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;
- The Price Loss Coverage (PLC) program that provides support when market prices drop below the commodity reference price (cotton is no longer considered a covered commodity);
- The Agricultural Risk Coverage (ARC) program that provides revenue assistance for crop losses that are typically not covered by crop insurance (shallow loss program) and is available as either an area-based program or at the individual level (cotton is no longer considered a covered commodity);
- The Supplemental Coverage Option (SCO) that 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 similar to SCO (although an underlying crop insurance policy is not required) but is only available to cotton producers;
- Disaster programs, which include the Livestock Forage Disaster Program (LFP—to compensate eligible livestock producers who suffer grazing losses due to drought/fire); the Livestock Indemnity Program (LIP—to compensate producers for above normal livestock losses due to adverse weather); the Emergency Assistance for Livestock, Honey Bees, and Farm-Raised Fish (to provide assistance for losses due to disease, adverse weather, or other conditions not covered by LFP or LIP); and the Tree Assistance Program (to provide benefits to producers who suffer tree losses due to natural disasters);
- Loan deficiency payments, which protect producers of major commodities against low prices;
- The Noninsured Assistance Program (NAP) for those crops for which crop insurance is unavailable;
- Emergency loans;
- Emergency haying and grazing assistance; and
- The Emergency Conservation Program for 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.