By Ariel Singerman
Federal crop insurance is a key component of the farm safety net because it allows growers to obtain coverage against losses and, therefore, manage risk at a subsidized premium rate. In 2022, the U.S. Department of Agriculture Risk Management Agency (RMA) started offering Florida citrus growers the option to insure their crop under a policy called Actual Production History (APH). The basis for establishing the guarantee and premium under such a policy is called the APH approved yield, which consists of averaging the grower’s yield records for the last 10 seasons. Thus, the policy provides coverage for yield losses based on a farm’s historical records. This is in contrast to the Dollar Amount policy that offers coverage based on a reference maximum dollar amount per acre established by RMA.
HOW APH WORKS
At the time of APH policy enrollment, the grower chooses a certain coverage level, which determines the guarantee (or liability) and the deductible (the amount of loss for which the grower will not receive an indemnity). In the event of a loss, any level of yield below the guarantee will trigger an indemnity. Because the policy offers coverage based on the yields of past seasons — despite the downward trend affecting Florida citrus due to HLB — the guarantees under the APH policy are higher than what they would be if the downward trend was considered. Thus, obtaining coverage under APH is likely going to be beneficial for most growers if such conditions continue.
POLICY PAYOFF COMPARISONS
This article estimates how much (on average) the APH policy has paid to growers compared to the Dollar Amount policy using RMA data for the 2022 and 2023 seasons.
Table 1 summarizes the performance of APH and Dollar Amount by coverage level (from 50% to 85%) for Florida orange growers in 2022. Columns 1 and 2 show the number of policies sold by policy and coverage level, as well as the percent they represent out of the total. Thus, for example, there were 81 policies sold under APH with 75% coverage, representing 39% (the largest percentage) of the total 209 policies sold for APH that year.
In contrast, the total number of policies sold under Dollar Amount were 1,198. The vast majority of those (60%) were for 60% coverage. Columns 3 and 4 in Table 1 show the number of acres insured under each policy and the percentage they represent out of the total, respectively. Therefore, there were 38,344 acres enrolled in APH and 18,863 of those acres — representing 49% of the total, the largest percentage — were enrolled for 60% coverage. In contrast, there were 220,398 acres enrolled under Dollar Amount, and 157,810 acres were enrolled for 60% coverage.
Columns 5 and 6 of Table 1 show the number of policies that received indemnities in 2022 and the percent those represent out of the total, respectively. On average, APH paid indemnities to 77% of the policies. It is interesting to note the differences in the percentage of policies that received indemnities among different coverage levels. The lowest coverage levels, namely 60%, 65% and 70%, received an indemnity in 67%, 75% and 67% of the cases, on average. The highest coverage levels, namely 75%, 80% and 85%, received an indemnity in 90%, 100% and 75% of the cases, on average. Contrastingly, the Dollar Amount coverage paid indemnities to 30% of the policies in 2022, on average. The coverage level that had the largest percentage of policies that received an indemnity (56%) under such a policy was 75% coverage.
Columns 7, 8 and 9 of Table 1 show the average indemnity per acre, the average grower premium and the average payoff (which is the difference between the former two columns), respectively. Thus, in 2022, the average APH indemnity was $726 per acre while the average grower premium was $22.59 per acre, resulting in an average policy payoff of $703 per acre. But it was the 80% coverage level that yielded the highest APH average payoff. On average, a grower that obtained such coverage obtained a payoff of $1,791 per acre.
For Dollar Amount, the average indemnity in 2022 was $153 per acre while the average grower premium was $18.75 per acre, making the average policy payoff $134 per acre. The coverage level that yielded the highest Dollar Amount average payoff was 75%. A grower that obtained such coverage, on average, obtained a payoff of $434 per acre. Therefore, orange growers in Florida that insured their crop under the APH policy in 2022 were, on average, not only more than twice as likely to obtain an indemnity relative to those that obtained Dollar Amount coverage, but also better off by an average of $569 per acre ($703 per acre – $134 per acre) relative to those that obtained coverage under the Dollar Amount policy.
