growth and Temperature Levels (Nield and Newman, 1986) SURVIVAL RANGE LIMITS 110 F 32 F GROWTH RANGE LIMITS the leaf has experienced before, but it generally takes temperatures above 100 F in fieldgrown plants. Corn originated as a tropical grass and can tolerate exposures to adverse temperatures as high as 112 F for brief periods. Optimal temperatures for growth vary between day and night, as well as over the entire growing season (Neild and Newman, 1986). Optimal daytime temperatures for corn typically ranges between 77 F and 91 F while optimum night temperatures range from 62 F to 74 F. Growth decreases when temperatures exceed 95 F. Relationships between growth and temperature are shown in Fig. 1. Iowa State University agronomist Roger Elmore and climatologist Elwynn Taylor noted that the 2011 heat wave might have a double impact on the Iowa corn crop. The first impact is the increase in rolling of corn leaves in response to moisture deficiency. By 95 F 41 F DAY 91 F 77 F MEAN NIGHT SEASONAL 74 F 73 F 68 F 62 F OPTIMAL GROWTH RANGES rule-of-thumb, the yield is diminished by one percent for every 12 hours of leaf rolling - except during the week of silking when the yield is cut one percent per four hours of leaf rolling. The second impact is less obvious initially. When soil moisture is sufficient, the crop does not have a measurable yield response to one day of temperatures between 93 F to 98 F. However, the fourth consecutive day with a maximum temperature of 93 F or above results in a one percent yield loss in addition to that computed from the leaf rolling. On the fifth day there is an additional two percent loss, and the sixth day an additional four percent loss. Data are not sufficient to make generalizations for a heat wave of more than six days; however, firing of leaves then becomes likely and very large yield losses are incurred. Generally a six-day heat wave at silking time is sufficient to assure a yield not to exceed trend (Iowa trend yield is near 174 bushels per acre). Should warmer than usual nights continue for a six-week period, the state is assured a below trend harvest. Because corn is such an important commodity to the U.S. and the world, NCIS conducts several research projects each year on various aspects of how it reacts to damage from different perils. Four projects in Illinois, Minnesota, Ohio and Kansas are being run simultaneously to examine the weight appraisal method for corn used as silage. Stand reduction in corn due to hail damage is being studied in Kansas. Once these threeyear projects are completed, NCIS uses those results to either revise the adjustment procedures or the results verify that current procedures are still accurate. Losses from drought, heat, and excess moisture are still being finalized for So far, three southern states have loss ratios that exceed 1.00, and those may continue to climb. We are hopeful that loss ratios are not excessive nationwide, as that will mean more crop in the bins for farmers and more bushels to support the ever-growing worldwide demand for corn. References Elmore, R. and E. Taylor Corn and a Big Long Heat Wave on the Way Iowa Integrated Crop Management Newsletter Iowa State Univ. s/2011/0715elmoretaylor.htm Nafziger, E High Temperaturesand Crops. University of Illinois illinois.edu/article.php?id=1537 Nield, R.E. and J.E. Newman Growing season characteristics and requirements in the Corn Belt. National Corn Handbook Publication. NCH-40. Purdue University Cooperative Extension Service, W. Lafayette, IN. NCH/NCH-40.html 20 november 2011

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24 TODAYOBITUARIES In Memory of Kenneth M. Peterson 22 november 2011 Kenneth M. Peterson, age 64, of Manhattan, died September 19, 2011, at his residence. He was born July 22, 1947, in Colby, Kansas, the son of Ernest Milton and Doris Ruby (Marcuson) Peterson. Ken grew up in Atwood, Kansas on the family farm. He graduated from Kansas State University in 1969 with a degree in Biochemistry. He was a member of ROTC during college and served two years in the United States Army during the Vietnam Conflict and was discharged at the rank of Captain. Following his military service he returned to Atwood to farm with his family. He began working as a crop adjuster for Rain and Hail LLC and later became a Field Supervisor for the state of Kansas and moved to Manhattan in His job afforded him the opportunity to travel the state and enjoy the wide open spaces. In , Ken served as the Chairman of the NCIS Kansas/Oklahoma Regional/State Committee. In his youth, he was a member of the Kansas Young Farmers organization. He loved to fish, hunt, and spend time with his family. His greatest joy was taking his grandchildren fishing. On January 29, 1967, in Kansas City, Missouri, he married Patricia June White. Mrs. Peterson survives of the home. Additional survivors include his two children: Shannon Kimball and her husband Jason of Lawrence, KS, and William Peterson and his wife Diane of Overland Park, KS; his mother, Doris of Atwood; two brothers: Wayne Peterson and his wife Ardis of Junction City, KS, and Gregory Peterson and his wife Brenda of Atwood, KS; and three grandchildren: Ian and Logan Kimball and Sydney Peterson. Ken was preceded in death by his father in 1989.

