Ep 24. Prevented Planting Provisions in the Federal Crop Insurance Program

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.

[00:01] John Anderson

Hello, this is John Anderson, Director of the Fryar Price Risk Management Center of Excellence at the University of Arkansas. Here with another Relevant Risk podcast, and the guest today on our podcast is a familiar guest, Dr. Hunter Biram, Extension Specialist and Assistant Professor in Agricultural Economics Agribusiness Department at the University of Arkansas. Hunter, how are you today?

[00:22] Hunter Biram

I’m doing fantastic, John. I wish it would cool off a little bit.

[00:25] John Anderson

Been a little bit warm. I think as we record this, it’s roughly 135 degrees outside, I think.

[00:33] Hunter Biram

Oh, and so I’m sure the heat index is…

[00:35] John Anderson

Yeah. Yes, it’s pretty rough and Hunter, we’ve got you on to talk about a familiar topic, familiar to you and I think familiar to listeners of the podcast when you are our guest, and that is crop insurance. And specifically, some aspects of the federal crop insurance program and we want to talk today about a piece of that program, maybe a subset of coverage that kind of operates behind the scenes, maybe at least it’s kind of a second level, third level kind of coverage kind of below the surface.

[01:13] John Anderson

There’s this coverage that’s sitting there on most of these individual policies, all these individual policies that’s pretty important, very important I think to producers in Arkansas and I’m talking about preventive planting coverage. And so, if you could give a little overview of what preventive planting coverage is, it’s reasonably self-explanatory, as the name implies, but there’s a lot of details to this coverage that I think are important, both for producers to understand as well as important for the functioning of the crop insurance system.

[01:44] John Anderson

So, give us a kind of prevent plant 101, if you wouldn’t mind.

[01:48] Hunter Biram

That’s right. So preventive planting is a coverage that is available in what I’m calling the individual crop insurance, like an individual coverage for its policy, such as yield protection or YP or revenue protection or revenue protection with harvest price exclusion. So, it is coverage that is essentially embedded in those products, like a producer doesn’t have to pay additional for the base coverage of preventive planning.

[02:13] Hunter Biram

So, for a producer to, I guess more or less gain access to that coverage, they have to, they must be unable to plant an insured crop. It can’t just be any crop. It’s got to be planting the insured crop, so there’s got to be failure to plant the insured crop by the final planting date. And that’s going to be determined by RMA.

[02:37] Hunter Biram

And those planting dates vary by crop. And so once…

[02:43] John Anderson

Look let me interrupt you for just a second. So what you’re saying is, if let’s say I’m a corn farmer in eastern Arkansas and I buy a revenue protection policy for my farm on corn, if I can’t get that corn crop planted by the last planning date specified in the policy, that’s determined by RMA I have a right to make a claim on that prevent plant provision of the insurance.

[03:06] John Anderson

Is that what you’re saying?

[03:08] Hunter Biram

That’s right. And I think there’s this little stipulation that it has to be shown that there’s just no way that that you can plant. But as long as…

[03:16] John Anderson

I can’t just say, hey, I didn’t get my corn crop planted, but all 275 of my neighbors within a five-mile radius got theirs planted, but I didn’t. Then I’m going to have trouble making that claim.

[03:28] Hunter Biram

That’s right. Yeah. You’re going to have trouble convincing that adjuster that you were unable to do that. 

[03:34] John Anderson

Right. But it’s a wet spring, we’re all having trouble, fields are rutted up. One of those nightmare springs where obviously everybody’s having problems in the planting operation and okay, it’s a lot easier case to make.

[03:46] Hunter Biram

That’s it.

[03:47] John Anderson

Okay, very good. And you mentioned individual policy, so this does not apply if I were to take like a group risk protection kind of policy, is that what you mean by that? By specifying the individual policy?

[03:59] Hunter Biram

That’s right. So, it wouldn’t be a part of, you know, stacks, for instance, or margin protection that’s got to be baked into the PRP.

[04:06] John Anderson

So, my revenue protection, yield protection, those are the big ones that we’re talking about here.