THE IAN IMPACT
During insurance year 2023 (crop year 2022–23), Hurricane Ian hit Florida in September 2022, causing significant yield losses in groves near the hurricane path. Columns 1 and 2 of Table 2 show that in that crop year orange growers purchased 227 APH policies that insured 54,934 acres. Most of the policies, 89 (which represented 39% of the total), and most of the insured acres, 33,550 (which represented 61% of the total), were enrolled in 60% coverage.
On average, 90% of the APH policies received an indemnity. For the most part, the percent of policies that received indemnities increased with the coverage level (with the exception of those that enrolled in 80% coverage, for which 83% received an indemnity). The average APH indemnity in 2023 was $958 per acre while the average grower premium was $17.44 per acre, making the average policy payoff for such a policy $941 per acre. That year, the 75% coverage level yielded the highest APH average payoff because, on average, a grower that obtained such coverage obtained a payoff of $1,274 per acre.
As shown in Table 2, in 2023, orange growers purchased 1,012 policies under the Dollar Amount policy, which insured 147,875 acres. Most of the policies (59%) were underwritten for 60% coverage and insured 98,098 acres (66% of the total). The average indemnity under Dollar Amount that year was $892 per acre while the average grower premium was $19.54 per acre, making the average policy payoff for such a policy $872 per acre. The coverage level that yielded the highest average payoff was 75%. On average, a grower that obtained such coverage obtained a payoff of $1,105 per acre.
In 2023, growers that insured their crop under the APH policy were not only more likely to obtain an indemnity relative to those that obtained Dollar Amount coverage, but also better off by an average of $69 per acre ($941 per acre – $872 per acre) relative to those that purchased the Dollar Amount policy. It is worth noting, however, that in 2023 the Dollar Amount policy provided higher average payoffs relative to APH for the 60% and 80% coverage levels.
PICKING A POLICY
There are two important considerations for growers when deciding what crop insurance policy to purchase in future years.
First, RMA’s standards for APH include a procedure for testing high variability in yields to determine whether any adjustments to the APH database are warranted, either due to alternate bearing or downward trend patterns. The test for a downward trend establishes that the adjustment is only implemented if the average actual yields of the last three seasons decreases by more than 25% relative to the average actual yields of the last 10 seasons. If that is the case, the APH yield is reduced by 20%.
The second consideration is that given the catastrophic weather events affecting citrus production in Florida during the insurance crop year 2023, the RMA instructed insurance companies to exclude that crop year from high variability tests calculations. This means that if the downward trend continues in 2025 (or if the yield in 2025 will be lower than the APH average yield for 2013–2022), growers will likely benefit from insuring their crop under APH.
SUMMARY AND CONCLUSIONS
The APH policy offers coverage against yield losses based on farm yield records for the previous 10 seasons. But given the negative impact of HLB on Florida citrus yield and the reliance of APH on the average yield for previous seasons, the APH guarantees are higher than what they should be if the downward trend is considered.
Data was used for crop years 2022 and 2023 to show that, on average, orange growers in Florida were not only more likely to receive an indemnity when obtaining coverage under the APH policy relative to the Dollar Amount policy but also, on average, received a higher dollar amount when doing so. Growers that obtained APH indemnities have been able to use those payments to maintain their level of caretaking costs.
Even though RMA standards for APH contemplate reducing yields by 20% due to a downward trend, the adjustment is only implemented when the average actual yields of the last three seasons decreases by more than 25% relative to the average actual yields of the last 10 seasons. For growers, this means that as long as the downward trend continues and RMA’s test for it does not trigger the adjustment, obtaining coverage under APH will likely continue to be beneficial.
Ariel Singerman is an associate professor and Extension economist at the University of Florida Institute of Food and Agricultural Sciences Citrus Research and Education Center in Lake Alfred.
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