Over the past decade the weather has continued to be a daily topic among farmers and those who serve them. It has become a major political topic in the discussion of global warming and the impact of humans on our environment.
Weather risks impact those in production agriculture from the simple task of harvesting hay to deciding when to apply a herbicide or insecticide used in the production of food. Weather can make or break a good harvest, destroy huge amounts of farm and other assets, and plunge people and companies into economic ruin.
There is an old saying I came across recently in a British tractor collectors' magazine that I thought was worth sharing: "Whether the weather be wet, whether the weather be hot, whatever the weather, we'll weather the weather, whether we like it or not."
Today's agriculture is a highly capital intensive business with more than $1,000 invested per acre to grow a crop. Investments in seed, fertilizer, equipment, land and technology exposes farmers to major risks of financial funds that are invested to produce a crop. These funds consist of farmers' own investments and those of financial institutions that lend to the production agriculture world we all call farming.
How can the risks of weather be managed? Some use of diversity of crops and multiple locations of farm units can help manage risk. Often when droughts or floods are in a wide geographic area such as last year's drought in the United States or massive flooding that impacted Europe, the use of diversity does little to lessen the impact of a weather event.
Some producers of livestock and dairy attempt to have carryover of extra feed reserves to feed livestock during times of severe shortages of crops used to feed livestock and cushion the impacts of a poor harvest by being able to draw down reserves of feed. Large reserves are expensive to maintain, but do offer a safety net of sorts.
One major tool that allows for the management of risk for agriculture producers in the United States is federally subsidized crop insurance. This product is sold by private insurance companies and agents to farmers in the countryside who want to manage risk and continue to stay in business after suffering a major crop loss. Insurance companies provide settlement checks after a disaster based upon historical yields and actual production in the year of the loss. This insurance payment allows farmers to pay bills for expenses incurred in the production of a crop. Federally subsidized crop insurance does not allow for profit taking, but does manage the risks related to weather losses.
What coverage level is best for farmers to purchase? How affordable is the product? How does it benefit others? Crop insurance offers many options to every crop producer. It also offers protection for many different crops that include apples, corn and crops like hay. It is best to check with a licensed agent to discuss what is best for the individual farmer.
Most policies are subsidized an estimated 50 percent by the Federal Government. The subsidy level varies by crop, production history of the farm and other factors. In a recent meeting I attended that was sponsored by RCIS insurance, I heard that omore than 1,500 calculations are used to set yield and subsidy levels.
My suggestion is for farmers to find an agent and review what is available for their farm. Many of the borrowers I work with select a coverage level of 75 to 85 percent coverage of their historical yield levels. This level of protection allows them to cover most input expense at a reasonable cost per acre. The USDA's Risk Management Agency manages the crop insurance program.