AGRICULTURE

Crop Insurance and CAIS

It's a question being asked by many farmers: Does the CAIS program replace government and private crop insurance?

At first glance the answer may appear to be yes. Crop insurance proceeds are qualifying revenue for purposes of the CAIS program, increasing the current year's production margin. Any proceeds from crop insurance would, therefore, reduce an entitlement to a CAIS payment. Why would a farmer pay an insurance premium for coverage that would, if collected, reduce other entitlements?

This same issue is obviously of concern to the general insurance brokers who service the agriculture sector. Private crop insurance for tobacco is an important part of their business, and they want to ensure they are providing their farm clients with proper advice and coverage.

At VMSW we needed to be able to provide our clients with solid guidance on this matter. To do so we required more information. Our solution was to combine our knowledge of the CAIS program with that of an insurance broker with knowledge in the agriculture sector. Tom Leitch of McFarlan Rowlands Insurance Brokers and Greg Bruce of the VMSW Agriculture Group met to develop an answer to the question.

In general we found that private and government crop insurance still play a role in agriculture risk management.

The Crop Insurance Program and Private Insurance (tobacco) combined with CAIS will:

• Stabilize the CAIS reference margin over time

• Stabilize cash flow for specific crops

• Provide a more timely payment in the year of crop loss

• Help to ensure that financial obligations are met

• Provide collateral for other programs

• Provide more security, and higher recovery of income in the case of a loss

Government Crop Insurance Program premiums are eligible for up to a 100% rebate if Crop Insurance results in a lower CAIS payment. This rebate does not apply to private tobacco crop insurance.

While CAIS by itself provides assurance that the farm income as a whole will be supported to a certain level (depending on your selected coverage), it uses anywhere from 17% to 50% of the farmers own money to do so. Even though it does not provide complete coverage, it does ensure that a farmer's income will not go below the previous 5 year average (or 70% thereof). CAIS is effective as an enterprise wide risk management strategy.

Crop insurance, on the other hand, is a very specific risk management tool. The risk of a decision to grow a certain crop is hedged by direct insurance coverage. Regardless whether the other parts of the farm operation have a good or poor year, the specific cropping investment is guaranteed to provide a rate of return because of the crop insurance. In the event of a crop failure the proceeds from the insurance claim will be there in a timely fashion.

A knowledgeable insurance broker should be able to advise farmers of the optimal amount of insurance coverage to combine with the CAIS program to provide a solid risk management strategy.

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