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Crop Insurance: An Investment in Risk Management

Date: 
Author: 
Dr. David Kohl
Educational Opportunities: 
Videos
Interests: 
Grain, Young, Beginning Farmers
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Hi, I'm Dr. David Kohl, professor of Merits and Academic Hall of Farmer, in the agriculture economics department at Virginia Tech, Blacksburg, Virginia. Today we're going to focus on crop insurance. It's not an option, it's a requirement.
 
It's interesting, I had an upper mid-west agricultural vendor indicate that one of his producers went about cutting his costs, but he cut the wrong cost. Of course the cost that he cut was crop insurance; only to find out that later in the summer, a hail storm came through which left him devastating loses. Well these losses carried through. He wasn’t able to pay down his operating line of credit and therefore had to restructure that $200,000 loss over a 30 year period. Also, it took $200,000 worth of working capital and equity off his balance sheet. Again, that was a tough lesson learned.
 
When looking at crop insurance, you've got to know your cost of production and should know your various input costs. What I'm finding is that the proactive manager is looking for little ways to improve, in other words, they're looking for what I call three ways to be 5% better. Of course we don't think of crop insurance as a cost, but as an investment, it's an investment into risk management. I think it's one of the four or five tools that are very, very critical in risk management. In addition to working capital and working capital assessment. Along with doing enterprise budgets to evaluate which enterprise is giving you the biggest bang for the buck; but also realizing that crop insurance is right there with interest rate risk.
 
One of the things that we're going to have to consider in risk management is a rise in interest rates, possibly three or four increases here in 2018. Meaning that one of the things producers have to do, is conduct a sensitivity analysis, basically to say, "Okay, what are two or three or four interest rate increases going to do to our financial bottom line?" And right along with that sensitivity analysis is to say, "Wonder if we didn't have crop insurance, and we took a loss, how this would impact our fortunes in to the future?" Crop insurance as you can see, it's not a cost, it's an investment and it's also not an option. It's a requirement in today's world, where there's a surprise around every corner.

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