What is the real value of crop insurance and how can a farmer bridge any gaps in his coverage?

Consider this: a corn farmer’s Actual Production History (APH), which the federal crop insurance program will use as a basis for payouts, may be 130 bushels per acre. However, his expectation and true target yield – especially after an often staggering, vast array of input expenses – is 180 bushels.

An insurance company says its product will protect those 50 uncovered bushels in a novel manner, using real-time weather information. And farmer clients can track the same data and know when checks are headed to their mailbox.

The company

Despite its name, Climate Corporation (formerly WeatherBill), is keen to distance itself from the tar-baby of global warming. But Jeff Hamlin, director of agronomic research, does say that “weather seems to getting more extreme on all sides these days. The wet years seem to be wetter and the dry years seem to be drier. The possibility of excessive or cold seems to (lead) to more volatile (situations) than in the past.

“That’s impacting agriculture and we’re trying to help agricultural entities navigate this new climate we seem to be in.”

The company has been around since it was founded by several former Google executives in 2006. The pair “saw an opportunity to apply technology to help offer insurance products to a lot of weather-sensitive businesses” says Hamlin. “I was the second employee of the company (hired), so I’ve been here quite a while.”

At the time, “we saw there were a lot of weather-sensitive businesses out there; agriculture, of course, through construction companies unable to work when it rains to county fairs that (suffer attendance losses) when it rains to golf courses and sporting events to travel and leisure. A lot of things are impacted by the weather.

“We’d ask businesses ‘what is bad weather to you? If you can tell us what it is, we’ll build a customized insurance product to cover it.’”

Eventually, Climate Corp’s predecessor began to hone in on agriculture. “It’s the one thing that drives yields and really trumps all other management decisions a grower can make.  A grower can buy the right seed, have the right fertilizer program, the right chemical program – do everything right – and if it doesn’t rain in July and August, it doesn’t matter what inputs he chose, it still won’t be a good year.

Initially, the company built on-demand products where growers “would say ‘I need rain in August’ or they’d tell us the time period they needed certain weather and what kind they needed. But it got to a point where growers were requesting a full-season product for several reasons. First, there are a number of weather events that can impact them through the year. It was proving difficult for them to decide what events to protect, or not to protect, against. They just never knew what was coming in a given year.

“Second, they wanted to get their insurance done at the start of the year, in March when they were doing federal crop insurance.” That was preferable “to interrupting the growing season and, suddenly in July, coming up with an insurance policy that made sense.”    

In turn, that led, to “Total Weather Insurance” -- a full-season program for corn, soybeans and wheat -- that basically takes an operation from seed to harvest. 2012 will be the second year the full-season weather program has been available.

“It has undergone quite a bit of growth,” says Hamlin. “2011 was the first year we offered it and it did extremely well. We sold a lot more than expected.”

As a result, the company grew from about 30 employees to 100-plus.

Is there a region that’s signing up quicker?

In 2011, sign-ups were limited by company resources. “We had three people – myself included – able to go out and train crop insurance agents on how the product works. … We focused on the corn and soybean belts … but, really, anywhere we presented it there was about a 75 percent close rate. The grower would see (the product) and about three-quarters of them ended up buying it.”

But because of too few employees, says Hamlin, “there was an inability to get into Alabama, Mississippi, Arkansas and other states where corn and soybeans are grown.”

For 2012, instead of three people in the field “we’ll have 33. Hopefully, we’ll cover a lot more of the country and let growers know this exists and is an option.”

Total Weather Insurance

With Total Weather Insurance “we’re taking a crop, say corn, and from seed to harvest asking ‘what are the weather events that, if they happen at a particular point in the growth cycle, will limit yield?’”

Among them:

  • Too much rain in the spring that keeps a crop from being planted in a timely manner.
  • Is there ever standing water in the field?
  • Is it too dry and hot – especially during pollination and grain-fill?
  • In the Dakotas and Minnesota “they worry about getting proper heat units during July and August to maximize yield.”

So, start to finish, “the coverage makes sure none” of the things above happen without recompense.

“TWI is not, in any way, meant to replace the federal crop insurance programs. It’s meant to complement it, to cover the parts of a grower’s yield he can’t insure through the federal program. TWI covers the ‘top end’ bushels that growers can lose without being paid by the federal program.”

Unlike federal crop insurance, TWI isn’t one-size-fits-all. Each policy is customized to individuals based on soil type, crops planted, weather in the area, and yield a farmer is targeting versus APH.

“Everyone will have a very different coverage even if they’re on opposite sides of the street if soil types are different.”

What are growers asked about when considering TWI coverage? Hamlin provides six questions:

  • What federal crop insurance level are you using this year?
  • What’s your APH?
  • What’s your expected average sell price for the commodity being grown?
  • What’s your target yield given the inputs you’ve bought?
  • What are your input costs?
  • What is your crop insurance premium?

After answering those questions, the company’s software will generate a customized program for the operation.

Quick checks

Hamlin says one of the things growers find most interesting about TWI, is because it isn’t a government program, “we’re able to make it a bit more hassle-free. If bad weather occurs, growers will get checks that show up in their mailbox automatically. They don’t have to document yields or APH’s. No documentation is required.

“Basically, the policy says ‘if it’s hot in July, the producer gets paid because they’ll probably have a yield (loss) at the end of the year.’ We pay based on the presumption of yield (loss) without documenting it actually happened. That’s quite different than having a crop adjuster coming out, filing claims or anything like that.”