[04:13] Hunter Biram

That’s right. And, you know, for the most part, I think why YP and RP make up about 76% of the total liability across the U.S. anyway. So, they’re the most popular products on large.

[04:24] John Anderson

So, this is something that applies to the vast majority of the policies that are actually being purchased by producers out there.

[04:31] Hunter Biram

That’s right.

[04:32] John Anderson

Okay. So I interrupted you. Carry on with your prevent plant 101.

[04:36] Hunter Biram

Oh, man. There’s just so much to it. It’s a very complicated program and there are definitely a lot of rules. I mean, we just talked about a few of the rules right off the bat. So, one rule is, okay, you can get a reduction in that prevent plant indemnity. So, let’s just go ahead and assume that, you know, everybody had that wet year.

[04:55] Hunter Biram

It was the nightmare spring. We weren’t able to get out there. And all my neighbors, we weren’t able to get out there and plant the crop. And so we get our agent and we say, Hey, I’m going to take prevent plant this year. Okay, well, prevent plant coverage varies by crop. So, the coverage levels, the base coverage levels, now will be different than your underlying RP or YP policy.

[05:21] Hunter Biram

So, let’s just say the YP RP coverage levels range from 50 to 85% in 5% increments. You know, we have our coverage levels for those. Well, in addition to that, in that prevent plant coverage, there is a base coverage for, say, corn of 55%. And for soybeans, it’s 60%. For rice, it’s 55% for cotton, 50%, peanuts, 55%. And those are just a few of those preventive planting coverage levels.

[05:51] Hunter Biram

So how is that prevented planting payment determined? Well, it’s all based on your underlying liability. Okay. So, let’s just say that a producer this is a real raw example but say that they get 75% coverage, and their associated liability is going to be there. Let’s just say their guarantee is $100 an acre. What you would end up doing then, as you would multiply for corn, for instance, you’d multiply that $100 by the 55% preventive plant cover level.

[06:23] Hunter Biram

So then that payment would then be $55 an acre. So, there are two key components to the prevent plant payment, that is the coverage factor for preventive planting and then the underlying liability for the RP or the YP policy.

[06:37] John Anderson

Okay. So, let’s say back to the corn policy it’s 75% coverage, RP revenue protection. That doesn’t mean I’ve got 75% protection on the prevent planting component of that of that policy. That’s going to be different. That’s specified by our RMA.

[06:58] Hunter Biram

That’s right. So think of it as 55% of 75% of that guarantee.

[07:03] John Anderson

It’s 55% of the liability under the policy.

[07:06] Hunter Biram

That’s right.

[07:07] John Anderson

Right. That’s good. And the reason for that is with Prevent Plant, you haven’t incurred all the expense of putting the crop in. Right. So you don’t, it’s not that not being able to put a crop in the ground is not the same thing as losing a crop on August 1st.

[07:26] Hunter Biram

That’s right. That’s right. So the preventive plant coverage is all about preproduction or it’s all the costs that are incurred leading up to the planting of the crop. So these are so the prevent plant loss, you know, if you think about it from the insurance perspective, is it is a nonproduction loss. So, with that 75% RP policy for corn, any losses that say we got that corn in the ground say that the weather was decent enough to be able to harvest something because you know we’re in corn harvest right now in Arkansas.

[08:00] Hunter Biram

So let’s just go ahead and say that we were able to harvest, but we had some losses. Those are production losses. Those are going to be mostly yield losses. Could be some price losses with the revenue protection, but with prevent plant, it’s going to be pre-planting. It’s not going to be, there will not be any yield to be calculated.

[08:17] Hunter Biram

Right. Because you were prevented from planting. So it’s going to be all of the cost. So you’re going to have protection. The producer will have protection against all of those costs, those costs incurred with attempting to plant the crop. And so RMA they have their methodology and they determined that 55% is the covers level for corn and 55% is the coverage level for rice.

[08:42] Hunter Biram

And that what is it really what is it, 55% of it’s going to be 55% of that total cost essentially is the way to think about it.

[08:52] John Anderson

Right. So as as most things with RMA, we can quibble with the numbers they come up with, but they do pretty systematically approach this notion of what share of costs should we consider being sunk by the time we’ve got that, we hit that last planting day.