25 TODAYcrop insurance Educating Adjusters for Over Three Decades By Dave Hall, NCIS One of the longest running adjuster training schools in the industry s history, the NCIS Crop-Hail Corn School held in Lincoln, Nebraska, has quite easily educated several thousand adjusters since its inception. What began as an annual two-day school in 1976, is now 1 ½ days in length, and held every other year. But that hasn t diminished its popularity or its purpose. Intended to provide information on the corn plant and cultural practices as well as crop-hail loss adjusting procedures for field corn and popcorn, this year s school had over 100 attendees representing 11 different companies and USDA/RMA. The first full day is composed of classroom instruction and the second half day of in-field, hands-on crop-hail training. Class room instruction takes place on the University of Nebraska-Lincoln East Campus. Attendees are divided into groups and rotate through sessions on corn diseases, corn insects, corn herbicide damage, corn morphology, and corn nutrient deficiency, all provided by university instructors. Classroom instruction also includes sessions on corn hail loss handbook procedures and problem exercises, led by company trainers. For the in-field training, attendees are divided into small groups (16 in 2011) and rotate through plots of field corn and Adjusters evaluate plant damage due to hail, which may include stand loss, stalk bruising, ear damage and defoliation in this test plot. Established in 1976 The school is always very well-attended and receives high marks for the quality of training provided. Students had finished the individual plant evaluations for corn stand reduction within the test plot and were receiving instruction on how to properly enter the results on the appraisal worksheet. CROP INSURANCE TODAY 23

26 popcorn containing simulated hail damage inflicted at various stages of corn plant development. Instruction provided by company trainers. The school is always very well-attended and receives high marks for the quality of training provided. NCIS would like to thank the NCIS Nebraska Regional/State Committee and the University of Nebraska-Lincoln professors and staff for their hard work and support in making this school possible over the years. Photo Note: All pictures are from the July 25-26, 2011 school and all company trainers/plot leaders can be identified by the striking Cornhusker red caps. Students receive instruction on how to determine corn leaf defoliation. Adjusters receive instruction on how to determine the proper stage of growth of the corn plant when the plant was damaged by hail. Each individual group s determination for a particular test plot was provided to a plot leader where the results were entered on a large survey sheet. University instructor, Bob Wright, talks corn insect damage with the attendees. At the conclusion of the in-field training, the results of each individual group s determinations were summarized and reviewed with all attendees. NCIS Crop-Hail Corn School 24 november 2011

27 Protecting your life story. We re looking for committed crop insurance agents. Since 1837, we ve grown our equipment business by investing in our dealers. And we re putting the same approach to work with our independent crop insurance agencies. We support our select group of agencies through extensive training, business development resources and professional, full-time adjusters. Agencies can accelerate the growth of their business by aligning themselves with one of the most trusted names in agriculture. American producer. And if you re an independent crop insurance agent who shares our conviction, we want to talk to you. *John Deere Financial Services, Inc., offers insurance products and services through its subsidiary John Deere Insurance Company of Johnston, Iowa. Coverage may not be available in all jurisdictions and is subject to actual policy language. See your authorized John Deere crop insurance agent for details. John Deere Insurance Company is an equal opportunity provider. John Deere Insurance Company is not licensed and does not do any insurance business in AK, CA, CT, D.C., HI, MA, ME, NH, NM, NV, RI, and VT. CR Litho in U.S.A. (11-09)

28 TODAYcrop insurance On the Road By Elizabeth Simmons, Summer Intern This summer I had the opportunity to travel to two NCIS schools and gain hands on experience in crop adjusting. For the first school, I drove through Iowa to a part of the country I never pictured myself traveling to. Before I knew it I was standing in fields of corn and soybeans, looking out at fields of green that reached as far as the eye could see. I had arrived at the University of Minnesota Southwest Research and Outreach Center at Lamberton. All attendees of the school were from different backgrounds, but a large number of participants were school teachers working as adjusters during the summer, as well as retired or part-time farmers. We worked in teams to learn how to properly identify bruising, calculate defoliation and stand reduction, and when to defer a claim. I learned that bruises are only fatal when they reach the pith of the plant. The pith is a tissue in the stem of vascular plants that contains the transport nutrients. I also learned how food/energy travels through the leaves of a corn stalk. When a leaf is torn across the middle, the Richard Hup filling in Soybean Chart. Steve Quiring demonstrating the hail machine at Lamberton. 26 november 2011

