Jul 27, 2016

Navigating crop insurance for damaged tart cherries

With the large crop and recent hailstorm, growers will need to make decisions regarding the marketability of the crop. This year is somewhat different from years past as there is now tart cherry crop insurance, which was an addition to the most recent Farm Bill. In 2015, growers in southwest Michigan had similar considerations with crop insurance when they were hit with hail and high winds. Additionally, diversion credits may be worth more than in past years; at this time, we have heard diversion credits may be worth $0.10-0.17 per pound. We worked through the following scenarios taking the following into consideration: diversion, catastrophic crop insurance (CAT) or Basic Noninsured Crop Disaster Assistance Program (NAP), Buy-up NAP, and tart cherry crop insurance.

The first step in this decision-making process is to determine if the crop is marketable; some growers may have taken this step already. Crop marketability depends on whether the whole orchard is damaged and is a total loss or if there is only partial damage to a block with some salvageable fruit. Growers should contact their processors to assist with this decision, and in many cases, the processor will determine if the crop is harvestable. However, if the damage is bad enough, the adjustor may be able to determine if the crop is salvageable. For any policy (NAP, crop insurance, etc.), the block needs to have a “salvage value of zero,” and an adjustor or processor needs to reject the fruit with some documentation that the fruit cannot be salvaged. If a processor has determined the block is not salvageable, then the grower must contact the adjustor. The fruit must be on the tree for an appraisal. Adjustors want to make sure the grower did everything they could to produce the crop. Growers may need to provide adjustors with a letter from the processor stating the crop is not marketable.

If the whole orchard is a total loss, and if the grower has tart cherry crop insurance, there are a few options to consider. The Risk Management Agency (RMA) decided that growers with crop insurance will receive 80 percent of the National Agricultural Statistics Service (NASS) price for the 2016 season, and they will not consider any revenue from diversion credits. The RMA felt there was no consistent price for diversion credits, so they will not count these credits against crop insurance. Growers will simply receive 80 percent of the NASS price.

Tart cherry crop insurance is a revenue policy, and the guarantee is based on the coverage a grower chooses (50-75 percent). The grower should have received a piece of paper that states the guarantee that was set in November 2015. If a grower has both the basic NAP and crop insurance, they cannot collect from both crop insurance and NAP. If you have already taken money from NAP, you will have to pay it back if you are receiving money from crop insurance.

Growers should keep their potential yield in mind with this large crop. If a grower shakes three-fourths of their acreage, the yields off the harvested portion of the farm may be larger than a grower’s historical yields that could result in disqualification of the grower’s crop insurance guarantee. Hence, growers will need to determine the total guarantee for crop insurance using the following formula:

Average price (ARH) x acres x coverage level = total $ guarantee

If a grower has higher yields in 2016, and they harvest only a portion of their total acres, the yield off the harvested acres multiplied by the NASS price (NASS is used in crop insurance rather than the Farm Service Agency (FSA) price that uses an Olympic average) = revenue that may exceed the guarantee. In this case, diversion might be an option on the acres that will not be harvested. Growers should talk with their crop insurance agent to help run the numbers.

If the orchard is determined to be a loss by an adjustor and the grower has Basic NAP, the loss has to be above 50 percent of the grower’s average yield (APH) in order to kick in the policy. Growers should use the following formula to calculate their expected revenue:

Average yield (APH) x acres x 50% coverage x $0.32 (FSA price) x 55% x 80% (for non-harvest) = expected revenue

Growers should pay particular attention to their yields this year as yields are higher in most orchards compared with past years. For Basic NAP, average yield is calculated as an average of the past 10 years of production (i.e., 2006 -2015). Growers should look at 2016 production in the orchard and compare it to past production as this year’s yields may influence the decision to use the Basic NAP or diversion certificates. If there is partial damage to the orchard, and 50 percent of the normal production is lost, the yields will likely be high enough to offset Basic NAP because it is a production policy. A Council of Insurance Agents and Brokers representative can help determine the tart cherry yield in an orchard.

If the tart cherry block has some salvageable production, and the grower has the Buy-up NAP, they can buy up from 50 percent coverage all the way up to 65 percent coverage. For example, if a grower has 65 percent coverage on Buy-up NAP, they have to have a marketable yield of 65 percent of the grower’s APH (10-year average yield) for the policy to kick in. With this policy, growers should use the following formula:

Average yield (APH) x acres x % coverage x $0.32 (FSA price) x 80% (for non-harvest)

There are two differences between Basic NAP and Buy-up NAP. First, a grower can choose to purchase more coverage in Buy-up NAP than the mandatory 50 percent coverage in Basic NAP. However, perhaps the greater advantage to Buy-up NAP is growers will be paid on 100 percent of the FSA price rather than 55 percent of that price in Basic NAP.

NAP is a policy based on marketable yield, and crop insurance is based on revenue. In the case of NAP, if diversion certificates are acquired and sold, then the crop is considered marketable and is not eligible for NAP. Whereas crop insurance allows the sales of diversion certificates as a means to capture some revenue, but this revenue will be considered when calculating the qualifying indemnification.

In summary, Michigan State University Extension recommends growers use these steps to determine how to proceed with damaged orchards:

1. Determine if the crop is marketable or if part of the block is salvageable.
2. Estimate yield of salvageable fruit.
3. Use the aforementioned formulas to calculate the estimated revenue based on the different policies.
4. Lastly, growers are recommended to contact FSA or a crop insurance agent to help calculate the expected values from the different options.

Again, growers need to consider their production for 2016 to determine which compensation scenario will be the most beneficial for their business.

Rothwell’s work is funded in part by MSU’s AgBioResearch.

— Nikki Rothwell, Emily Pochubay, Jim Bardenhagen and Jim Nugent, Michigan State University

Source: Michigan State University Extension