NAP Insurance Program Changes

The Farm Service Administration (FSA) recently announced changes to the Noninsured Crop Disaster Assistance Program (NAP).  But before discussing those changes, lets first discuss what NAP is.

Simply, NAP provides an insurance option for farmers who grow crops that are not eligible for crop insurance.  In fact, if a farmer can obtain crop insurance, including the Risk Management Agency’s multi-peril crop insurance (MPCI), NAP is unavailable.  NAP only covers those crops that are non-insurable and is intended to help farmers farm another year in the event of a catastrophic event.

So what are the changes?

Coverage Levels:

Previously, NAP would cover only 50% of a crop and then pay out up to 55% of the crop’s value.  Now, NAP includes a buy-up provision to cover up to 65% of a crop and pay out up to 100% of the crop’s value.

The 50% coverage cost remains at $250.  Any coverage beyond 50% requires the farmer to pay an additional formula-based premium, or 5.25 times the level of coverage.  The premium is capped at $6,562.00 and it applies towards an individual or entity’s $125,000 NAP payment limitation.

Beginning, Socially Disadvantaged, and Limited Resource Farmers:

First, the $250 service fee is waived for beginning and socially disadvantaged farmers.  This is an expansion of the fee waiver; previously, it applied only to limited resource farmers.  If a beginning farmer has paid the service fee for the 2015 crop year, a refund will be issued.

Additionally, beginning, socially disadvantaged, and limited resource farmers are now eligible for a 50% premium reduction when purchasing buy-up coverage.

Organic and direct market prices:

The state FSA office can provide farmers with the option of insuring crops at the organic market price, rather than conventional or direct-to-consumer price.  However, sufficient data must be available for FSA to establish those separate price points.

Other issues of potential interest:

The NAP changes include a sodsaver provision that is relevant to Nebraska farmers.  If NAP coverage is sought for newly broken cropland, the farmer must pay 200% of the normal premium, not to exceed $6,562.00.

Pasture, Rangeland and Forage Insurance — A Pilot Project for Nebraska

Cornhusker Economics has a wonderful overview of the new Pasture, Rangeland and Forage Insurance pilot program in Nebraska.  In summary:

  • If you are a Nebraska producer who uses grazing and hay production in your operation, the USDA’s Risk Management Agency is introducing a new insurance product, the Pasture, Rangeland and Forage (“PRF”) coverage.
  • In the 2013 crop year, PRF coverage changes from a vegetative index to a rainfall index.  This means that, instead of PRF coverage based upon satellite imagery to determine the “greenness” of a pasture, PRF will now be based upon the rainfall received in insured area.
  • Insurance (or, in legalese, indemnity) is paid when the rainfall in the insured area is below the guaranteed level, which is determined as a percent of average rainfall.  This means that coverage is determined based upon the rainfall in the insured area, and not upon the production of the operator.
  • An insured area is based upon a grid.  Per Cornhusker Economics, the grid in Nebraska is approximately 13 miles east-to-west and 17 miles north-to-south.  Thus, the rainfall index is calculated for the grid rather than an individual farm or ranch.

But how does it work?  That requires a few steps.

  • First, each grid area has a base dollar value of production determined by RMA for grazing or haying.
  • Next, the producer selects a productivity factor.  The productivity factor adjusts the base dollar value up or down, from 60 percent to 150 percent of the base dollar value.
  • Third, the producer will also select a guarantee level.  The guarantee level is the percentage of average rainfall at which insurance payments are triggered.  The guarantee level can range from 70 percent to 90 percent, ranging in five percent increments (i.e. 70, 75, 80, 85, and 90 percent).  Thus, if a producer selects an 85 percent guarantee level but the grid receives only 82 percent of average rainfall, the insurance is triggered.
  • With the base dollar value, productivity factor, and guarantee level, it is possible to calculate the maximum payout.  Liability is calculated per acre and is calculated as the productivity factor multiplied by the guarantee level.  In other words, if there is a base dollar value of $30 per acre and a productivity factor of 120 percent, the productivity value is $36 per acre.  (30 x 1.2 = 36).  Then you multiply the productivity value by the guarantee level.  Assuming a guarantee level of 80 percent, the total payout would be $28.80 per acre.  (36 x .8 = 28.8)

But wait, there is more!

