Questions & Answers
Q. What are the major kinds of risk faced by a farm business?
A. The risks faced by a farm business can be summarized using five categories:
- Production risk - The risk of lower quantity or quality of output;
- Price or market risk - The risk of low output prices (or high input prices) or of limited market outlets;
- Financial risk - The risk that debt cannot be repaid or that credit will not be available when needed;
- Institutional risk - The risks that come from changing government policies; and
- Human or personal risk - The risk that the business could be disrupted by illness, accident, death, or other personal problems.
Q. What are the major causes of crop losses in the United States?
A. No perfect measure of crop losses exists, but USDA's Risk Management Agency does have data on the sources of losses for claims filed under Federal crop insurance. Since 1988, about 40 percent of crop insurance indemnities have been due to drought; about 30 percent to excessive moisture, rain, or floods; about 10 percent to frost, freeze, and cold weather; and about 10 percent to hail. Note that uninsured crops might have somewhat different causes of loss. Also, causes of yield loss will vary by year, by crop, and by region.
Q. What are the main Government programs that address farm risk management?
A. The main Government programs related to farm risk management are:
- Crop yield insurance and crop revenue insurance provides indemnities to producers who purchase annual policies to cover yield and revenue losses;
- The Price Loss Coverage (PLC) program provides income support tied to historical base acres of covered commodities when market prices drop below the commodity’s statutory reference price;
- The Agricultural Risk Coverage (ARC) program provides income support tied to historical base acres when county or individual revenues for covered commodities falls below their benchmark revenues;
- The Supplemental Coverage Option (SCO) provides area-based coverage for a portion of the deductible of a producer’s underlying crop insurance policy. SCO covers either yield or revenue (depending on the underlying individual producer’s crop insurance policy);
- The Stacked Income Protection (STAX) program provides shallow loss protection like SCO (although an underlying crop insurance policy is not required) but is only available to cotton producers;
- Marketing Assistance Loans provide producers with flexibility in marketing their harvested commodities by offering short-term low-interest loans. The program also protects producers of major commodities against low prices by allowing producers to repay short-term post-harvest commodity loans at below-loan rate market prices. Producers who choose not to take commodity loans are offered the equivalent benefit through loan deficiency payments (LDPs);
- Disaster assistance programs, including
- the Livestock Forage Disaster Program (LFP) to compensate eligible livestock producers who suffer grazing losses because of drought;
- the Livestock Indemnity Program (LIP) to compensate producers for above normal livestock losses because of adverse weather;
- the Emergency Assistance for Livestock, Honey Bees, and Farm-Raised Fish to provide assistance for losses because of disease, adverse weather, or other conditions not covered by LFP or LIP;
- the Tree Assistance Program to provide benefits to producers who suffer tree, bush, and vine losses because of natural disasters;
- Emergency loans to producers to help them recover from natural disaster losses to production and/or facilities;
- Emergency haying and grazing assistance that allows haying and grazing on Conservation Reserve land as a result of natural disasters; and
- the Emergency Conservation Program to help producers repair farmlands damaged by natural disasters.
Q. For which crops is federally backed insurance available?
A. USDA's Risk Management Agency (RMA) has approved insurance coverage for more than 100 crops representing the great majority of the value of U.S. crop production. The Federal Government provides both a premium subsidy and reinsurance backing for these insurance policies. Some crops can be insured under a variety of existing plans, while others can be insured only under pilot programs of limited scope and duration. The RMA Crop Policies web page offers information on crops for which insurance is available, as well as instructions on how to obtain crop insurance.