What happens if, at the end of the season, their yields are better than expected? Is the amount already paid to the producer refundable?

“We’ve certainly had those situations. … (A producer) has a great year but the weather indicated he shouldn’t have had such a great year. We’d sent him checks anyway and he ended up with a good crop and crop insurance payments.”

Unfortunately, it can also work the other way.

“Maybe the weather was fine but, for some reason, a producer’s crop doesn’t perform well and yields are low. He can’t come to us and say ‘hey, I only made 105 bushels and was targeting 130.’ It’s all about the weather – it’s the only thing that determines claims.”

Weather tracking

Using National Weather Service rain and temperature reports, Climate Corp tracks weatherautomatically. A grower can also log in and see the data immediately.

“They know exactly what the policy says. Maybe it says ‘if there are more than three 92-degree days in July, that’s a trigger for payment.’

“It’s all based on the idea that there’s a strong correlation between weather and yield. We’ve done studies on this in different parts of the country and can say, with 90 to 95 percent certainty, that when a certain weather events happen you’ll lose 15 bushels or 25 bushels. And we’ll pay you accordingly.”

Is it also correlated with pests and disease that tend to show up in, or after, certain weather?

That’s factored in, says Hamlin, “because we’re taking account the historic yields a (certain) area has seen under certain weather. When it’s wet and there’s standing water in a field, the yield loss is partly from the crop being starved of oxygen, partially from nutrients leached from the soil and partially from disease pressures.”

Company set-up

At heart, Climate Corp is a technology company, says Hamlin. “We have a lot of computer scientists, mathematicians and statisticians running all kinds of information and correlations through our system. Daily, we run 2.5 million locations of weather data, 150 billion soil observations and 10 trillion weather date simulation points. Lots and lots of data come through.

“It’s been interesting to take all that complicated data and present it in a format where a grower can come into his crop insurance agent’s office, never having heard of weather insurance before, and within 45 minutes to an hour the grower is able to see a product that makes sense; enough sense that 75 percent of the people we showed it to in 2011, bought it. Really that’s where we’re adding value to the market: taking complex problems and … getting it to a place where a grower is able to say ‘based on my experience, what you’ve shown me makes sense and it’s something I need.’”

2011, he says, was both good and bad.

“It was good in that growers got to see how the product worked because there was some extreme weather and they received checks from us. It was bad, obviously, because (the company) had to send out a lot of payments. But that’s what insurance companies do – we pay when things go badly.

“Many growers, when first presented with this (product), say ‘this sounds too good to be true. I don’t have to deal with a crop adjuster? I don’t have to document yields? You might pay me even if I have a good year?’ It’s totally different than what they’re used to with the federal crop insurance program.

“So, we had a lot of growers this year who looked at the coverage, bought it – some for all their acres and others who dipped their toe in the water – and then were hit was an extremely wet spring.”

That was especially true in Indiana, Ohio and parts of Illinois “where they had the rainiest spring in the last 100 years. At the end of May, after so much moisture, a check arrived in their mailbox. We paid them for a presumed yield loss at the end of the season. Then, it was hot in July and dry in August. So, they got checks in July and August. By the time it was September – the crop still in the field finishing – they’d already received two or three checks from our company.”

Crop agnostic

Once producers understand what Climate Corp offers “is truly just weather insurance – it’s essentially crop agnostic – they say ‘you know what, I have 100 acres of cantaloupes that I’ve never been able to get insurance for. But I’ve been growing them for 15 years and I know what’s important.’ That might be rain in September, or heat in July -- some weather event that makes or breaks the crop.”

In such cases, Climate Corp simply adjusted a TWI corn or soybean policy and adapted it for whatever specialty crop the producer grows.

What about cotton and rice? Sugarcane in Louisiana?

“Rice and cotton are our next two target crops. We’ve covered rice growers before – rain in September and worries about hurricanes knocking the crop down and becoming lodged. We built a policy that said ‘if there’s ever a day or two with more than 3 or 4 inches of rain, it probably means you had a tropical storm or hurricane come through. We’ll pay you based on that.’

“But we’re working on developing (specific) programs for rice and cotton next.”

Refining rainfall/soil data

Every day, the National Weather Service reports a rainfall value for each square in a grid covering the United States. The squares are each 12-miles-by-14-miles square – about 164 square miles.

“That’s how we determine drought and moisture stress on crops,” in 2011. “The problem is it wasn’t as (specific) as we’d like. In a 164-square-mile area rainfall can vary quite a bit.”

For 2012, “we’ll move to a better, more high-resolution dataset that reports rainfall for squares of 2.5-miles-by-2.5-miles. While still not at the individual farm level, it’s 25 times greater in resolution.”

And Climate Corp wants to refine the resolution even more. “Hopefully, eventually there will be the ability to outline farms and get a rainfall report” for each farm.

Another change for 2012 will be accounting for soil types. In 2011, “we just looked at rainfall in each area and didn’t account … for lighter and heavier soils. 

“Now, we have access to a database of every 30-foot-by-30-foot square of land in the country: the soil depth, the moisture-holding capacity, the soil type. This (consists) of 150 billion data points around the United States.”

The company can now precisely identify differences from farm to farm. Therefore, “we can appropriately pay for drought risks. If an area has a week with no rain, we’re able to recognize that crops on lighter soil may be drought-stressed because it can’t hold water as well. (Meanwhile), the farm across the street has heavier soils and isn’t drought-stressed because it’s still holding rain from a week ago.”