[09:09] Hunter Biram

That’s right. And these are done by a crop across the country. So there’s no like state or county level coverage factor. This is going to be for by crop, but across the country.

[09:19] John Anderson

Yeah. Yeah. So obviously it’s not a lot of granularities there in that number but an attempt to identify a reasonable share of those production costs that somebody would have incurred.

[09:34] Hunter Biram

Sure. Absolutely.

[09:36] John Anderson

Now let’s talk a little bit about if I have a prevent plant claim, let’s say the last planting date has passed on the calendar. And I have not been able to get a crop in despite every reasonable effort that I could make. I call the adjuster and say, I’ve got a prevent planting claim, what is next, and what are my options from that point?

[10:01] John Anderson

Do I just take a check and then sit at home or what? What can I do with that? Because there are some different possibilities there.

[10:09] Hunter Biram

That’s right there. There are a few things. First, you can leave the land fallow. You can leave the land fallow, and then you will get 100% of the preventive planting indemnity. So you’ll get a full plan indemnity if you leave the land fallow. Second option is you can plant a cover crop on that ground that you prevented planting.

[10:26] Hunter Biram

Now, as long as you don’t harvest the cover crop for grain or for seed, you’ll still get the full PP indemnity. But if you harvest that cover crop for grain or for seed, then your payment is reduced by 65%. Similarly, the third option is to plant a second crop in the acreage that you prevented planting that you claimed for prevented planting.

[10:52] Hunter Biram

So, let’s say that we had PP rice, for instance, and then later we went ahead and we planted and insured soybeans. And that’s key as well. You got to it’s got to be that the soybeans were planted and insured as that second crop. And then if you do that, you also get a 65% reduction in your indemnity. Now, in both of those cases that I mentioned where you get the payment reduction, your premium is also reduced on that first crop.

[11:21] Hunter Biram

So, your premium also is reduced by 65%. So, your net indemnity or your indemnity minus premium or your indemnity net of premium is reduced by 65%. If you plant that plant harvest either a cover crop for seed or grain or plant insure and harvest the second crop. If the second crop incurs losses. Now it even gets a little bit more in the weeds here.

[11:48] Hunter Biram

So what if you don’t have a loss? This is kind of a weird scenario for me to think about, but if you don’t have a loss on that second crop, soybeans, for instance, then you can still get the full prevented planting claim. It’s only when that second crop has the loss. So those are the three alternatives that that a farmer has when they’re thinking about the preventive plant coverage.

[12:09] John Anderson

So realistically in Arkansas, the second crop or the backup crop would be soybeans pretty much exclusively for most people, whether we’re preventive planting on corn or rice or cotton, we would back up with soybeans. I guess if you’re preventive planning on soybeans, you plant a cover crop and go on maybe. But soybeans are kind of the most flexible crop in terms of planting window.

[12:35] John Anderson

So that’s primarily what we’re talking about, is that backup crop.

[12:39] Hunter Biram

That’s right. Yeah. And soybeans, you can plant, you know, I guess you can quote on quote plant it a lot later. Your yield potential is reduced significantly if you do plant that second crop. But you can plant soybeans after rice or soybeans after corn on that land. You know, is it always feasible? Not exactly, but there may be certain circumstances where that is the case.

[13:03] Hunter Biram

But I think the two biggest takeaways from this is just to think about that you know, it’s more ideal to plant, it’s more ideal to produce, it’s more ideal to have that have that growing season. And secondly, RMA wants that like I mean, as farmers generally, they want to harvest, they want to plant the crop, they want to harvest it and that’s what RMA wants too.

[13:28] Hunter Biram

And so all of these rules are set in place to, I guess, provide some accountability and provide some structure as to making sure that we achieve that still. And I mean, we’ve done everything we can do to try and plant and harvest that crop.

[13:42] John Anderson

Yeah, there’s nobody wants to create an incentive for not producing.

[13:47] Hunter Biram

That’s right. That’s yeah, that’s doomsday right, definitely don’t want that.

