Take a quick glance at any recent farm news publication and it should be clear that the future of America’s agricultural landscape remains uncertain. Risk management in farming will never again be limited to concerns over weather, pests, disease, and prices. Lately, declining support for federal farm programs and the transition of farmland ownership and lease agreements have been the topic of much conversation. Farmers have also shown concern over the Environmental Protection Agency’s ever-increasing interest in stricter regulation of traditional farming practices. Developments in these areas have the potential to affect farm profitability and force change on the way that agricultural producers do business. Farmers would be wise to plan ahead and give attention to such issues now as minor mistakes and oversights have already proven costly for many. We have also learned from the Bayer Rice Litigation that farmers must be diligent and proactive in protecting their interests. The settlement of the Bayer Rice Litigation clearly demonstrated that, in today’s world, a farmer’s bottom line can be severely damaged by the actions of others before the farmer is made aware of the problem.
Shifting Farm Policy and the Move to Crop Insurance
Our federal government’s deficit reduction efforts will take a significant bite out of current farm programs. Policy changes included in the next farm bill will likely force producers to rethink their approach to managing risk. It now appears that direct payments will be completely eliminated. Congress will attempt to offset these spending cuts through the introduction of “shallow loss” crop insurance programs. In order for crop insurance to be an effective risk management tool, farmers must educate themselves as to how these crop insurance policies work and the obligations that farmers carry under each insurance agreement.
All crop insurance policies are reinsured by the federal government. The United States Department of Agriculture, through the Federal Crop Insurance Corporation (FCIC) and the Risk Management Agency (RMA), sets the basic policy terms, conditions, and rates. Producers should be aware that the federal government has the actual authority to make final determinations as to certain provisions in their crop insurance agreement. This can make for a complex arrangement where the RMA and individual insurance providers regularly disagree as to whether a farmer is owed an indemnity.
The complexity of crop insurance policies has led to significant confusion and many farmers have experienced difficulty navigating the claims process. The tips and suggestions listed below may help producers avoid some of the mistakes that can complicate the recovery of losses insured under a crop insurance policy.
- Act quickly upon the discovery of damaged crops. A farmer only has 72 hours after the discovery of losses to put the insurance provider on notice of a claim.
- Regardless of time constraints, do not destroy a damaged crop before a claims adjuster has finished the adjustment process.
- When a claim arises under prevented planting coverage, have a crop consultant or agronomic specialist visit the field and make notes as to the conditions that prevented a timely planting of the crop.
- Always keep good records relating to an insured crop and give extra care to reporting acreage planted correctly. A simple underreporting of acreage planted can result in a lower indemnity payment.
- The initial denial of an insurance claim does not necessarily mean that a farmer has done anything wrong. In many cases, farmers have taken action to appeal and contest the initial denial of an indemnity payment and later recovered the value of their disputed policy.
Remember, extra effort and attention to detail at the time of the initial claim to the insurance provider may very well prevent severe headaches further down the road. Innocent mistakes and simple oversights in the process of pursuing a crop insurance claim have all too often proven costly for farmers.
Environmental Regulation under the Clean Water Act
Producers should also take notice that the recent debates over the Environmental Protection Agency’s (EPA) proposed regulation of farm dust and routine pesticide applications give clear indication that federal environmental authorities are taking steps to become more directly involved in the regulation of routine farming practices. The Clean Water Act (CWA) continues to evolve and may be increasingly relevant to farmers in the near future. Section 404 of the Act, requires those discharging dredged or fill material into waters of the United States, including wetlands, to obtain a permit before taking such action. While many normal farming practices are exempt from this provision, problems arise with the government’s interpretation of “wetlands” and “normal farming practices.”
What farmers need to know is that the EPA and the U.S. Army Corps of Engineers will get to make the final decision as to what is a wetland and what farming practices should be called a “normal farming practice.” Before clearing or making physical changes to any land that is not currently in farm production and is seasonally saturated with water, farmers should give some thought to contacting the following regional offices.
- The U.S. Army Corps of Engineers. The Corps has the responsibility of running the Section 404 permitting process. The regional office can provide assistance in making a determination as to whether a planned alteration will require a permit.
- The National Resource Conservation Service. Contact the NRCS to make sure that the planned activity will not affect eligibility for certain farm programs.
Taking these steps before making minor changes to farm property can be an inconvenience. However, the possibility of severe fines combined with the time and cost involved in appealing a penalty assessed by the Corps of Engineers should provide a substantial incentive for caution before making any physical modification to land that is not currently in farm production and is seasonally wet.
Changes in Farmland Ownership and Lease Agreements
In recent years, many producers have had to adapt to dealing with absentee landowners who have little knowledge of day-to-day agricultural operations. All too often, misunderstandings of lease agreements between landowners and farmers have led to the breakdown of a lease agreements and litigation. A comprehensive, written farm lease agreement is an important step in eliminating these time consuming conflicts. When drafting a farm lease agreement, the devil is in the details so consider the following issues if they are applicable to the farm operation.
- Oral leases may be valid, but they are never recommended.
- Clearly outline the expectations and responsibilities of both the farmer and the landowner.
- Make clear any obligations regarding maintenance of the property, including responsibility for the cost of fertilizer.
- Address the allocation of farm program payments.
- Include provisions for the untimely death of either the landlord or the farmer. Whether the lease will continue in the hands of either successor should not be left to debate while the ownership of the property or the farm is in transition.
- Discuss a termination clause. Both parties should understand and agree to the circumstances which may end the lease.
- Vague lease terms should be avoided at all cost as they are capable of multiple interpretations. Terms and conditions cannot be too specific. Remember, what means one thing to the farmer may mean another to a landlord who has not been involved in production agriculture.
Another development arising at least in part from transitions in farm ownership is the increasing demand for cash rent by landowners. Cash rental agreements are becoming more common, but the varying nature of farm income often makes it difficult to arrive at a fair rental rate. Farmers who would like to see landowners share risk might consider a flexible rent agreement as these agreements can help a producer maintain profitability when crop prices or yields decline. Under a typical flex-rent agreement, rent is not set until after harvest and can be based on either a share of gross revenue or a base rent with an added “bonus’ percentage of farm revenue. The most obvious benefit of the flexible rent agreement is that rent is adjusted based upon the yield and price that the farmer actually receives.
This article highlights only a few issues that are of increasing importance to those involved in farming on an everyday basis. The winds of change are certainly blowing, and farmers should prepare now for the coming changes to federal farm policy and crop insurance protection. Farmers must also be proactive in taking action to avoid costly disputes with environmental regulators and landowners. Put simply, there has never been a time in which farmers have needed to be more aware of these developing issues and risks which have the potential to severely impact the profitability of individual farm operations.
* First published in the Delta Farm Press on February 15, 2012.