Ep. 12 Margin Protection Insurance for Rice

[00:01] Intro/Outro:
Welcome to Relevant Risk from the Fryar Price Risk Management Center of Excellence presenting conversations and Analysis about Risk and Risk Management for food and agriculture, supply chain decision makers from farmers to consumers and everyone in between. This is Relevant Risk.

[00:19] John Anderson:
Hello, this is John Anderson, director of the Fryar Center for Price Risk Management at the University of Arkansas, here with another Relevant Risk podcast. And kind of a special day for the podcast, we have a first-time guest. Hunter Byrum is a new assistant professor at the University of Arkansas with an extension appointment working out of the Little Rock State office. Hunter, how are you today?

[00:40] Hunter Biram:
I’m doing great, John. How are you?

[00:42] John Anderson:
I’m good. Well, it’s good to have you on the podcast. I appreciate you joining us here. And Hunter, your background, you’ve got a very diverse background, but one of the things that you have particular expertise in is crop insurance. Is that right?

[00:55] Hunter Biram:
That’s right. I have done a lot of work in crop insurance where I was schooled by Keith Coble of Mississippi State and I guess I was a glutton for punishment. So then I went to Kansas State and worked with Jesse Tech.

[01:07] John Anderson:
So yeah, they’re both very good friends of mine and both are outstanding ag economists doing a lot of good work on on risk generally and and policy as well as far as that goes, which we’ll have you on to talk about policy at another day. But we want to talk about crop insurance today. And this is something that we’ve talked about quite a bit at the Fryar Center, a very important risk management tool and something that I think we are working very hard to figure out how to make crop insurance work to maximum effect for the producers in Arkansas and really across the Mid-South. And, you know, I think most people are really familiar with the basic crop insurance products. I mean, you got the classic yield protection product that protects against losses in yield. You’ve got the revenue products, revenue protection and revenue protection with harvest price exclusion that add a price risk component to the insurance product. And those are kind of — correct me if I’m wrong — but those are kind of the bread and butter products that most people think of when they think of

[02:12] Hunter Biram:
That’s right…very mainstream.

[02:14] John Anderson:
Very mainstream, at least in terms of crop production. What we want to talk about today is a little bit different product. And one that I think maybe more of our listeners, more of our stakeholders in the state are are certainly less familiar with, a newer product and that’s a margin protection product. So give us a brief overview of what margin protection insurance is.

[02:35] Hunter Biram:
That’s right. So I’m glad that you broke down the yield protection to revenue protection. That’s kind of first gen, second gen, if you want to think about in terms of the roll out of crop insurance products. But margin protections now, I guess more of a third gen, we’re going to think about prices, yields and also cost. And so importantly with margin protection, I just I just wanna be upfront and say that this is a county level product.

[02:57] John Anderson:
So it’s an area product.

[02:58] Hunter Biram:
It is an area product. So area yields will be used on the yield side, projected prices will be used just like they would be for revenue protection. And then there’s going to be a county level cost that’s going to be that will be determined based on county level costs, with chemicals, with fertilizer, fuel, interest rates even are factored into this calculation.

[03:23] John Anderson:
So the important thing about area products is with with the revenue product you just mentioned, the cost side is not an individual producer’s cost. So it’s not like they’re going to look at. You’re not going to show your receipts for what you spent for diesel and fertilizer.

[03:37] Hunter Biram:
That’s right.  RMA makes no effort to try to figure out a farm level cost.

[03:40] John Anderson:
So there are some assumptions about physical use and then some aggregate prices are applied to that, and that’s how the margins determine determined. It’s kind of a almost like an index concept.

[03:50] Hunter Biram:
That’s right; that’s right

[03:51] John Anderson:
And the other thing that’s important about an area product is that triggers are different for an area product. So say a little bit if you would, about about the trigger concept with insurance, what it means when when a product triggers and specifically how does a county level margin product trigger.

[04:13] Hunter Biram:
Right. So we’ll start with yield protection insurance and the yield trigger. So, you know, with your protection insurance, there will be a coverage level that’s chosen and it will be multiplied by some expected yield, which will be based on a yield history of. So it will be an average of farm level yields.

[04:30] John Anderson:
The actual production history or APH for people that are familiar with the product.