[13:51] John Anderson

Right, that’s where policy unintended consequences really crop up. The reason we’re talking about prevent plant, this is a pretty important component of the program to people in the mid-south I would say based on the the levels of prevent plant, the prevent the number or total liability and prevent plant claims that we see in this region.

[14:14] John Anderson

Is that fair to say?

[14:16] Hunter Biram

It is. I’m not sure what the dollar amounts are or what percentage of losses those dollar amounts are, but I will just tell you that we do use prevent plant quite a bit in the Mid-South and I think a lot of it is driven by we do have wet springs and I do think that a lot of its driven by weather.

[14:35] Hunter Biram

And so, we utilize the coverage quite a bit.

[14:38] John Anderson

So, and that also relates to planting date. I mean, I hear a lot of people that use the programs really quibble a lot over planting dates and are they accurate and the prevent plant program I think is one thing that really highlights why planning dates are important. Obviously, that’s something that we want to have right.

[14:56] John Anderson

And you know, I’m not I would not try to either defend or attack RMA planting dates, but just to say there’s a lot of incentive to get that planting date. And part of that incentive is related to prevent plant coverage that people have.

[15:12] Hunter Biram

That’s right. I mean, just as we mentioned earlier, the later you wait to plant yield potential falls, doesn’t matter if it’s an earlier planted crop, like corn or rice or a later planted crop like cotton or soybeans. Just delaying the planting is going to hurt that yield potential. I mean, I don’t really know how many times I’ve heard whenever I go to production meetings where I’m at county meetings and you know the growers are saying hey, earlier is better, earlier is better.

[15:39] Hunter Biram

And farmers I mean, I’ve even heard that there’s one farmer who’s trying to triple crop by planting, you know, as early as January. I mean, like I mean earlier is better and the yield potential is greater the earlier that you plant.

[15:54] John Anderson

So there is this balancing act when you talk about that last planting date and that that balance is between making sure that there’s adequate time to get a crop in and give that crop a good chance. But also on the back side of that, not going so far with that late planting date that the yield potential of the crop is impinged, and we would have bigger production losses on the back side of that.

[16:15] Hunter Biram

That’s right.

[16:16] John Anderson

So that’s kind of the optimum that we’re looking for is where can we set that date so that we give people the best chance to get the crop in without an adverse effect on yield potential because of late planting. And that’s a pretty delicate issue.

[16:31] Hunter Biram

It is. And I know that we have talked to RMA, I say we as an extension, I know I’ve heard one of our corn agronomists. He has spoken with RMA about this and there have been others in this space at the institution that have spoken with RMA about pushing planting dates back. And, you know, do we have it right?

[16:51] Hunter Biram

Is it totally airtight in terms of how we found the right date yet? You know, I’m not fully convinced that we have. I think that’s where research comes in. And I know that there are people in faculty here and in other places that have studied that. So, I think it is something that is very important.

[17:07] Hunter Biram

I mean, it really, I think that planting date draws most of these losses. I think once we can figure out what that planting date is, we may see those losses fall actually.

[17:19] John Anderson

Another difficult challenge here related to that is that technology is constantly evolving. And so, what is an optimal planting date now versus ten years ago, for instance, 15 years ago? Those might be different things because of the equipment complement that we use or because of the genetics of the varieties that we’re planting. But we’re using historical data to try to assess that planning date.

[17:39] John Anderson

But technology evolves pretty rapidly, which could potentially change that. So, the decisions around that are fairly difficult.

[17:47] Hunter Biram

That’s right. I mean, and on top of that, you know, we have changing weather patterns. It had been very wet, I know, in 2022, so before I started, you know, I’ve barely been here, I guess I’ve been here about a year and a couple of months now and before I had started, there was a lot of rain, I know in Arkansas.

[18:06] Hunter Biram

And looking at all the losses and kind of giving those crop updates and doing those production meetings and we definitely had a very, very wet, very wet spring and we had a lot of losses, a total opposite this year. But anyway, all that to say that is not an uncommon thing though, to have the total year more or less actually the less common weather phenomena is what we had this year.

