Disclaimer
This is a hypothetical case study. For educational purposes. Not intended to contradict or supersede USDA information. Not formal insurance or financial planning advice.
This material is based upon work supported by USDA/NIFA under Award Number 2024-70027-42471.
Gus Smith is a 4th-generation row crop farmer and owner of G.S. 4Farms located in Central Alabama. G.S. 4Farms consists of grain crops such as corn, soybeans, and wheat, as well as a few hundred acres of cotton. Gus’s father, Newt, realized the importance of diversification after enduring the farm crisis of the 1980s and introduced timber and cattle to the operation. Gus says, “I enjoy these two commodities not only for additional revenue during certain years, but as a reminder of my father, who passed away 8 years ago. Cattle and timber are not our main source of revenue by any means, but they can help us cash flow when our row crops struggle to generate returns.”
In addition to row crop challenges, Gus has a fixed mindset that Mother Nature does not always show mercy, regardless of yield or the amount of work put into the crop. Gus said, “To say farming is risky is an understatement. I sometimes feel like I would have better luck at a blackjack table or slot machine with the spotty rainfall or tornadoes that occur during certain times of the year.”
Gus realizes the importance of diversification and the inherent risks associated with the agriculture industry. Due to these factors, G.S. 4Farms has shifted towards an increase in hay production. G.S. 4Farms consists of a total of 80 acres of Bermuda grass. The 80 acres are not all in the same location, though. 35 acres are located at G.S. 4Farms headquarters, and because of the proximity to headquarters, that is where their commercial herd of 40 cows is located. Gus said, “I like having the cows close to headquarters because if they get out of their pen or a bad calving occurs, we can be right there lickety-split with assistance.” The other 45 acres is located 3.5 miles east of headquarters, straddling Lonesome County, a neighboring county, and Grant County, Gus’s home county. This haying acreage is fully dryland due to the high cost of well-drilling in this part of the state.
During years of drought, Gus worries about his grazing and haying acreage for his cattle. He comments, “In wet years, my concern is very little because I’ve been blessed with good soil and my fertilizer formula seems to work. However, in years of drought, I become highly concerned because that is when hay prices increase due to the lack of supply, and I might get lucky with two cuttings a year, maybe, causing me and several other farmers in the area to go hay hunting for the winter.” Gus also went on to say, “The last decade has been relatively drier than normal, than when I was growing up. I always reference the drought of ’90, but recently it has come to my attention that I have said that every year,” with a chuckle.
As Gus has noticed the increase in drought, his priorities have shifted from the technology obsession to the reducing and eliminating risk obsession. Over the years, he has developed a relationship with his crop insurance agent that has increased Gus’s knowledge and has had a profound impact on his decision-making when deciding which crop insurance policies to purchase for his row crops. One afternoon, over discussion, because cows were high and hay was dry, Gus hinted at the possibility of insuring his grazing and haying production. Even though grazing or haying is not a main source of revenue for his operation, he could not help but think of the loss incurred from another year of drought through the emergency purchase of hay. At this point, on top of his row crops suffering from the lack of moisture, Gus’s drought tolerance had reached its ceiling. His crop insurance agent responded with a crisp answer of, “Well, have you heard of Pasture, Rangeland, and Forage (PRF) insurance to help manage costs during a year with a lack of rainfall?”
From that point forward, Gus decided to enroll in the PRF insurance policy for two reasons: to reduce risk and cover his costs. After consulting with his crop insurance agent and using the USDA’s PRF decision support tool, Gus settled on a coverage level of 80% and a productivity level of 115%. The percentage of value and index intervals Gus typically decides on for his total grazing and haying acreage is 20% from April-May, 35% from June-July, 35% from August-September, and 10% from October-November.
Gus is cognizant that the portion of hay production he has straddles the county lines of Lonesome and Grant counties. This is important to note; PRF operates on a county and grid basis. County outlines set the base value, while grids set the rainfall parameters. Each grid covers an area equal to 0.25 degrees in latitude by 0.25 degrees in longitude, identified by a specific number code (grid ID). These grids do not follow state, county, or any other geopolitical boundaries.
As for yield, an on-the-ground inspection is not required, and production amount is not considered when determining eligibility for an indemnity payment since it is an area-based insurance plan. So, yes, Gus can receive an indemnity even if he achieves an optimal hay cutting year, but it is also possible for Gus not to receive an indemnity, even if he doesn’t have a chance to cut hay due to drought. That is the risk associated with PRF, but as for Gus, the risk is worth it compared to the alternative, a reality where out-of-pocket costs occur to purchase hay or other means of feed without an indemnity payment.
Beyond financial implications, there is another benefit to participating in PRF. Throughout the years, Gus has become risk-averse. Gus said, “I now have the security not only over my cattle, but over the production side as well. Ya know, if I don’t receive the payment, it’s not a big deal because that means (more than likely), I will have the hay to cut and store.” Now and then, a banner year occurs and Gus will sell a considerable amount of excess hay. When this happens, a “margin cushion” is granted from selling hay and paying the PRF premium costs. Gus’s closing comment was, “In this day and age, with technology available at our fingertips, we need to be smart and take advantage of every opportunity we can. Even if we lose out and do not receive an indemnity payment, I am satisfied because I have done all I can do to minimize my risk for G.S. 4Farms, and that is what my father would have wanted.”
Form Quick Links
- PRF Quick Fact Sheet (PDF)
- Form-578
- EIN Form (PDF)
- CCC-901 Form (PDF)
- CCC-9021 (PDF)
- AD-1026 (PDF)
- USDA AIP Locator