[04:34] Hunter Biram:
That’s right. The APH. And then there will be some price that will be multiplied by that yield times, that coverage level. So whenever your yield essentially drops below that that yield guarantee, there will be a payment that will get you essentially up to whatever that yield guarantee was independent of price.  Revenue; very straightforward. The there there will be prices and yields times a coverage level. So expected price expected yield times that coverage level to get your liability, that guaranteed revenue. And then if if your farm level revenue falls below that guarantee, there will be a payment that will get you that that will essentially get a producer’s revenue up to whatever that guarantee is.  With margin with the margin protection insurance, there will be a margin guarantee. There’s going to be some expected operating operating margin that will be calculated where we’re going to have the county level yields. We’re going to have that projected price that I mentioned earlier, and then we’re going to have some county level cost that will also be considered. So it’s all about protecting that difference in revenue and operating costs. And so that’s going to be that margin. So those coverage levels, I’ve been mentioning coverage levels for yield and revenue protection.  There are coverage levels for margin protection as well. They go from 70 to 95% in 5% increments. So if you buy a 95% margin protection plan and margin, your margin, falls below the 95%, you will get a payment that will get you up to your margin, that would have been 95% of whatever that expected margin.

[06:12] John Anderson:
Up to that county margin.

[06:12] Hunter Biram:
Up to the county margin. That’s right.

[06:14] John Anderson:
Yeah. And that’s a higher coverage level than is available on individual products.

[06:17] Hunter Biram:
That’s right. That’s right. Which makes it kind of unique. But for area products, they tend to have those higher coverage levels. In the individual, more mainstream products that we’re talking about with yield protection, revenue protection. They range from the 50 to 85% in 5% increments.

[06:33] John Anderson:
Right. So a little higher level of protection, which I think makes sense given that you don’t expect your individual experience to exactly match the county experience. And so that additional flexibility in coverage level maybe helps helps people adjust to that to some extent.

[06:50] Hunter Biram:
Right And it’s all about well, there’s this idea that we talk about called basis risk. So how how do how does your farm more or less perform relative to the county average? And so depending on what the perception of basis risk is, so more basis risk would mean what what happens on your farm is way different than what’s happening everywhere else around you in the county. So if you if you perceive, perceive higher basis risk, it could be a good idea to go ahead and wrap around your individual plan with that area yield plan.

[07:19] John Anderson:
So these can be purchased in conjunction with one … an individual and this area margin.

[07:23] Hunter Biram:
That’s right.

[07:24] John Anderson:
Purchased together. It’s not an either or decision.

[07:26] Hunter Biram:
That’s right. Margin protection is a can be a standalone, or it can be bought with your individual plan of insurance.

[07:33] John Anderson:
Okay. So somebody might buy a 75% coverage individual policy and 90% coverage margin policy at the county level. Right at the same time.

[07:45] Hunter Biram:
That’s right.

[07:46] John Anderson:
Okay, very good. So let’s talk about crops a little bit now. Obviously, the yield protection, revenue protection, those products are available on all of the major row crops in every county. The margin protection is not that widely available. At least in terms of crops.

[08:01] Hunter Biram:
That’s right. So, you know, we’ll talk about our Arkansas for for the moment. It, margin protection is only available for rice in Arkansas. So there is not, there’s no coverage available for margin protection for corn and soybeans or wheat or cotton. It’s only going to be for rice in Arkansas, as well as parts of the Mississippi Delta and northern Louisiana and south east Texas.

[08:27] John Anderson:
Okay. In other states, there are other margin products available. But in Arkansas, we’re talking about rice.

[08:32] Hunter Biram:
Just rice alone. So in the upper Midwest, you’re going to see corn and soybean coverage and very far north in the northwest, you’re going to see wheat coverage.

[08:40] John Anderson:
Okay. But this is not a pilot project anymore. We’re past the pilot project – the pilot product stage with this?

[08:47] Hunter Biram:
That’s right. It is administered by RMA and the premiums are subsidized.

[08:52] John Anderson:
Okay. So let’s talk a little bit about the components of cost. I don’t know how much detail we can get into here, Hunter, but you mentioned margin. And obviously, and specific to the rice industry, we have talked a lot this year about cost production because it was a really high cost of production year. You know, really even going back into 2021 when when fertilizer prices really started to take off. But between fertilizer and fuel, primarily, we’ve been really concerned about margins specific to rice because it is a fairly input-intensive crop. So this margin protection program is is certainly timely and the focus on rice certainly makes sense in Arkansas. But what can you tell us about the components of of cost in that margin? What what is included in that, at least the major blocks?