[18:31] Hunter Biram

I mean, the weather has been way too good. It’s been one of those it’s been unusually good. It’s kind of like it’s quiet, a little too quiet, you know. But for the most part, the weather has been mostly good this year, but last year, not unheard of to have those extremely wet seasons.

[18:47] John Anderson

Yeah, it’s been a little hot. I’ll complain a little bit about the heat.

[18:50] Hunter Biram

I mean it has been hot. But, you know, I was just talking with our corn agronomist this morning and he’s like, you know, it’s kind of hot and dry and we’re in corn harvest right now. And he’s like, so it’s kind of an ideal situation, at least for corn. 

[19:03] John Anderson

Well, and then we do stipulate I mean, honestly, now when we talk about Arkansas crops, we just almost assume 100% irrigation on our major crops. We don’t have very many dry land acres left in this state. And so if we’ve got water, we feel pretty good about our chances of getting a crop. If we can get it in the ground and not have to take that prevent plant payment, right?

[19:27] Hunter Biram

That’s right. So, I mean, I think what you’re trying to say is the flood risk with prevent plant probably is the is the bigger risk rather than drought since you have the irrigation in place. Yeah, that’s right.

[19:38] John Anderson

Okay. Hunter, anything else we need to know about prevent plant that we haven’t touched on?

[19:43] Hunter Biram

I can’t think of anything else and I think we’ve hit on hit on the important rules, first and second crop rules. Oh, one thing I will add is, if you plant and ensure that second crop, soybeans, for instance, let’s talk about a rice soybean right here. So say we PP rice and plant soybeans and ensure it. The APH the actual production history or that farm level yield average based on some historical farm level yields for a given crop that APH will take a hit on the rice.

[20:16] Hunter Biram

So, the APH is reduced by 60%. So, what I’ve looked at already is if a farmer takes, plants that second crop, ensures it after rice, they take a 4% hit on their APH in the grand scheme of what their ten-year yield history would look like. So, every time that that 60% hit on the entry, just the one-year entry of APH.

[20:47] Hunter Biram

So, you take that 60% hit. So, say like 100 bushels an acre, 60% boom now you get 60 bushels an acre is what your yield is going to be recorded for that year. So, say you do that over and over again, you’re going to 4% that year. And if you do this, 8 to 10 times, you could lose 32 to 40% of what APH could have been had you never taken the PP payment.

[21:10] Hunter Biram

So this has implications not just in the term. I mean, that check may look good, but in the long run, your yield guarantee is going to fall drastically if this is something that happens year after year.

[21:22] John Anderson

Okay. That’s a good, that’s a really important point. There is an APH penalty when one takes a prevent plant claim. Is that the bottom line? And that’s important because that affects the coverage that you can get in subsequent years APH actual production history is used to establish the liability on the insurance purchase. So, what you’re saying is if I’m repeatedly taking prevent plant claims I am degrading my actual production history that’s used to calculate my coverage in subsequent years.

[21:58] Hunter Biram

It’s kind of like you think about two states of the world. So, let’s think about the state of the world where, you know, we never have to prevent plant. Maybe the weather is good every single year. And so we get that nice ten year APH yield history. Things look really good versus the other world where we have take PP even up to ten times.

[22:17] Hunter Biram

You could lose in some instances, you know, up to 40% of what that could have been in the ideal world. And so that means your yield guarantee falls by 40% in that 10th year after you’ve done this for consecutive years.

[22:31] John Anderson

Yeah. So, it’s certainly something to think about when you think about optimizing over multiple years, not just within a single year.

[22:39] Hunter Biram

Something that it will follow you after you do this. That’s the second crop again, like if you just plant, leave it fallow it’s totally fine but planting and then taking prevent plant and planting the second crop after it. That’s going to introduce some trouble in the long run.

[22:57] John Anderson

Okay. All right, Hunter, appreciate you joining us. This is I think an important topic for our producers. Again, prevent plant is kind of embedded in that insurance program in a way that’s not necessarily transparent to a lot of people, but it’s something that’s really important to our state and I think to the region more broadly. So, I appreciate you being here with us Hunter.

[23:17] John Anderson

This is John Anderson with relevant risk. Thanks for joining us.

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.