Insurance for Hemp Crops: An Evolving Landscape of Government-Backed and Private Options to Manage Risk

Insurance for Hemp Crops: An Evolving Landscape of Government-Backed and Private Options to Manage Risk
December 09, 2020

America’s hemp growers face high levels of uncertainty; greater than those found with traditional row crops. As we covered in our November Spot Price Index Report, a recent Hemp Benchmarks survey of producers found that hemp cultivators faced challenges common to all agricultural operations, namely pests, disease, and, of course, inclement weather. Additionally, hemp farmers must deal with variables specific to the newly-legal plant, such as ensuring that THC levels are below the legal threshold and inconsistent genetics. 

For those growing traditional crops, insurance coverage is a matter of course to help manage the risks that come with farming. However, risk management options for hemp are still developing. The federal government has stepped in to an extent by enacting hemp crop insurance policies. There are also private options being offered that can reportedly fill some of the gaps in federally-backed coverage. This article provides updates on some risk management options for hemp growers that we have highlighted previously. 

Federal Hemp Insurance Program Expands in 2021

In February 2020, the U.S. Department of Agriculture (USDA) announced the availability of two programs that would protect hemp crops from natural disasters. The pilot Multi-Peril Crop Insurance (MPCI) program covers farmers against losses for hemp grown for fiber, grain, or CBD. At the same time, the Noninsured Crop Disaster Assistance Program (NAP) protects against losses associated with lower yields, destroyed crops, or prevented planting when no permanent, federal crop insurance programs are available.

The MPCI program was originally available to hemp producers in select counties of 21 states during the 2020 season. At the end of November, USDA announced it was expanding and improving the MPCI plan for hemp for the 2021 growing season. According to a press release from the USDA’s Risk Management Agency (RMA), the program will next year include select counties in Arizona, Arkansas, Nevada, and Texas. It will also expand to 13 new counties in states with existing coverage and will allow broker contracts for hemp grain, while adjusting program, reporting, and billing dates. 

Very Specific Requirements for Federal Coverage

As Garret Graff, managing attorney for the Hoban Law Group, noted on the firm’s website in March, MPCI is meant to provide coverage for hemp farmers whose losses are due to insurable causes. To be eligible, Graff wrote, a hemp farming operation needs to “possess at least one year of hemp-growing experience, have a contract to sell the insured hemp, and meet minimum acreage requirements.” These requirements present challenges to those new to farming hemp, who might want to experiment with only a small amount of acreage, as many did this past year. A survey of growers conducted by Hemp Benchmarks earlier this year also found that only about a third of growers reported having contracts to offload their crops, raising another hurdle to obtaining coverage under the USDA programs. 

Whether one’s hemp crop is eligible for federal insurance coverage also depends on other requirements. For example, the hemp must be grown in compliance with USDA or state regulations during the planting season. “Hot” hemp – that is, hemp that tests over the 0.3% THC limit for the plant – is not considered insurable. 

In sum, not all hemp farmers are eligible to even purchase the federally-backed insurance on offer, while those who do qualify for such programs could still suffer losses that are not covered. 

Weather Contracts

“The USDA has a lot of gaps in their coverage programs,” Brian O’Hearne, head of sales for New York-based Arbol, told Hemp Benchmarks. He added that the USDA program has a crop rotation requirement, while many hemp cultivators are dedicated to solely growing hemp. Given the limitations of federal insurance programs, O’Hearne stated that a growing number of hemp cultivators are looking at so-called weather contracts. As we covered in a post earlier this year, weather contracts are a form of risk management that protects farmers – or other parties – against adverse weather conditions such as drought, excessive rain, extreme temperatures, or hail.

“Farmers think they can handle anything,” he said. “But if you look at this year, with three tropical storm systems going through Tennessee and Kentucky, how much water that put down – and right now [with] the western half of the country in a pretty serious drought – we think we’re a natural. We’re the only one with a multi-peril [parametric] program for hemp.”

Arbol is a provider of marketplace technology that supports parametric risk transfer, or weather insurance. As Sid Jha, Arbol’s founder and CEO, explained on the firm’s website, parametric coverage means that contracts are paid out based on data as opposed to a subjective claims process. “Once the threshold for loss in a contract is triggered by the applicable dataset an agreement is structured on, the client gets paid automatically.” 

Due to this criteria, whether a hemp crop tests hot – as well as a farmer’s acreage, production history, and other requirements of federal insurance programs – are immaterial. In fact, O’Hearne noted that a farmer does not even have to suffer any crop loss for a weather contract to pay out; only the conditions specified in the coverage matter.

As an example, O’Hearne explained the company’s excess heat program, which pays out if a crop is subjected to temperatures above an agreed-upon threshold. “With a 100 degree high temperature contract, if on day one you have 110 degrees you get 10 damage degree units that day; the high temperature minus the threshold,” he explained. Damage degree units accumulate during the agreed-upon time period of the contract. The farmer then takes a deductible above the average number of damage degree units, and is paid 100% of their contract value if it meets or exceeds the previous temperature record.

Planning for Weather Volatility

Like the federal offerings, Arbol’s hemp-focused weather program is evolving. It will soon switch to percentages above average heat, rainfall, and other weather conditions. The company is also working on parametric wildfire and early freeze programs, all which can be customized to particular times of the hemp growing and harvest season.

There are still some challenges with these coverage programs, O’Hearne said, but he is working to educate the hemp industry. He noted that he took part in webinars for more than 100 insurance brokers and their clients over the past year, to inform them of their coverage options. One big issue for individual operators is funding; in other words, having hemp growers plan for some form of insurance coverage in their annual budgets, which many have not done to this point. 

Other issues, O’Hearne added, stem from the newness of hemp itself, along with the extreme weather events observed across the country in recent years. “Getting people to understand what weather is bad weather; what they should be protected against,” is not so straightforward for hemp, he pointed out, as the strengths and weaknesses of various hemp cultivars are still being discovered. O’Hearne also noted, “Whether you believe in climate change or not, [weather] volatility is going through the roof,” exacerbating threats to crops and even raising new ones that farmers might not have had to grapple with only a few years ago. 

Hemp Industries Association Midwest Hemp Council National Hemp Association