[09:41] Hunter Biram:
So the major blocks, from understanding there’s a more of a fixed cost side of things, even though it’s not fixed in the sense that we would think about it. But in that portion, there are chemicals such as pesticides and fuel expenses are going to be factored into that portion. Then there’s more of what they call the the variable side. And so in that portion, you’re going to get your, your N, P and K, costs are going to be factored in on that side of things. And they also try to account for interest rates. So, you know, you’re operating loan. They try to account for the cost of your operating loan.

[10:14] John Anderson:
Which will certainly be more important next year than it has been for the last several years.

[10:18] Hunter Biram:
Absolutely. No, you got that right.

[10:19] John Anderson:
Yeah. Interest rates are definitely on the rise.

[10:21] Hunter Biram:
And I think another thing that’s important here with the cost side of things is that just in the region that we’re talking about with Arkansas, Mississippi, Louisiana, Texas and Rice, those cost regions, there are three different ones just among those states. In Arkansas, we’re in the cost region one. So if you ever go to margin protection dot com which has a ton of documentation and and you want to see what those costs look like you want to look at cost region number one. Then as you go into Mississippi, Louisiana, you’re going to look at cost region three or two and then over in Texas, maybe cost region number three.

[10:53] John Anderson:
Okay. So there is some some attempt to account for differences in production practices primarily is what that would be?

[11:00] Hunter Biram:
That’s right. That’s right. So again, this is an area product. So yeah, there will be a county trigger, but those costs are going to vary based on what region of the country you’re in.

[11:09] John Anderson:
Okay. Okay. And, you know, I think the issue with with area products.  And there have been some area products over the years. I mean, I’m thinking back to the Group Risk Income Protection – the old GRIP program was was an area program. You know, the tradeoffs around area program, they tend to be lower cost because they’re much easier to administer. You know, the data collection, for instance, you’re not you’re not having to gather individual data and make individual adjustments; nobody is going to come out of the farm to do an adjustment. So in terms of overhead, they’re they’re pretty low cost, and that’s reflected in the premiums. The downside of that is you’re not getting individual coverage. So your individual experiences, you talked about basis risk, your individual experience might diverge from the area experience.

[12:04] Hunter Biram:
But also addresses the criticism of the moral hazard aspect.

[12:07] John Anderson:
Exactly. And elaborate on that a little bit. Give a definition of that and elaborate on that a little bit, because that is a really important advantage of area products.

[12:16] Hunter Biram:
Right. So moral hazard essentially is going to mean that upon purchasing insurance, it will alter a producer’s behavior and it will be the behavior will be more adverse. So maybe they maybe there there might be a they may apply less pesticides or they may over apply fertilizer for whatever reason, but anyway there will be adverse practices that happen that will increase the chances, increase probability of getting an insurance indemnity. So that’s the moral hazard aspect of insurance.

[12:47] John Anderson:
So the analogy would be somebody who buys car insurance might drive more recklessly because they have car insurance.

[12:53] Hunter Biram:
That’s right. Because because they’re trying to get that indemnity. Of course, for cars, I’ll tell you what, that has to be a huge indemnity to, to want to trigger that. But the yes, that is the idea.

[13:04] John Anderson:
Yeah. And yeah, area products really obviate the problem. Moral hazard is a common problem in any conversation with insurance.

[13:14] Hunter Biram:
That’s right.

[13:15] John Anderson:
And so, area products really get around that.

[13:17] Hunter Biram:
By aggregating across all those farms.

[13:19] John Anderson:
Because individual behavior doesn’t affect the trigger.

[13:21] Hunter Biram:
That’s right. Yeah. Not one person’s behavior will affect what that county level trigger will be. Now, if they all act together, we have a different story. But that hardly is the case, at least from what we’ve seen.

[13:32] John Anderson:
Right. So that design, those area designs are attractive from that standpoint. But again, you accept the basis risk with that. So lower cost, ease of administration and but less precise coverage. And I think as long as people are aware of that going in, these can be effective products.

[13:50] Hunter Biram:
That’s right.

[13:52] John Anderson:
So is there anything a farmer could do on the front end to have to have a maybe a more informed expectation of how their experience might line up with the county? Or is this just something, you know, you get it and you see how it works for a couple of years and then you decide, or is there anything on the front end that you can do to to see kind of what that basis risk situation might be.

