Crop Insurance and Vomitoxin In Wheat: What are Farmers Options?

June 25, 2010 at 6:05 pm

The following was written by Chris Bruynis, Assistant Professor/Extension Educator, OSU Extension:

Producers that carry multi-peril crop insurance policies subsidized and reinsured by the Federal Crop Insurance Corporation (as overseen by the Risk Management Agency (RMA)) may be eligible for quality loss adjustments if the reason for the loss in value is due to a covered event such as the excessive precipitation received this spring. Reports coming from the elevators on harvested wheat indicate that not only are wheat yields lower than expected but vomitoxin levels are high, ranging from 5 – 10 ppm in Northwest Ohio.

In order for producer’s to protect their rights, it is imperative to report any damage in the required time frame and seek advice from the insurance company before proceeding with harvest or destruction of the damaged crop. Failure to do so may jeopardize the claim. Crop insurance policies require that farmers notify their company within 72 hours of noticing a loss. It is important that farmers be proactive in checking their fields to determine if there is any damage to the crop before harvest. Quality adjustments are available for loss in value for conditions such as low test weight, damaged kernels, and shrunken or broken kernels. Discounts made for crop loss purposes may not be the same as those seen at the elevator. For example, quality discounts begin when the test weight is less than 50 pounds, defects are above 15% or grade is U.S. No. 5 or worse.

Any production of extremely poor quality wheat that has a value not located on the discount factor charts in the Special Provisions of Insurance (“off the discount tables”) is adjusted by taking the actual sale price based upon the Reduction In Value divided by the local market price to equal the discount factor for the production. In the event that the production has a Zero-Market Value Production, RMA loss procedures require insurance providers to make every effort to find a market for the production before declaring a zero value. Therefore, insurance providers will not be making declarations of zero market value until they can firmly establish that there is no market for poor quality grain.

Quality adjustments are based on samples obtained by the adjuster or other disinterested parties authorized by the insurance provider, such as an elevator employee. Harvested and delivered production samples taken from each conveyance and then blended may be accepted under certain conditions. If vomitoxin is suspected, the sample must be collected before the grain is placed in storage to be eligible for quality adjustment. The samples should be placed in a heavy paper bag for delivery to an approved laboratory for a determination of whether vomitoxin is present.  There is a minimum number of samples required based on acreage.  For a field of 10 acres or less 3 samples are required: 40 acres or less 4 samples and the one additional sample for every additional 40 acres or fraction thereof.  Examples: 9 acres = 3 samples; 13 acres = 4 samples; 63 acres = 5 samples; 110 acres = 6 samples.

There are special problems that arise when examining quality adjustments such as vomitoxin in wheat.  The first problem is the elevator’s discounts that are applied to the wheat.  They may not align with the calculations determined by RMA, resulting in a discrepancy between the discounts taken by the elevator and the coverage provided from the indemnity payment.  The second problem is the adjustment that occurs to the proven yield for this year’s crop that becomes part of the farm’s 10 year actual production history (APH).  Since price is fixed at the planting or the harvest price, the quality loss adjustment is attributed to the yield.  In the example below, a producer has purchased 4,500 bushels of coverage (45 bu/a) on his 100 acres of wheat. At harvest 40 bu/a were harvested with an average vomitoxin level of 10 ppm. If no quality adjustment is made, the APH for 2010 is 40 bu/a and the indemnity payment is for 500 bushel.  If quality adjustments are made, the APH becomes 20 bu/a in this example and the payment would be for 2,500 bushels.  This difference in yield might lower the farms APH enough to make the increased indemnity payment less attractive, especially if the discount taken at the elevator was significantly less than the calculated loss.

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Example of coverage calculation:

Producer has actual production history (APH) of 60 bu/acre

Producer plants 100 acres; elects 75% coverage level

60 bu/acre X 100 acre X 75% = 4,500 bu coverage

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Example with no quality adjustment:

Producer harvested 4,000 bu Production to Count (PTC)

4,500 bu coverage – 4,000 bu PTC = 500 bu shortfall

Indemnity based upon 500 bu X price election

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Example with quality adjustment:

Producer harvested 4,000 bu Production to Count (PTC)

Production is quality adjusted to 2,000 bu PTC

4,500 bu coverage – 2,000 bu PTC = 2,500 bu shortfall

Indemnity based upon 2,500 bu X price election

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Farmers also need to think about the implication on ACRE and SURE in claiming the quality adjustment for crop insurance purposes.  SURE payments are 60% of the difference between the SURE guarantee and all crop revenue.  All crop revenue includes insurance indemnities, prevented planting payments, other federal aid for same loss, 15% of direct payments, all ACRE, counter cyclical, and market loan program payments, and the estimated actual crop revenue from farm.  Taking the quality adjustments would increase the insurance indemnities while lowering the estimated actual crop revenue for a net sum of zero (or close to zero).  In the event there is a 2010 SURE payment, taking the quality adjustment should have minimal impact on the SURE payment.

If the producer has enrolled in ACRE, the farm’s five year Olympic average is used to set the farm trigger.  There is nothing in the literature that would indicate that the quality adjustment would affect the 2010 crop yield used in this calculation. Producers can still use elevator receipts to verify yield so the actual yield before quality adjustments would be used.  Even if the 20 bushel yield in this example was used in calculating the Olympic average, it would be the low year and excluded from the average. This only becomes problematic if there is another very low year in the past five years or in the future.

As a final comment, producers should contact their crop insurance provider as soon as possible to discuss potential losses and receive the correct procedures to follow. This will help insure that the producer can collect an indemnity payment if the conditions warrant.  Just because a producer contacts their crop insurance provider, does not require them to file a claim, if they choose not to following harvest.

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