Is Nursery Insurance Practical to Manage Risk in Your Business?
by Trent Teegerstrom and Ursula K. Schuch
In Cooperation with University of Arizona extension specialists Trent Teegerstrom and Ursula Schuch, UCNFA provided a risk management workshop for greenhouse and nursery managers last May in Carpinteria. One of the topics was nursery crop insurance programs in California. In response to requests from workshop participants for more risk management information, Trent and Ursula provide a detailed article on crop insurance programs below. For more information, look for the next UCNFA risk management meeting to be scheduled in Watsonville in 2012.
Nursery insurance is one of many tools to manage risks in a production system that deals with perishable products that are exposed to the hazards of inclement weather, outbreaks of pests and diseases, and various market forces to name a few. Climate extremes including unseasonable or extreme high or low temperatures, severe rainfall, hail, flooding, drought and wildfires have occurred more frequently in recent years. Pests and diseases challenge plant health, but can also limit or prevent marketing of plants or can require costly treatments before shipping products to customers. Nursery insurance can protect against some of these risks and offset potential losses. Nursery insurance underwritten by the Federal Risk Management Agency subsidizes the premiums.
There are two types of federal insurance products available for nursery and floriculture products in California. Both cover growing products but one uses an approach based on whole-operation revenue (Adjusted Gross Revenue or AGR) and the other uses an inventory-value approach (nursery crop insurance). Table 1 lists a few characteristics of the two types of insurance. Both products can work together or independently (http://www.rma.usda.gov).
Table 1. Characteristics of the two types of federal crop insurance available to nursery and floriculture business operators.
|Nursery Crop Insurance||Adjusted Gross Revenue|
|Operations eligible||More than 50% of the operation’s income is from wholesale nursery revenue||No more than 35% of expected allowable income is from animals or animal products|
|Plant types eligible||Nursery plants in container or field production (some exceptions)||Nursery and greenhouse products including cut flowers and Christmas trees|
|Insurance criteria||Crop inventory valuation list||5-year historical farm average revenue reported in 1040 Schedule F tax form|
|Time||June 1 – May 31 the following year||Any full 12-month tax year|
|Insurable causes of loss||Adverse weather, fire, wildlife, earthquakes||Yield loss (due to natural causes), price drop (due to market fluctuations)|
|Maximum coverage claim||None||$6.5 million|
|Basic catastrophic coverage (CAT)||Yes||No|
Nursery Crop Insurance
Nursery crop insurance is available to operators of nurseries that meet certain criteria. These include that the operation receives more than 50% of the income from wholesale marketing of nursery plants, and that plants are on the eligible plant list and are grown in appropriate medium. Operations must meet all requirements for insurability and the nursery must be inspected and approved as acceptable before insurance coverage begins. Both field and container-grown plants are eligible for insurance, but a few exceptions include plants grown for Christmas trees, stock plants and plants harvested for cut foliage. Containers with different species, cultivars, varieties, or genera are also not eligible for this insurance.
Insurance can be purchased for the current crop year until May 1, and coverage extends from June 1 until May 31 of the following year. However, if you miss the initial deadline of May 1, insurance can still be obtained anytime during the insurance period up to April 1 with a 30-day waiting period before insurance coverage begins.
Now is a good time to evaluate whether this insurance product makes sense for your operation. If you are a do-it-yourself operator, just follow the steps below to get an initial idea of whether the product will assist you in better managing risk; otherwise, go straight to the list of crop insurance agents (http://www.rma.usda.gov/tools/agent.html/) and have them walk you through the process.
A first step can be to evaluate whether the insured causes of loss are a threat in your area. Are adverse weather conditions such as freeze, wind or hurricane, fire, wildlife, or failure of irrigation supply due to drought a risk for your operation? The insurance does not give operators carte blanche to neglect best practices for growing and adequately protecting plants from such hazards and requires that good practices are followed. If your nursery is potentially affected by any of the insurable losses, the next step is to evaluate whether only container plants, field-grown plants, or both should be insured.
The next step is to consult the eligible plant list and the plant price schedule at http://www.rma.usda.gov/tools/eplpps. Creating a crop-inventory valuation report is the most time-consuming task which is required to calculate the plant inventory value. It requires that each plant species and cultivar is listed by botanical and common name, container size and number of plants in the inventory at the time when insurance is purchased. Further information for each plant includes the hardiness zone for field-grown material that can be insured and winter protection that is required for container plants in different counties. Software is available at the website to assist in the creation of this list. A wholesale catalog of the nursery is required to accompany the crop-inventory valuation report.
Coverage levels between 50 to 75% of the plant inventory value can be purchased with premium subsidies. The most basic coverage is the catastrophic coverage level which is available for a flat administrative fee of $300; this level covers 27.5% of the plant inventory value and the premium is fully subsidized. If you choose a coverage level of 50% of the plant-inventory value, the premium is subsidized by two-thirds and one-third is paid by the nursery. Under the highest coverage level of 75%, the premium subsidy is 55% and the nursery pays 45% of the premium.
Adjusted Gross Revenue
Adjusted Gross Revenue (AGR) is a whole-farm revenue protection plan of insurance and provides insurance coverage for multiple agricultural commodities in one product. It is available for nearly all agricultural crops grown in California. For example, an operation that produces nursery plants in containers, cut flowers and citrus fruit in an orchard can use AGR insurance to cover all three commodities. The plan provides protection against low revenue due to unavoidable natural disasters and market fluctuations that affect income during the insurance year. More information on AGR policies can be found at: http://www.rma.usda.gov/policies/agr.html.
AGR insurance eligibility requires that farms have five consecutive years of 1040 Schedule F tax records or comparable tax information, and that no more than 35% of the expected allowable income is from animals and animal products. The application also requires a farm report listing commodities and quantities to be produced along with expected prices. Beginning inventories if available should be listed and expected changes in the current year that may lead to lower revenue compared to previous years should be documented. The period of a one-year insurance coverage is for the operation’s tax year (depending on whether tax filing is for the calendar or fiscal year). Crop insurance agents for AGR can be located at: http://www3.rma.usda.gov/tools/agents/companies/.
AGR coverage levels and payment rate eligibility vary with the number of commodities a business produces and only one coverage amount may be selected:
65% coverage level with 75% or 90% payment rate (applies to any number of commodities).
75% coverage level with 75% or 90% payment rate (applies to any number of commodities).
80% coverage level with 75% or 90% payment rate (at least 3 commodities required).
A cost estimator is available at http://ewebapp.rma.usda.gov/apps/costestimator.
While there is some overlap between the two insurance products discussed that are available for nursery and floriculture business operators, AGR covers cut flowers, Christmas trees and lost revenue from market fluctuations. Both products cover a portion of loss due to adverse weather and other natural disasters. Businesses that produce a number of different crops and have some income from animals or animal products may find AGR more flexible because it covers a range of commodities compared to nursery insurance. Contact a crop insurance agent to learn more about these crop insurance programs.
Trent Teegerstrom is Extension Specialist, Department of Agricultural and Resource Economics, University of Arizona and Ursula Schuch is Extension Specialist Environmental Horticulture and Professor, School of Plant Sciences, University of Arizona.