29 Discussing leaf defoliation on corn Fargo Gathering wheat plants for evaluation. Fargo food/energy will back up to a crosschannel until it reaches a part of the leaf that is not torn and continues down to the stem of the plant. I had the opportunity to talk to many of the instructors about research. I learned how cover crops how can eradicate fungus from soil. I also learned that if you cut down a soybean plant in the vegetative stages, just above the cotyledons, the plant can grow back with two main stems, possibly producing a higher yield. On my way back to Kansas City I witnessed just some of the flooding affecting Iowa. My first view of the flood damage was in Sioux City. An entire hotel and several parks and businesses were closed down. Entire parking lots had been claimed by the river. I pulled over on the other side of the river, in a neighborhood sitting on the banks. Several houses had been abandoned and were sand bagged with PVC pipes rigged to make sure the water would flow out of the yards and the houses back to the river. Crime scene tape was put up to caution residents against approaching the fast-moving river. The river carried whole tree branches past the neighborhood as fast as the cars were moving across the bridge above. After taking a few photographs I hit the road again and traveled down I-29 toward Council Bluffs. All along the way field upon field lay underwater. Now and again I would see a stranded patch of corn in the middle of a lake. Grain silos and storage containers were unreachable. A few days later, I boarded a plane for Fargo, North Dakota. The flooding in the Red River Valley could be seen from my plane. Streaks of water covered much of the farmland below and streaks of brown could be seen where the water had begun to recede. The locals on the plane could be heard telling their non-dakotan peers all about the effects of the flooding. The Crop-Hail school in Fargo was hosted by North Dakota State University. NDSU has a beautifully well kept campus and were great hosts throughout the week. The Fargo school covered hail loss procedures for corn, soybeans, wheat, dry beans (pinto and navy) and sunflowers. I had never seen a sunflower in person and had not realized just how tall they can get. They were up above my waist and not even flowering yet. I also noticed that every single one had holes in their leaves. Every insect on God s green earth loves sunflowers, instructor Mark Askerooth explained. Sunflowers are harvested for their seeds and their oil, which is used in many trans fat-free foods. I learned the different varieties of dry beans; some are viney and some are bushy like soybeans. During the school we heard from a few speakers. Dr. Johnson, Professor of CROP INSURANCE TODAY 27

30 Crop Production at NDSU and host of the school, informed us of past and present research he conducted at the university and the involvement of his students. Dr. Adnan Akyuz, Assistant Professor of Climatology, taught the attendees about hail and how it forms. Dr. Joel Ransom, Professor and Extension Specialist, spoke about genetically modified crops. Dr. Harlene Hatterman-Valenti was kind enough to take me on a tour of the production horticulture research at NDSU when she heard I was considering undergraduate research. She showed me the research she was conducting on potatoes, grapes, onions, and woody plants. By getting out into the field, I gained a better understanding of how decisions made in Kansas City and Washington, DC, affect adjusters and farmers. Adjusters determine stand reduction counts on corn at Fargo school. Errors and Omission Insurance For Your Agency Full lines of coverage including MPCI Crop Insurance We will work diligently to offer you quotes with reputable companies at competitive prices To obtain a quote for your agency call American Insurance Services, LLC. Premium financing is available We have over 35 years experience in all lines of insurance 28 november 2011

31 F08 Get Real Mapping Solutions Online and offline, flin we ve got the tools you need to increase productivity and get on with life after crop insurance. For real solutions to your mapping ping problems, contact us today at NAU.MPCI or naucountry.com! 2011 NAU Country Insurance Company. All rights reserved. NAU Country Insurance Company is an Equal Opportunity Provider. The links logo is a registered service mark of QBE Insurance Group Limited. NAU Country is a registered service mark of NAU Country Insurance Company.

32 TODAYcrop insurance STEP 4-SETTING PERSONAL AND BUSINESS GOALS Q:What do I want to accomplish? This is the fourth in a ten-part series of articles on The Steps of Farm Business Planning. The introductory article for the series was published in the November 2010 issue of Crop Insurance TODAY and additional articles will be printed each quarter. By Dr. Laurence Crane, NCIS Setting goals is an integral part of all successful plans. By knowing precisely what you want to achieve, decisions about what to concentrate on and what distractions to avoid become easier. Goals provide longterm vision and short-term motivation. They provide essential guidance and direction at critical decision points. Most importantly, setting goals requires you to critically and objectively think through the business from both short and long term perspectives, and to identify and focus on those areas where you have as much control as possible. Planning a business has been compared to planning a trip; you need to know your starting point and destination to determine the route and mode of transportation. This step reviews how to specify, prioritize, and reconcile your personal and business goals. Clearly defined goals are a critical element in developing a well-designed business strategy. They help specify the exact location you wish to reach and set the criteria for making future decisions. The previous steps addressed getting to know your starting point by describing your current business (Step 1), reviewing human resources and identifying your skills and interests (Step 2), and considered your expectations about the future of the industry (Step 3). Challenge of Setting Goals Defining goals may be challenging the first time you attempt to specify your goals. Goal setting requires thinking about the future. The process takes time, a precious commodity for everyone. The reward or payback for setting goals is not always immediately recognized. However, farmers often benefit from specifying their goals because they acquire a better understanding of what they are trying to accomplish with their business. They then rely on the goals in making decisions every time a question arises. When a decision must be made, farmers ask themselves which alternatives best facilitate reaching their goals. Benefit of Setting Goals Setting goals causes you to think about the future, and such forward thinking about opportunities and challenges benefits you and businesses. Farmers who have specified their personal and business goals find themselves better able to explain their objectives to others. Discussions and documents that indicate where the business is headed allow others, including lenders, investors, purchasers of output, input suppliers, and possibly regulators, to decide whether they want to be part of the future of the farm business. Having established goals demonstrates that you have thought about the future. Benefit of Writing Goals Written goals can help you be more precise in your thoughts about the future and where you want to end up. Written goals are more easily shared with others and demonstrate that you have given careful thought to the situation and the future. Finally, you can refer to written goals (rather than relying solely on your memory) to guide decision making and the operation of the business. Beginning to Identify Goals One way you can begin to specify goals is to answer questions about yourself and your business. At the end of this step is a list of suggested questions that you can consider as you begin to identify goals. This is not a complete list because there are likely additional questions you 30 november 2011