  • The producer not only chooses the productivity factor and guarantee rate, but the producer must also select time period of coverage called index intervals.  An index interval is two months long.  If PFR insurance is selected, a producer must select two index intervals during the calendar year.
  • Once the intervals are selected, the total payout must be allocated across the intervals.  How does this work?  Well, our producer above has $28.80 of total payout available.  Thus, our producer must allocate part of the $28.80 to separate index intervals.  For example, our producer can allocate 60 percent (or $17.28) to one index interval and 40 percent (or $11.52) to a different index interval.  Keep in mind that if an index interval is selected, at least ten percent of the total payout must be assigned to the index interval and the maximum allocation for any index interval is 60 percent of the total payout.
  • Premiums are subsidized and the amount of the subsidy depends upon the guarantee level.  For a 90 percent guarantee level, 51 percent of the subsidy is paid.  An 80 and 85 percent guarantee level has 55 percent of the subsidy paid.  For 70 and 75 percent guarantee level, 59 percent of the premiums is subsidized.

Keep in mind that any indemnity paid is based upon the grid system and the index interval selected.  That means it may not rain adequately on your acres but the grid may have enough rain that coverage is not triggered.  Also keep in mind that two index intervals must be selected.  Cornhusker Economics suggests selecting the two index intervals in which precipitation has the greatest impact upon production.

If you are curious as to your grid, click here.  Also feel free to contact your crop insurance representative or, if you have any other questions, you are welcome to contact Legal Aid of Nebraska!

Common factors of beginning farmer success

Courtesy of beginningfarmers.org, I learned of this project from Michigan State University on assessing common factors of success among Michigan’s Upper Peninsula beginning farmers.  The project interviewed eight beginning farmers and two supporting organizations to ask about, among other things, the challenges and opportunities for beginning farmers.*  What I found most interesting about the study were the responses from the two supporting organizations regarding:

  1. the most important factors of success among newer farmers; and
  2. the most common pitfalls newer farmer should try to avoid.

What struck me was the same themes in the answers to both questions.  Researching the market.  Persistence.  Organization/recordkeeping.  Calculated risk-taking.

With the possible exception of one of the above (persistence), the other themes are skills that can be learned by beginning farmers.  But how does a beginning farmer research the market, keep records, and decide when to take a risk with the operation?

Researching the market:

There is no one-size-fits-all answer to how to research the market because each market is different.  Do you want to establish an organic vegetable direct-marketing operation?  Or enter the feeder cattle market?  Maybe you want to establish a CSA?  Or perhaps row crops such as corn, soybeans, and wheat?  The possibilities truly are endless but that means different research is required for each possibility.

You must know the type of operation you want to run.  That requires making a business plan, even if it is a rudimentary one.  Research the cost of inputs (e.g. seed, fertilizer, livestock).  Research historical trends of input costs, productivity of the land, selling price.  Understand the possible federal, state, and local rules and regulations.  Talk with local producers about their operation and practices.  Determine how you will obtain access to land and how much land your operation requires.  With this research, you can determine how prepared you are to launch your operation but also, set the foundation to be persistent and become a successful farmer.

Recordkeeping:

We’ve discussed recordkeeping before but it bears repeating: without knowing the cost of your inputs, the cost of your time, and your break-even point, you will not be able to properly manage your operation.

Calculated Risk-taking:

This is the scariest proposition.  When do you look to expand your operation or change enterprises?  Are there value-added enterprises you may add to the operation?  Do you continue to rent or purchase land?  Do you have the resources and labor expand both your production and distribution capacity?  Can you live off the farm income alone or do you require an off-farm source of income?

To make those decisions, you have to return to research and recordkeeping.  Research and recordkeeping is critical to responsibly running your operation and knowing when it is possible to expand, when to consider changing enterprises, knowing whether production and distribution capacity are at their maximum, and knowing whether you are making a profit.

Want some help navigating the landscape?  Feel free to contact us because we’re here to help Nebraska and South Dakota’s beginning farmers and ranchers!

*The caveat to the study is that this is a small qualitative study focused on a small geographic region.  However, the study authors do you claim to extend their results beyond what the results state.  I am the person suggesting that the answers by the supporting organizations provide food for thought to all beginning farmers.

Agricultural Libraries

There are several online library resources that you may find useful as you consider starting or building your farming or ranching operation.

First, the USDA’s National Agricultural Library provides a wonderful resource for beginning farmers: Start2Farm.  Start2Farm is an online database of organizations, programs, and events directed towards beginning farmers.  You can find information on education and training, technical assistance, financing your operation, and networking opportunities.  The site allows you to drill down via categories of information to find exactly the information you want.

Second, the University of Minnesota hosts the Ag Risk and Farm Management Library.  The Ag Risk library hosts information on risk management, marketing, financial management, legal concerns, and more.

If you are interested in agricultural and food law, the University of Arkansas National Agricultural Law Center provides a wealth of information, covering everything from current and previous Farm Bills to summaries of various state laws concerning agriculture.

The information in these libraries and resources is extensive and covers a wide variety of topics — it is worth just wandering around the digital bookcase to learn some new information that may be pertinent to your operation.  If you have any questions about anything you read, feel free to contact us — we’re happy to help!