COMMON GROUND BLOG

With the March 15 crop insurance deadline fast approaching, it seems farmers are just saying no to Whole Farm Revenue Protection (WFRP). Only 494 policies had sold nationwide through late February, despite increased attention this year. The total premium due on these is $3.8 million, with $2.2 million covered by the government. The four states served by Farm Credit Services of America (FCSAmerica) – Iowa, Nebraska, South Dakota and Wyoming – had five policies on the books.

Last year, WFRP totaled 1,131 policies with a liability of $1.14 billion, premiums of $53.8 million and subsidies of $38.4 million. Indemnities paid totaled $155,363. More than 45 percent of the policies were sold in the Pacific Northwest, which has many specialty and perennial crops - which might be a better fit for WFRP than in the Midwest.

The whole farm program was designed to accommodate producers of organic crops, those who market direct and diversified operations with livestock and crops. You must have three commodities to be able to elect 80 or 85 percent coverage; those with fewer commodities can choose 50 to 75 percent coverage.

“One issue with WFRP is that it doesn’t really address the risk that a crop will fall short of the amount a producer has forward priced the way Revenue Protection (RP) does,” said Tony Jesina, senior vice president – related services at FCSAmerica. Why? Because it does not have the fall price adjustment and revenue from one crop may offset enough lost revenue that you wouldn’t receive an indemnity on the other. Consider this example:

** Note: Does not take into account basis impact on Whole Farm revenue calculations.

In this example, fall prices increased the guarantee for both crops under the revenue protection plan. But with the lower corn yield coupled with the higher price, overall revenue was above the total guarantee even though the soybean crop was a complete disaster.

Forward pricing the covered bushels (80 percent of the APH or 160 bu. and 40 bu.) at $4.50 and $9.50 locked in $65,000 higher income than the spring guarantee. After the total soybean crop failure, the $140,000 indemnity on the soybeans covered the $140,000 cost of replacing the bushels you had sold but didn’t produce. Total actual income = $635,000 + $56,250 (open corn bushels at harvest price) = $691,250.

Now, if you had a whole farm policy, the guaranteed income would be the same $570,000. Your corn income was $540,000 + $56,250 (open corn) = $596,250.  Your soybean revenue was the contract value of $95,000 minus $140,000 to buy the bushels you didn’t produce = ($45,000).  Combined revenue = $551,250 plus a WFRP indemnity of $18,750 = $570,000 (your initial guarantee). WFRP was able to protect your initial guaranteed revenue, it just didn’t provide the opportunity to allow the producer to capture the marketing gains due to the price rally. 

Of course, this illustration does not take into account differences in premium costs. WFRP premiums are discounted because of the lower risk due to farm diversification and the WFRP subsidy is as high as 80 percent for farms with two or more commodities, though it drops to 71 percent at the 80 percent coverage level and 56 percent at the 85 percent level.

It also is worth noting that WFRP uses cash prices, reflecting basis, while RP uses futures prices. And the provisions for prevent plant and re-plant are more restricted for WFRP.

Five consecutive years of Tax Form 1040 Schedule F tax forms are necessary, with reduced requirements for beginning farmers or ranchers. An application, an Intended Farm Operation Report for the insurance period and worksheets for allowable expenses and revenue are needed. Additional paperwork is necessary during the year. 

“There are some cases in which WFRP – alone or layered on multi-peril – may benefit an operation,” said Jesina. “But you need to understand a pretty complex program with rules that are quite different from traditional crop insurance.”

Other deadline concerns

The impending deadline cannot be ignored if you are choosing a more familiar policy, either, Jesina said. “We are still hearing of compliance issues – most often because RMA and FSA records don’t match exactly or because conservation compliance forms haven’t been filed.”

Given this is the only input that guarantees revenue, you don’t want to jeopardize your coverage. Your policy choice depends on your business and marketing strategies, the risks you face and your financial situation. Never has it been more important to work with a crop insurance agent who understands how these pieces of your business health work together. If you haven’t already met with your FCSAmerica crop insurance officer, make an appointment today.