33 will think about. Similarly, every question does not pertain to each situation. The questions are intended to stimulate thinking and conversations among owners and family members. Although answers to the questions are not goals, they should help you specify and prioritize your personal and business goals. It is important that you take the time and make the effort to write your personal and business goals. Time for Accomplishing Goals The period for accomplishing goals varies from situation to situation and from person to person. Therefore, goals should reflect different periods, such as shortterm and long-term goals. Some farmers specify long-term goals, intermediateterm goals, and short-term goals. The following list provides examples of each type of goal. 1. I will spend 10 days each year away from the farm business. 2. I will increase the amount of farm income available for family living or nonfarm investments by $1,000 each year for the next five years. 3. The only debt I will have 15 years from now is what is needed to expand the business at that time. Some farmers consider their shortterm business goals to be performance standards. Growth of the business, rate of return on assets, production goals, turnover of inventory, and general use of resources to reach maximum efficiency are some common performance standards. Performance benchmarks will be addressed in Step 9 (Monitoring and Control). Perhaps the most critical goal for farmers in a closely held business is to specify how much cash will be withdrawn annually from the business to meet living expenses. At this point, you also can consider how this amount may change in the future as the family grows or retirement approaches. Characteristics of a Goal A meaningful goal is: Specific; Measurable; Challenging but realistic; Time specific; Addresses key result areas; and, Written down. For example, a family may specify a goal to set aside, in addition to its regular savings plan, an extra $12,000 into a savings account over the next three years for

34 home remodeling. The additional $4,000 each year can be challenging, yet it is measurable, has a time limit, states a purpose, and addresses an effort that is important to the family. Interaction and Relationship Among Goals Farmers in closely held businesses coordinate their personal goals with their business goals. This is a result of the farmer s heavy reliance on the business as a primary source of income for living expenses. Such coordination also is important when cash withdrawals for family living impacts the financial condition of the business. Few businesses or families have enough resources to reach all their goals at one time; therefore, you will need to prioritize your goals. Specify which goals will be emphasized first, and which ones will be delayed. Farmers that have gone through this process stress that communication among family members and coowners of the farm business is vital in minimizing the conflicts that may arise when establishing, prioritizing, and reconciling personal goals of several individuals with their collective goals for the business. Steps in Group Goal Setting Several steps have been suggested for setting goals if the business involves more than one person. First, all individuals should set and prioritize their goals. Second, married couples should share their individual goals with one another to identify common goals and recognize differences. The couple can then set and prioritize their collective goals. Third, the units within the family (unmarried individuals and married couples) should discuss their goals and work together to set and prioritize their collective goals. Some farmers have suggested that not everyone needs to participate in this third round of setting goals as long as everyone s interests are adequately and accurately represented. This observation is made recognizing that the discussion at this point may focus more on business goals than personal goals and that not everyone is intimately involved in the operating the farm. The next suggested step is to set and prioritize business goals with nonfamily business partners. Finally, goals can be assessed against what others, such as landlords, lenders, or investors, expect from the farm business. The importance of effective communication is often mentioned as farmers and their families describe their experiences in setting goals. These individuals also mention the extensive time commitment that may be necessary for a successful goal-setting process. Farmers indicate that during the process of discussing and setting goals, the conversation can be inadvertently side-tracked onto other topics. Families might rely on an unrelated person to serve as a facilitator during these discussions. Such an individual also can help the farmers maintain the focus of their conversation. A question that arises is how business owners can reconcile their different goals. The individuals that ask this question have already set their own goals and shared them with their family and co-owners. It is at this point in the process that they realize there are differences that need to be resolved. One observation in answering this question is that the goals of family members and co-owners do not need to, and never will, be identical. It is not reasonable to strive to establish one set of goals that fits everyone. Yet goals cannot be so divergent that there is nothing in common. Instead, group members should strive to find commonalities among their goals and opportunities to work together to accomplish tasks that fulfill the goals of several individuals. For example, there may be an activity that fulfills goals for several people even though they are different goals. The key to working out differences among goals appears to be communication and a willingness to cooperate. Categories of Goals Not all goals fit within the same categories. For example, one individual may focus on career interests whereas another person may emphasize personal financial goals, while others may address their business practices or estate planning. Goals likely will address personal career objectives, business objectives, and personal financial objectives. One suggestion is to initially categorize goals as Short-term personal goals; Long-term personal goals; Short-term business goals; and, Long-term business goals. You and your family will likely define additional categories of goals as you progress through the planning process. For example, an issue to consider as a long-term personal goal would be retirement/estate planning, including a summary of your current plans for retirement and the disposal of your estate. Revising Goals Goals change over time because people change; their needs, desires, and situations change. You are encouraged to guard against changing your goals just because the first one turns out to require more effort than initially expected. Similarly, you are urged to be cautious about lowering your goals just because they are not immediately accomplished. However, it is recommended that goals be revised once it is clear that the current goals are so challenging that they are detracting from other important business or family interests. Conclusion Goal setting is a very powerful technique that can produce strong support to effective management and decision making. Having established goals provides the criteria necessary to select among alternatives in the future. By planning ahead and setting meaningful goals, you can be more disciplined and focused in the decision making process. Performance and self-confidence can improve, and stress and anxiety be reduced as you are more prepared to make decisions and follow a goal-directed business plan. 32 november 2011