[14:13] Hunter Biram:
In terms of what maybe a farm level cost would be relative to that county level cost? You know, I, I don’t know for sure. I think that’s a really good question. I’m not sure if there’s a if there’s a way to I mean, like I said, there are the cost regions that are published on the margin protection. I mean, for for for 2022, they do have those costs published. So you as a producer for producers that are listening, look at your budgets and look at how your operation is working and see how you compare to what those what those costs are. And I want to say that they have historical costs as well on that website, if they don’t, I’d be happy to try and dig some of that up and contact some people.

[14:56] John Anderson:
So at a minimum, a farmer could look and see, okay, I’ve got my margin expectation based on my budgeting for next year and I can see how that relates to the county margin that’s projected for this for this product.

[15:07] Hunter Biram:
That’s right. And then they can see how much basis risk that might be present if maybe their cost is way lower than what that county is. There could be a lot of basis risk there or higher. But I mean, if the costs line up on the farm, well, I guess or more accurately with what’s happening at the county, it could be a good product to consider.

[15:25] John Anderson:
And specific to the revenue side, a farm a farm could know fairly easily how their yields track with county yields.

[15:32] Hunter Biram:
That’s right. They could. I mean, there’s several resources out there. I know USDA, National Ag Stats Service publishes those yields. I mean, I’ll be happy to talk to farmers about whatever the county yields that are published are and seeing how maybe the county yields that are calculated compare to their farm level production history and so that they can determine on the output side what their basis risk might look like.

[15:57] John Anderson:
Okay. So that’s an additional tool in the crop insurance world that our rice farmers at least have to manage risk.

[16:05] Hunter Biram:
That’s right. It’s it’s something that is also relatively new to me. I mean, the 2018 Farm Bill really is what formalized the RMA administration of mortgage protection. It’s a privately developed product from Watts and Associates up in the northwest part of the country.

[16:22] John Anderson:
Yeah Montana. Right. And Watts and Associates is as a long-time participant in the development of crop insurance products and in the evaluation of products, I would say — very familiar with the crop insurance program. And so Watts and Associates is a well-known name in the crop insurance world.

[16:41] Hunter Biram:
Yeah. One thing that I do want to note, John, is with with what’s with the upcoming growing season? You know, I think obviously ask — for those producers listening — ask your insurance agent if margin protection is going to be.

[16:54] John Anderson:
Absolutely.

[16:55] Hunter Biram:
Be good for your operation. But really, the perfect storm for margin protection insurance is whenever the expected margins are are wide. So they should get a higher guarantee.

[17:05] John Anderson:
So there’s a lot of money on the table at the beginning of the year. Right. There’s an expectation of a of a fat margin.

[17:11] Hunter Biram:
That’s right. And so.

[17:12] John Anderson:
Which is probably not going to be the case when we look at next year.

[17:14] Hunter Biram:
Probably not next year. Again, talk with your agent. You know what your operation is. That’s really important to know what’s going on at your farm and talk with your agent about that. But in general, I would say it might not be the best to buy. Now, if you had bought it this past year, I’ve heard of people getting getting payments on it and it triggered well. But coming up we’re already in this higher input cost environment, but we’re also in a higher price environment, too. So again, it just it just depends on it depends on your operation.

[17:43] John Anderson:
Right. Well, and even if there is a small margin to be insured, protecting a small margin is preferable to sustaining a big loss.

[17:53] Hunter Biram:
That’s right.

[17:54] John Anderson:
So margins can go below zero and often do in agriculture. Unfortunately.

[18:01] Hunter Biram:
Unfortunately, that’s right. Yeah.

[18:03] John Anderson:
Anything else about this product?

[18:06] Hunter Biram:
Not that I can think of.

[18:08] John Anderson:
Did we talk about sales closing date?

[18:10] Hunter Biram:
We have not.

[18:10] John Anderson:
When do, when do people want to make a purchase decision on that?

[18:13] Hunter Biram:
That’s right. Sales closing date for this will be February 28th. February 28^th, you want you’re going to make that decision by then with your agent. I think something else that’s worth mentioning would be the projected price period. Now, this would be the same for margin protection as well as for revenue protection and yield protection.  So projected price I’m talking about the output price, I’m talking about the crop price and the projected price discovery period is going to be from January 15th or February 14th. So there will be an average essentially of of what that futures price looks like.

[18:40] John Anderson:
And so the price discovery period is the period of time in which our RMA establishes the price expectation for their insurance products. And that’s based on on harvest time futures contracts on the Chicago — on the CME.

[18:53] Hunter Biram:
That’s right.

[18:54] John Anderson:
So for rice, that price discovery period they, they’re watching the the daily settlement price on the…

[19:01] Hunter Biram:
Rough rice futures for November.

