Farmers make a huge financial investment year after year with a high risk of not recovering that investment.
They can be left in a tough financial position if the weather does not co-operate or the markets drop.
Farmers can mitigate this risk by diversifying their operations with different products, but there is still some risk exposure.
Alternatively, farmers can buy insurance to cover their risks, but it’s not easy knowing which is best for their operation while being the most cost effective. A variety of products are available, and the following are just a few to consider.
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New private insurance products can help protect the farm’s financial stability by insuring a specified margin. This allows farmers to be insured for a certain amount of earnings over their costs. Input costs include fertilizer, chemical and seed.
One advantage to this option is that it allows for a minimum amount of margin to be covered for the farm, which means the quantity, quality and price for production are covered in the revenue calculation.
Like other programs, the margins used are based on five years of financial results. However, the difference is that these margins are based on accrual-based financial statements which, depending on the operation, may cost extra to prepare.
The premiums depend on fluctuations in the farm’s earnings, assets held and average inputs per acre. As a result, the cost can vary from year to year.
This government program is also designed to protect an operation’s margins. In simple terms, a payout is determined by looking at an average of revenue less expenses for the past five years and determining if the gross margin has dropped by more than 30 percent.
It helps ensure that a disaster does not destroy the farm financially. The chance of a payout is reduced if the farmer has other coverage, such as traditional insurance, because the proceeds of this coverage are also considered.
Traditional crop insurance uses the producer’s average yield per crop from the past.
Coverage is bought for a percentage of this production, which in turn provides less price protection. However, the spring price endorsement can be used to help protect for the price offered for the crops.
This insurance is a longstanding and trusted form of protection for farmers, but it can be costly and depends on an adjustor to determine the insurance payout for items such as hail damage.
These are only a few of the insurance options available to farmers.
Cost, tolerance for risk and the ability for insurance companies to be able to pay in the event of a claim should be considered.
It may not be possible to reduce all of the risk involved in farming, but insurance can help. Make sure to consult a professional to discuss available options and which ones make the most sense for your operation.