35 Questions to Ask When Setting Goals A purpose of business planning is to assure that you fulfill your desires. All adult members of the business may want to consider the following questions as they review their goals. Likewise, married couples should discuss their ideas with each other to focus on their similarities and reconcile differences. It is important to recognize the interrelationships among personal and business goals. The following questions are designed to stimulate the thought process, but each question does not require a written answer or detailed thought. Many questions are followed with a second question of why? This is because the reason for the thought is often as important as the thought. PERSONAL CAREER INTERESTS These questions ask you to think about the types of work/business activities that provide you the greatest personal satisfaction. 1. Do you consider yourself primarily involved in farming? Yes No (What do you consider to be your primary activity? ) 2. Why are you farming? (Check as many as apply.) Farming was the best opportunity available when I started my career. The farm was transferred to me by a relative or neighbor. I trained to be a farm operator. I like farming. I feel pressured to continue the farm business. Farming generates an adequate income for me. The personal satisfaction from producing agricultural commodities and being involved in the ownership of a business is important to me. My spouse is involved in farming. At this time, I am not trained for any other career. Farming still offers the best opportunities for me. Other 3. What do you want to accomplish by farming? 4. How long do you want to farm? Why? 5. What would cause you to discontinue your involvement in the farm business (such as employment opportunity, disability, death of spouse, divorce, higher production costs, lower commodity prices, increased land prices, others)? 6. Do you have any off-farm employment? If yes, what type? Do you want to continue this employment? For how long? Why? Do you want to quit your current off-farm employment? When? Why? 7. How much time do you want to invest in the farm business (full-time or part-time)? Why? 8. Do you want to further your education? What additional training are you interested in? When? Why? 9. Are you married? No Do you plan to marry? Yes No Yes Do you plan to add to your family? Yes No 10. In what type of leisure/recreational activities do you like to participate? Why? 11. Would you like to take a vacation in the next few years? What type of a vacation? 12. How much time off do you want during the next few years? How much time-off do you want six to ten years from now? 13. Would you like to change your housing situation? What type of change would you like? When? Why? 14. Are you planning for retirement? No a. Why aren t you planning? b. When do you expect to start planning? Yes c. At what age would you like to retire or begin reducing your work responsibilities? Why? d. Between now and retirement, do you want to change your role in the business? If yes, what changes would you envision (reduce your labor obligation; reduce your managerial role; reduce your financial risk; increase your successor s involvement in terms of financial commitment, labor, and/or management)? e. How much time off do you want as you approach retirement? f. What role in the farm business do you want to have after retirement (provide labor, provide management, lease assets to the business, receive an income share, no involvement)? g. What would you like to do with the additional time you would CROP INSURANCE TODAY 33

