Building a Risk Management Toolkit for New and Beginning Farmers

Everyone has heard of risk management. In fact, there are so many insurance commercials on television that you have a difficult time ignoring risk management. Risk management takes on many forms. Most new farms rarely produce only one crop. Producing a variety of crops, commonly called diversification, is just one of many risk management strategies you can employ. Other risk management strategies include crop rotation and the use of a variety of insurance products.

Diversification

Diversification is one of the most commonly used risk management tools. Many farms may say, "I grow vegetables, so I am not really diversified." Almost no one grows only one vegetable, so if you grow asparagus, onions, tomatoes, peppers, and potatoes, you are diversified. If you are direct marketing your crops, having a progression of crops throughout the year keeps your marketing stream active. These previously mentioned crops may have some similar production methods and harvest dates, but you will need to learn when these crops usually mature and what production method works best. The one farming business that I can think of that may not be an example of diversification is wine or juice grapes production. However, grape producers tend to grow more than one cultivar, so they are still somewhat diversified.

Crop Rotation

Crop rotation is critical for most operations, especially vegetables. Early blight is a common disease and may remain in the soil for several years. For this reason, susceptible crops like tomatoes should not be planted in the same space every year or the crop will fail during the season. Urban farmers have made crop rotation an exact science. When you are trying to maximize production on one-fourth acre or less, harvesting and replanting happen several times on the same land each growing season. The use of cover crops in the off-season helps break disease cycles and increase organic matter in soils.

Insurance

Using insurance products is a must in agriculture. Agriculture is inherently a risky business. There are so many things that increase your risk potential that you cannot control or are controlled by others. If you are risk-averse, agriculture may not be for you. However, you can mitigate risk by using the strategies mentioned above combined with insurance. When using insurance, you are paying someone else to assume some of your risk. The cost of your insurance depends on the amount of risk you are willing to accept. Think about your auto insurance deductible. A $1,000 deductible costs less than a $250 deductible on your policy because you are assuming more of the risk. When you assume the risk, you pay lower premiums.

Many crops, livestock production, and income can be insured using crop insurance products. Crop insurance covers all "program crops" (corn, wheat, soybeans, etc.) and several vegetable crops in Pennsylvania (PA). To see which crops are covered and the programs available in PA, please see this webpage. The site also contains a link to more information specifically for beginning farmers and can be found on the USDA Risk Management Agency (RMA) website.

The Whole Farm Revenue Protection (WFRP) product will ensure the income of your operation. The policy does not cover specific crops but insures a percentage of your average income. As with all crop insurance policies, the premiums are subsidized by the Federal Government. If you are a beginning farmer, you will need to have 3 consecutive years of a Schedule F or other acceptable farm tax forms. If you do not qualify as a new and beginning farmer, you will need 5 years of Schedule F forms or other acceptable tax forms. I encourage all beginning farmers to begin filing a Schedule F as soon as you begin farming for this reason. Please contact a crop insurance salesperson to assist with your decisions.

For crops you produce that are not covered under a program, you can use the Noninsured Crop Disaster Assistance Program (NAP). NAP is sold through your local Farm Service Agency (FSA) office and covers crops that do not have a crop insurance product. For example, in PA, strawberries are not covered under crop insurance but can be covered by NAP. Contact your local FSA office for more information.

Always carry farm liability coverage for anyone who may be injured when entering your property. There are many coverage levels and you can add a blanket policy for additional coverage. Keep in mind that if someone is injured on your property, their insurance company will try to minimize their payout by having your company pay the claim. If you are found at fault for an accident, your company will cover you to the limit of your policy.

Many farm liability policies carry a small amount of product liability insurance, but you should carry a minimum of $1 M if you are selling directly to the public or adding value to any production. Do not rely on goodwill or food safety regulations as your only risk management strategy when direct marketing or adding value.

These are just a few of the insurance products you should consider. You will need coverage for automobiles, employees, and yourself. For much more information covering insurance products, please see the Penn State Extension Insurance website.

Risk Management Checklist and User's Guide

Within the Insurance website is the English version of the USDA Risk Management Checklist and the Spanish version of the checklist.  These documents were developed with funding from a Risk Management Agency grant under award number RM18RMEPP522C032/4500081810 with information derived from focus groups. The Checklist covers the traditional areas of risk; production, marketing, financial, legal, human, and general, and was expanded to include food safety and electronic risks that agriculture now faces.

Used alone or together, these tools help new and experienced farmers identify and learn about the risk management planning process. Although the checklist does not cover every source of potential risk, it will help to generate discussion with your legal, insurance, agricultural, or financial advisor.

You should use the checklist as a guide to determine where you may need more assistance with your risk management plan. Answer all questions honestly and determine your level of comfort with your answers. For those questions that you could not answer "YES," the User's Guide will assist with finding more information on each question.

There are many tools in your risk management toolbox, and I have provided an overview of a few. If you ask the question "what if" for opportunities or situations that come up, you will have the basis for your risk management plan. By asking "what if," you will begin to consider all aspects of opportunities presented and will take more time to consider options for negative situations that arise.  Above all else, practice and promote safety throughout your operation.