[19:02] John Anderson:
The November rough rice futures and they take the average of that mid-January to mid-February. Have I got—have I explained that well?

[19:08] Hunter Biram:
You did a great job; you nailed it

[19:09] John Anderson:
Okay, so that price discovery period for margin protection is the same as the price discovery period for RP, for the revenue protection.

[19:16] Hunter Biram:
That’s right. And same sales closing date as well.

[19:18] John Anderson:
Okay. So by mid-February, you’ll know kind of what the guarantee that’s available is and you’ve got until the end of February then to pull the trigger on purchasing the product.

[19:27] Hunter Biram:
That’s right. And that’s for rice, I do want to note that’s for rice. Now, margin protection for corn, soybeans – I know that doesn’t apply to Arkansas — but for those who are not from Arkansas listening, they have different sales closing.

[19:37] John Anderson:
Different price discovery period potentially and different sales closing date.

[19:40] Hunter Biram:
That’s right. And the sales closing for margin protection for corn and soybeans is tomorrow, September 30th. So, you know, doesn’t really applied much to the Arkansas producers. But for those growing corn and soybeans in the Midwest, that’s going to be September 30th.

[19:54] John Anderson:
Okay. So for our rice producers.

[19:57] Hunter Biram:
You got some time.

[19:57] John Anderson:
You got some time as we go through. Of course, our rice producers are — many as we’re recording this probably still trying to wrap up the 2022 crop. So they’re a little preoccupied right now for the most part. But when we get that out of the way and we get into our normal winter activity of planning next year’s rotations and plantings and putting budgets together and arranging financing, that’s the time to be evaluating the risk management decision and and maybe exploring this as a potential, because it is it is an additional tool that our rice farmers have access to.

[20:35] Hunter Biram:
That’s absolutely. Yeah, that’s right. And it’s really important for rice. You know, as you mentioned, it’s very input intensive. And we know that this summer we saw drought and we saw fuel prices. We’re still seeing fuel prices relatively high, farm diesel. And so it’s important to account for that more specifically for rice, just because it’s so input intensive. So to be able to have that margin protected with rice, I think is a very valuable risk management tool.

[21:06] John Anderson:
All right, Hunter, appreciate your being here.  For you listeners. If you have more questions about this, Hunter is our extension economist in Little Rock state office and he’s happy to take questions and and very responsive to that, as are we here at the Fryar Center. So another option to explore as you think about risk management in rice, which is really an important topic in Arkansas. So Hunter, thank you for being with us. We will have you back again to talk about crop insurance and and probably some farm bill stuff here in the not too distant future.

[21:42] Hunter Biram:
Oh man; buckle up, buddy.

[21:44] John Anderson:
Hunter is Hunter is also our — one of our — I would say one of our resident farm bill experts. And so we are not far from the time when that will be a hot topic of conversation. So, Hunter, I’ll keep you — you will certainly be on our rotation to come back and talk to us about that.

[22:01] Hunter Biram:
Well, that sounds like so much fun. And I appreciate you having me on the having me on the podcast today. I will have one parting thought and that is I have written up a fact sheet – a U of A Division of Agricultural fact sheet — on margin protection insurance. So if you’re interested in having something to read and look at for reference, I’d be happy to share that with you. It’s also on the Division website and I’m sure we could probably get that on the Fryar Center website.

[22:23] John Anderson:
We will absolutely post on the Fryar Center website on our Publications page and it will be available also on UAEX dot edu. So you can search that pretty easily, but we will definitely get that on the Fryar Center page. So I appreciate that. And that is an excellent fact sheet, by the way. So, very informative for anybody who’s looking for some good basic information about crop insurance in Arkansas, Hunter has produced a really good resource there. So that’s a good parting thought. With that, I will again note that this is the Relevant Risk podcast from the Fryar Center for Price Risk Management. Thank you for joining us.

[22:58] Intro/Outro:
Thanks for listening to the Relevant Risk Podcast, a production of the Fryar Price Risk Management Center of Excellence in the Department of Agricultural Economics and Agribusiness within the University of Arkansas System. The Fryar Price Risk Management Center of Excellence carries out teaching activities through the Dale Bumpers College of Agricultural, Food and Life Sciences at the University of Arkansas in Fayetteville and research and Extension Activities through the University of Arkansas System Division of Agriculture. Visit fryar-risk-center.uada.edu for more information. Thanks for listening.