36 have available after retirement or in what type of activities will you participate after retirement (travel, work on the farm, move to another region of the country)? h. Where do you want to live when you retire (on the farmstead in the house where you now live, on the farmstead but in a different house, in the local community, in another community)? i. What will happen to the farm assets when you have retired? j. Do you expect someone to continue the farm operation after your career? Yes No Do not know at this time k. How much money will you need to retire? l. What will be the most likely source(s) and amount of retirement income from nonfarm sources? m. Do you expect income from the farm business after retirement? If yes, how much would you expect to receive and, if annual payments, for how many years? What would be the reason for the payment (rent of assets, sale of assets)? 15. Have you developed an estate plan for yourself (such as prepared or updated your will)? BUSINESS OBJECTIVES 16. Do you intend that the farm business participate in government farm programs during the next five years? Why? 17. Do you want the business to be eligible to receive all government payments possible? Do you envision that all persons involved in the farm business will assume some financial risk? 18. Do you want to expand the business? If yes, a. What do you want to change? b.when do you want these changes accomplished? c. How will the changes be accomplished? 19. What additional enterprises would you like to add to the farm operation? a. What do you want to change? b. When do you want these changes accomplished? c. How will the changes be accomplished? 20. Why do you want to expand the business or add an enterprise (a financial need for a larger business, improve efficiency of assets, for personal satisfaction, other reasons)? 21. How will the expansion be financed (borrowed capital, sale of other farm assets, sale of nonfarm assets, farm earnings, nonfarm earnings, investors)? 22. Who will pay for the expansion? 23. How soon do you expect and want this expansion activity to pay for itself (one year, five years, eight years)? 24. Do you want to reduce the business size or eliminate an enterprise? If yes, a. How would you reduce the size (sell assets, lease out assets, discontinue leasing assets, give assets away)? b. Which enterprise would be discontinued, and why would you make this change? c. When would you want to accomplish this change? d. What would you want to do with any revenue generated from this change? 25. Are there any property improvements you want to make (construct or remodel buildings, drainage, dams, replace some machinery)? What are they and why do you want to do them (to increase production, improve efficiency, for personal satisfaction)? 26. What type of production goals do you have for the business? 27. What is the incentive or motivation for these production goals (financial need, personal satisfaction, other reasons)? 28. What type of return do you expect for replacing machinery (fewer breakdowns, less time to complete task, provide capacity so business can be expanded, do some custom work? 29. The business is a success because: 30. What are your primary concerns for the business (too many equipment breakdowns, tasks too long, not enough labor to satisfactorily complete tasks, cannot keep me fully employed year-round, no longer enjoy the work)? 31. The biggest problem facing the business is: 32. What can be done about these concerns (and we cannot change the weather)? 33. The business would prosper if: 34. Is someone else involved in this business? If yes, a. Have they identified their goals? b. Have you collectively discussed and prioritized your goals? c. For which functions in the business do you make the decisions? Why? (Functions may include production, marketing, labor allocation financing, accounting, leasing, crop rotation, purchases.) d. For which functions in the business does your spouse make the decisions? Why? e. For which functions in the business do other family members make the decisions? Why? f. For which functions in the business do partner(s) make the decisions? Why? g. For which functions in the business do you, your spouse, family members, and partner(s) make collective decisions? Why? h. Which management functions are you: willing to share? want to no longer be involved with? i. For which enterprises are you willing to relinquish management? j. Do you want to alter your management responsibility? When and how? 35. Do you want to help someone become involved in your farming business? If yes, a. How would you like to help? Hire them Sell property to them (which assets, when, at what price) Lease property to them (which assets, when, at what price) Give property to them (which assets, when) Expand the business to include them b. Do you envision this person becoming involved in your farm business and becoming your successor? If yes, in what role (provide labor, provide management, lease assets to the business, receive an income share)? c. If a successor joins the business and wants to become involved in management and control, when would you be willing to relinquish some control or management of the business? 36. Do you want someone to help you become more involved in a farming business? If yes, what type of help do you expect? Hire you 34 NOVEMBER 2011

