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Sunday, 06 January 2013 23:14

Farmers get creative with risk management

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WEST MICHIGAN — As farmers look to the 2013 growing season, none relish the thought of having a repeat of 2012.

After a year in which local farmers saw decimated tree fruit yields thanks to a spring freeze and scorched grain throughout the summer, national underwriting losses nearly topped $15 billion, according to Kansas State University. These losses were largely related to the Midwest drought in which the Great Lakes Basin received only 85 percent of its normal precipitation, according to reports.

Farming has always been an industry with a healthy element of risk baked in, but under conditions like these, farmers have to find ways to manage that risk without breaking the bank.

“Really the mindset of agriculture today is, ‘How can we manage risk?” said Ryan Findlay, national legislative counsel at the Michigan Farm Bureau. “For program growers — your corn, wheat and soybean growers — that would be through a crop insurance program.”

Crop insurance works by covering a portion of the crop lost during any given harvest year. The amount covered has yet to be determined as several pieces of legislation — known colloquially as the Farm Bill — have yet to be passed into law. The so-called “fiscal cliff” legislation merely extended current farm policy for nine months.

Crop insurance is available through the government or from a private insurance company.

One issue with standard crop insurance is that it does not cover all crops. Some Michigan fruit that was hit particularly hard in 2012 — such as tart cherries — is not covered, though the USDA’s Risk Management Agency is planning to develop a risk management product for the crop.

“Crop insurance is, primarily today, what we refer to as a program crop tool,” Michigan Farm Bureau’s Findlay said. “Where we’re lacking when it comes to crop insurance: apple growers, cherry growers, peaches. There are some products that are available, there are others that are not available. For those that are available, there are some concerns.”

While crop insurance does protect farmers against a wide range of issues, there’s more to risk management than just crop insurance, said Charlie Lerg, regional director of the food-ag-beverage practice at AON Risk Services in Grand Rapids.

“I’m seeing a lot of trends suggesting that farmers don’t know there are other vehicles out there,” Lerg said. “The trend is that the farmers are starting to look at new ways of protection.”

These new risk management products include the volumetric, or yield, hedge and a weather derivative. The volumetric hedge works by taking into account historic crop yields and compensates farmers for every unit it is below historic levels. A weather derivative compensates farmers whenever weather falls outside set parameters during the year. Weather derivatives are particularly useful when hedging against early freezes like the one that decimated tree fruit in 2012, Lerg said.

“If you couple a weather derivative with a volumetric hedge, you get a payment for the poor spring or the poor blossom, which usually corresponds with a poor harvest,” Lerg said. “That (type of product) is something that not a lot of people have seen before.”

The level of protection, while comprehensive, comes at a premium, and crop insurance of any kind is not designed to make the policyholder whole.

“Of course, that’s the most expensive,” Lerg said of the hedge and derivative products. “It usually corresponds with a lot of acreage.”

While crop insurance and risk management products are a good option for larger farms, smaller farms, like Ada’s Sietsema Orchards, find those solutions to be cost-prohibitive. Andy Sietsema, son of owner Skip Sietsema, said their orchard doesn’t carry crop insurance.

“For one, I’m not too familiar with it,” Sietsema said. “You’ve got to buy it a year in advance, and then … there’s the cost. With what we’re doing right now, it’s not worth it because we’re so small.”

Instead of buying crop insurance, Sietsema employs a variety of creative techniques to offset risk, including a technique farmers always used: diversification. Some farmers, like Sietsema, already specialize in heirloom apple varieties, so it isn’t much of a leap for them to go from planting heirloom to planting hardier, later-blooming trees.

“We’re starting to look at later-blooming varieties of trees,” Sietsema said. “A lot of those are heirloom (varieties), which plays right into our wheelhouse. Come springtime, we’ll probably be out there more, now that I know the hit that we took.”

The “hit” was the loss of revenue from “You-Pick-It” customers. While some orchards were lucky enough to make a 10 or 15 percent yield on their crops, at Sietsema Orchards, there wasn’t enough on the trees to justify harvesting. However, due to product diversification in previous years, Sietsema had higher sales numbers during the 2012 season than the 2011 season. The goal of these efforts was to sell the cider mill experience to customer, not just the cider itself.

Additionally, Sietsema said the orchard would look at other ways of preserving the crop in the event of another March thaw-freeze cycle.

“Our best bet really will ... probably be more hands-on heating techniques in the orchard,” Sietsema said. “If you do fires, a lot of your heat will go straight up. We’re just not in the position where we can spend $35,000 to $45,000 on a wind machine.”

For farmers who do rely on crop insurance, the passage of the Farm Bill is crucial to ensuring they are protected as best as possible. The amount of subsidies and what is covered will largely depend on what is passed by Congress.

“We have yet to see results from the Farm Bill,” Lerg said. “We’re going to see where that falls and how it’s going to affect ... the crop insurance and the subsidies.”

Federal farm policy has evolved over the years to meet farmers’ changing needs, Findlay said. It began with parity pricing as well as systems like wheat quota cards, then methods whereby the government would artificially inflate prices if they fell too low, and finally shifted into the direct payment system during the 1990s. However, even that system is beginning to fall by the wayside.

“Farmers have really said, ‘That’s not really a safety net that works in today’s business structure, and it doesn’t work in today’s agricultural mode, but we want to be able to manage our risk,’” Findlay said. “How do we make sure that we provide some safety mechanism, some risk-management tools that allow a farmer to protect their investment without guaranteeing a profit? That became the birth of crop insurance.”

Findlay said farm policy likely will continue to evolve to meet the needs of farmers.

While he does not plan to buy crop insurance for his orchard, at this point, Sietsema is cautiously optimistic about 2013’s crop.

“It’s supposed to be a bumper crop (this year) because the trees got a bunch of rest (in 2012),” Sietsema said. “All the forecasts right now are good, and everybody really can’t wait until next spring to see what happens. If we get through next spring, it should be a very good year for apples in general. ... It’s a waiting game to see what happens next spring. We just need January and February to be cold like they’re supposed to be.”

Read 2278 times Last modified on Sunday, 06 January 2013 00:32
Carl Dunker

Contributing reporter

cdunker@mibiz.com

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