Crop Insurance Focus of the Week
Understanding Crop Insurance Unit Structures
All those of you with crop insurance policies have at one point selected a unit structure. Is it a decision you remember? It is worth taking a few moments to review, as it impacts your operation. How you divide your land determines APH yields, loss payments, and the premium under your crop insurance policy. Each parcel of land for which premiums are calculated and for which potential insurance claims are made is called an “insurance unit”.
There are benefits to each type of unit structure, so it is important to consider your operation: its geographical layout, production/loss histories and financial priorities, in order to make the best decision. All four of the unit structure types below require that each crop/county have its own units. You have the option to select a different policy type, coverage level and unit structure for each of these unit groups. For example, all of your soybeans in County A must be under one policy/coverage level/unit structure, but you may select different options for your milo in County A or your soybeans in County C.
Here is a summary of each type of insurable unit structure:
BASIC UNITS (BU): In addition to crop and county, acres are also divided by share arrangement. Land from each landlord you work with is a unique unit; percentages are not separated. (Landlords can insure their own percentage separately). All acres owned or cash-rented make up another basic unit. Separate APH records must be reported for each basic unit, and production records must be maintained. Insuring all acres as basic units entitles producers up to a 10 percent discount on their premiums.
OPTIONAL UNITS (OU): This unit type divides acreage into the smallest insurable segments. Units are determined by location (FSN), crop type, method of farming, and can sometimes even be broken down further by crop variety or non-contiguous land. Separate APH records must be reported for each optional unit, and production records must be maintained. By grouping acres into these smaller, unique units, the chances of a claim become greater…you are more likely to receive a loss check! However, because the insurance company is taking on a higher risk with this type of structure, there is no premium discount and the government lowers it’s subsidy.
ENTERPRISE UNITS (EU): Units consist of all the planted acres of one crop type within a county. This structure is available for revenue protection or yield protection plans, when you have a minimum of two fields in different township sections within a county, both of which are either 20% of your total or 20 acres (the lesser of the two). APH and production records should be maintained at the optional unit level, allowing you to insure under either structure as necessary. A weighted average APH is calculated based on all fields included in the enterprise unit. Choosing this structure may sometimes eliminate or lower a loss payment, as a high yield in one field could balance out a lower yield in another. This downside can be partially resolved by selecting higher levels of coverage affordable with the premium savings you receive through a higher level of government subsidy.
ENTERPRISE UNITS BY PRACTICE (EP): When available, this option allows the above units to be divided by irrigation practice. The qualifying requirements are the same as for EU. The benefit is that the irrigated units do not have their level of insured value lowered by the non-irrigated yield histories, and conversely, the non-irrigated units are more likely to have their losses paid out, because their lower yields are not covered by the higher yields of the irrigated fields. This structuring still receives the higher level of subsidy.
The most common unit selections are optional or enterprise. When making this decision, there are a few questions to ask:
Do the yields on my fields rise or fall together in a season?
Are my fields geographically close to each other, so that they receive the impact of the same positive/negative weather?
Do I use the same farming practices from field to field?
If your answer to these questions is “yes”, then enterprise units are worth considering for the premium savings. However, if your answers are more like the following…
…I historically have a field or two that has losses while the others do well.
…My fields are all over the county…one can have lots of rain while another is dry!
…I have been trying a different variety of seed on one of my fields to see how it yields compared to my other fields.
…these all suggest that optional units may be the best choice.
Please do not hesitate to give FitzSimmons a call as you consider which direction to go. We will gladly review your operation and historical data to provide you with some cost/loss comparisons that will assist you in making an informed financial decision.