37 Sell property to you (which assets, when, at what price) Lease property to you (which assets, when, at what price) Give property to you (which assets, when) Bequeath property to you (which assets) Expand the business to include you Other 37. Are you willing to be part of a co-owned business? For your farm property that is used in a co-owned business, do you envision paying for repairs or improvements to buildings, machinery, land (fences), or housing? Or would you expect the business to pay for such repairs? 38. If you pay for the repairs or improvements, do you expect additional compensation for those expenditures? If yes, in what form would you want to be compensated (increased rental payments)? 39. If the business pays for the improvements or repairs, will it be compensated? If yes, how would it be compensated (reduced rent, increased ownership interest in the improved or repaired property, compensation upon sale of asset)? 40. Do you want to increase your business ownership interest? If yes, when and how [contributing more labor, contributing more management, assuming more risk (borrowing capital or initiating another enterprise), contributing more assets (capital, machinery, buildings, land)]? 41. Do you want to increase the amount of assets you own? If yes, when and how (buying from co-owner, buying from unrelated sellers, receiving gifts)? If you want to buy property from your co-owner, which assets would you want to purchase, when would you want to buy the property, and how much would you be willing to pay? 42. Do you want to be sole owner of some farm assets? If yes, which assets (all of the property, land, machinery, livestock, farmstead, home)? 43. Are you willing to co-own some farm assets with your partners? If yes, which assets and for how long? 44. How much business debt are you willing to take on? Do you have the financial capacity to obtain that amount of capital? 45. What would happen to the business if you or a key person in the business became disabled? a. What would be the impact on the business and individual incomes? b. What would be the disabled person s sources of income? c. What would be the impact upon the disabled person s spouse and dependents? d. How would related medical costs be paid? e. How would the costs impact the operation of the farm business? f. How would current business and personal debts be paid? 46. The greatest management weakness is: PERSONAL FINANCIAL 47. How much do you annually spend on each of the following categories at this time (and in total)? a. Family living (food, clothing, health insurance, housing, utilities); b. Debt service and income tax (business and personal obligations and income tax); and, c. Other expenditures (travel, and luxury items). 48. What is the minimum amount of cash you annually need for each category (and in total)? a. Family living (food, clothing, health insurance, housing, utilities); b. Debt service and income tax (business and personal obligations and income tax); and, c. Other expenditures (travel, and luxury items). 49. How much do you annually want to spend for each category (and in total)? a. Family living (food, clothing, health insurance, housing, utilities); b. Debt service and income tax (business and personal obligations and income tax); and, c. Other expenditures (travel, and luxury items). 50. How much cash income do you earn each year from the following sources (and in total) that can be used to pay the expenses listed in the preceding questions? CROP INSURANCE TODAY 35

38 a. Farm income (return over operating expenses from livestock, crops, and other enterprises); and, b. Nonfarm sources (financial assets, off-farm employment, nonfarm investments). 51. How will your family living costs change over the next five years? Why will they change? Do family members want to further their education? Who? How? 52. How are your nonfarm sources of income likely to change in the next five years? Why will they change? 53. How are your family living costs likely to change six to ten years from now? Why would they change? Do family members want to further their education? Who? How? 54. How are your nonfarm sources of income likely to change six to ten years from now? Why would they change? 55. Based on the previous answers, what is the minimum amount of annual cash farm income (return over operating expenses from livestock, crops, and other enterprises) you can tolerate? 56. What is the three-year minimum average annual cash and noncash farm income (return over operating expenses from livestock, crops, and other enterprises) you would accept from this business and still continue farming? a. What rate of return on your farm assets do you need to earn the amount of income specified in the first part of this question? b. What rate of return on your farm equity do you need to earn the amount of income specified in the first part of this question? 57. What rate of return on your farm assets and farm equity do you want? Why do you want that rate? 58. What percent of your gross income do you want as net returns? Why? 59. What debt-to-asset ratio do you want for your business by the end of this year? By the end of five years? By the end of ten years? Why? 60. What change do you want in your total liabilities by the end of this year? By the end of five years? By the end of ten years? Why? 61. What change do you want in your net worth by the end of this year? By the end of five years? By the end of ten years? Why? 62. How much income do you annually want from the farm operation for farm and non-farm investments? 63. Based on the previous questions, what amount of cash do you want or need to annually withdraw from the farm business to meet your family needs and your expectations for the business? 64. Bottom line: Does the farm business appear to have the capacity to generate the level of income necessary to satisfy the previous answer for all owners of the business? You may not want or be able to answer this question at this time, but keep it in mind as you continue the planning process. Call and ask for Donna $.20 each, plus shipping. For orders over 500, please call for discounted price. 36 NOVEMBER 2011

