Can You Make It Rain?
What if someone said to you, “For $40,000, I could ensure that you have a guaranteed income this year.” Would you take that deal?
What if someone said to you, “For $40,000, I could ensure that it rains this year.” Would you take that offer?
A co-worker of mine recently had this very conversation at the kitchen table with potential clients. I’m paraphrasing a little, but the husband asked his wife if she would pay for someone to make it rain. Her response was along the lines of, “Darn straight!”
Putting in a crop is an expensive undertaking, no matter how affordably you’re able to source your inputs. Given the price of those inputs this year, it’s a daunting task, without even thinking about the lack of moisture across much of the Canadian Prairies. Add the stress caused by low rainfall in 2021 and no better than average snowfall this winter, grain farmers and cattle farmers alike are scratching their heads, just trying to find a way to make sure they’re still around this fall and ready to try again in 2023.
Agriculture Financial Services Corporation, the traditional crop insurance model has been around for over 80 years in Alberta, supporting farmers the way they know how. They provide yield-based support programs that will shore up farm receipts to about 80% of their average yield. If you produce 1% over that 80% threshold, AFSC doesn’t owe you a dime. If you produce a good crop, but the bottom falls out of the market, AFSC still doesn’t have to pay you.
Don’t get me wrong, in 2021 AFSC was the hottest ticket in town with a very splashy campaign in the spring when they announced a 20% premium discount due to the large reserves accumulated from farmer’s premiums and government subsidization over the years. They are expected to process over $3 billion in payouts this winter between the crop and livestock support programs. This is badly needed support funding for Alberta farmers. While I don’t know the stats for Saskatchewan and Manitoba, I’m sure it’s a similar story across the prairies.
Saskatchewan Crop Insurance Corporation SCIC and Manitoba Agricultural Services Corporation (MASC) offer similar programs to AFSC and are arms of their respective provincial government in all cases.
Did you know there are other options, though??
Founded in 2011, Global Ag Risk Solutions (GARS) was an idea developed by accountants who also happened to be farmers or worked with farm operations extensively. They’ve seen firsthand how tough it is managing financial risk in these economic conditions. So, they developed a solution. It is a private, revenue-based, risk management insurance solution that does what no other insurance can do.
Production Cost Insurance is a very different way to insure your business. Your three major inputs; fertilizer, seed and chemicals are covered, PLUS an additional gross margin amount per acre. As your input costs increase over the year, so does your coverage. There’s no ceiling, and no effect on your premium. You can insure your bottom line and farm the way you’ve always wanted to, sleeping better at night, knowing that your business is protected. Imagine you’ve produced an average to poor crop, just barely sneaking over the 80% coverage level of your government crop insurance and the markets have taken a plunge. They’re not obligated to assist, but this is just what GARS was made for.
Just Solutions Agriculture is a slightly newer company than GARS. Their insurance works similarly but the way they calculate revenue and payouts is different. They use an index price in January X (times) your expected yield to calculate your estimated crop revenue for the year.
They take your actual yield X (times) November price index to calculate your claim revenue. This approach can have some pros and cons.
Here’s the deal, there’s no silver bullet when it comes to insurance, but it’s become a necessary risk management tool. The ability to transfer the significant financial risks that farmers incur every year is critical to make sure you’re not drawing down your hard-earned equity. That can lead to an early demise of your goals and dreams or, even worse, selling the family farm. Find a licensed insurance advisor in your area who provides these products and ask some questions. A good advisor will always do what’s best for you and your operation and they’re trained to help you navigate the roadmap to success.
While there is no insurance policy that can actually make it rain, what if your bank account never knew the difference?