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40 Continued from President s Message and severe drought in the Southwest and sections of the Plains. In evaluating any proposal for deficit reduction or the Farm Bill, we should simply ask the question, do these future proposals or components of the proposals deter the advances that the industry has made in the past 10 to 15 years? It is beyond the scope of this message to evaluate each and every proposal under consideration. The myriad and complexity of the various proposals coupled with the deluge of new farm program acronyms is somewhat overwhelming, particularly in light of the short timeframe in which these decisions may have to be made. But, the question on the table is simple and straightforward, can we readily build on our existing success? Going forward, we should build upon our strengths. I would like to think that our future agricultural policies would be characterized by an adequate safety net that continues to emphasize crop 38 november 2011 insurance as the primary risk management vehicle for our farmers and ranchers. Moreover, that the future safety net would continue to emphasize competitive private sector delivery and eliminate redundancy among future farm support programs. To be more specific, we can think of an agricultural safety net in which producers take an active and leading role in managing their business risks, which includes deliberate decisions to protect their assets from natural hazards and market risks. Producers would continue to participate financially in their crop insurance policies in the form of farmer-paid premiums. There would continue to be a shared responsibility among farmers, private insurance companies, and taxpayers to share losses. In terms of the product mix, crop insurance coverages and policies should be widely and equitably available for most commodities. Program features and costs should be fair and actuarially justifiable across crops and regions. With respect to the private sector delivery system, incentivized sales and service, program compliance penalties, and risks borne by crop insurance companies have resulted in high levels of service and very low incidences of waste, fraud, and abuse. This should be continued and reinforced. Lastly, the role of USDA/RMA should be to provide regulatory oversight and reinsurance to the industry and in addition, premium subsidy to the farmer. Provisions of the crop insurance policies and procedures, to the maximum extent possible, should be consistent with WTO in that they are minimally production and trade distorting. Farm programs should be designed to augment, not substitute for crop insurance. Eligibility for payments and the payments themselves should be triggered by actual losses. While there most likely will always be a role for government in providing some income support programs to production agriculture, every effort should be made to find ways to increase the role of the private sector to take advantage of the cost-effectiveness and service that comes with market competition. To reiterate, Primum Non Nocere - First, Do No Harm - can and should be invoked when we consider the range of possible options confronting us in the debate over alternative deficit reduction proposals, and the resulting implications for farm policy and the essential role of crop insurance in these debates. As we have heard all summer throughout the press, and at the August Farm Bill hearings in Wichita, Kansas, held by Senators Stabenow of Michigan and Roberts of Kansas, farmers, in general, have expressed a clear preference for crop insurance as it is currently delivered by the private sector as the fundamental tool in meeting their risk management needs. Crop insurance should be the primary risk management tool for U.S. production agriculture. Farmers prefer crop insurance as it is serviced and delivered today. We would implore our agricultural leadership to not only maintain the program, but in addition, find the necessary resources to grow the program so that crop insurance continues to meet the needs of American agriculture.

41 come grow with us... Hudson Crop is a unit of Hudson Insurance Group, the US Insurance Division of Odyssey Re Holdings Corp. OdysseyRe operates through 18 offices worldwide with $3.5 billion in policyholders surplus. Hudson Insurance Company is rated A (Excellent) XV by A.M. Best and is widely licensed. With an exclusive strategic relationship with Growers National Cooperative*, Hudson Crop is a rapidly growing company, committed to providing our farmers and their agents with the best service our industry can offer. *GNC is not available in all states Hudson Crop Hudson Insurance Group is an equal opportunity provider. For career opportunities, contact: Dan Gasser, National Sales Manager Doug Nelson, National Claims Manager INDUSTRY NCISAWARDS Under the direction of its Board of Directors, National Crop Insurance Services has developed two national awards to be given to individuals who achieve excellence in the criteria set out by the awards. The first award is the Outstanding Service Award. This award, primarily for agents, has actually been in existence since 2001 and has been awarded to several excellent individuals. The purpose of this award is to promote exceptional service industry-wide, and encourage outstanding outreach efforts to all farmers, especially limited-resource farmers, by highlighting an individual who has demonstrated exceptional service. The newest award established is the Industry Leadership Award. This award, targeted primarily to members of the NCIS regional/state crop insurance committees, was created to formally recognize individuals who are directly involved in the crop insurance industry and who consistently serve the industry by providing outstanding leadership. Company employees at both the field and management level are eligible to be nominated. The criteria for both awards are: 1. Strong personal and business ethics. 2. Demonstrated service above and beyond to the crop insurance industry. 3. Represents themselves, their company, and the crop insurance industry well. The two winners will be presented with their awards at the crop insurance industry annual convention held in February of each year. All nominations must be submitted in writing to NCIS by October 15, 2012, for awards to be given at the 2013 Annual Convention. For nomination information and forms to be submitted, please go to the NCIS website at to download. If you have any questions regarding the criteria or whom is eligible for either award, please contact Laurie Langstraat at NCIS at lauriel@ag-risk.org or CROP INSURANCE TODAY 39

42 NATIONAL CROP INSURANCE SERVICES w w w. c r o p i n s u r a n c e i n a m e r i c a. c o m 40 november 2011

43 Other crop insurance companies can t touch this. At Great American, we know it s not enough to just access policy data from the field. We re in touch with what agents really need: the ability to actually conduct business on-site, from start to finish. With our ipad app, our agents can write, sign and submit forms right where they re standing even if that s in the middle of the soybeans. Touch-screen technology in the field. One more way Great American puts its strength and expertise right where it counts: in your hands and at your fingertips. Great American s ipad application draws data from our popular GreatAg policy administration system. Crop Insurance Division E. Fourth Street I Cincinnati, OH Great American Insurance Group is an equal opportunity provider. ipad is a registered trademark of Apple, Inc. GreatAmericanInsuranceGroup.com

44 PRSRT. STD. U.S. POSTAGE PAID Permit No. 116 LAWRENCE, KS 8900 Indian Creek Parkway, Suite 600 Overland Park, Kansas 66210