Focus on Ag

Crop Insurance Key to Farm Risk Management

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Many farm operators across the upper Midwest are facing the most severe crop loss since 1988, with some producers facing the most significant drought since the 1930s. There will undoubtedly be large financial losses in many areas of the regions to farm operators, associated businesses, and local communities, even in some portions of southern Minnesota. However, the financial losses to corn and soybean producers in 2012 will be somewhat mitigated by Federal Crop Insurance coverage.

Most corn and soybean producers in Minnesota and Iowa carry Revenue Protection (RP) crop insurance policies, which protect against the combination of yield losses and price reductions during the growing season. A base revenue level is established on a farm unit using the historic average crop yield times the average crop price at the beginning of the crop insurance coverage period.

For RP policies, the insurance coverage level purchased by farm operators is a percentage of that base revenue, ranging from 50% up to 85%, with most producers opting for 75% coverage or higher. The final crop revenue on the insured farm unit is the actual crop yield times the crop price at harvest time. If the actual crop revenue is lower than the guaranteed insurance coverage, a crop insurance indemnity payment is made for that crop on a specific farm unit.

The premiums paid by farm operators for crop insurance coverage are subsidized by the federal government, with an average subsidization rate of 62% of the total premium amount in 2011. The percentage of premium subsidy is higher at the lower coverage levels; however the premium subsidy per acre increases at higher insurance coverage levels. For example on corn in Minnesota in 2011, the percentage premium subsidy was 71% for a 60% RP insurance policy, 66% for a 75% RP policy and 49% for a 85% RP policy. The total premium subsidy averaged $32.02/acre on a 60% RP policy, $38.30/acre on a 75% RP policy and $41 on an 85% RP policy. The average insurance premiums paid by farmers in 2011 were $13.12/acre for 60% coverage, $19.69/acre for 75% coverage, and $42.75/acre for 85% coverage.

As the new farm bill is being developed, some members of Congress, the Government Accountability Office (GAO), the Environmental Working Group (EWG) and other groups have called for changes and restrictions in crop insurance subsidy levels. One proposal calls for setting all crop insurance premium subsidy levels at 50%, as compared to the current average premium subsidy level of 62%. This would increase the farmer-paid average crop insurance premiums for most crops at all insurance coverage levels, except the 85% coverage level. Another proposal would restrict the total crop insurance premium subsidy to $40,000/individual or farm operation. Other proposals would restrict crop insurance premium subsidies to any individual or entity with an adjusted gross income (AGI) over $750,000/year. Some have even suggested reducing the AGI threshold as low as $250,000.

The higher value of most crops in recent years has greatly increased the total federal expenditures for the crop insurance premium subsidy, which has increased from $1.5 billion in 2002 to $7.4 billion in 2011. The higher crop value also means that a larger number of farm operations would reach the premium subsidy limit, if a $40,000 limit were imposed. The GAO estimated that 33,690 farm operators would hit that limit, based on 2011 data. Based on average 2011 premiums in Minnesota, 952 acres of corn or 1,487 acres of soybeans would reach the $40,000 limit with 80% RP insurance policies. This would mean that a typical corn and soybean crop operation of 1,100-1,200 acres could likely reach the $40,000 limit, which is certainly not a large operation by today’s standards.

Using a means test, such as a $750,000 or $250,000 AGI limit for having subsidized crop insurance available would set a precedence, since no other federally subsidized insurance programs have such a means test. Using a means test may also be quite complicated and expensive to administrate. Some farm operations may be forced to change farm business structures from family partnerships and corporations in order to stay eligible for crop insurance, if this type of approach is enacted.

Crop insurance is not only a key risk management tool for corn, soybean and wheat producers, but also for producers of sweet corn, peas, potatoes, and other vegetable crops and newer ventures such as apples or grapes. Crop insurance only makes payments when losses occur due yield reductions or lower prices. In 2011, crop insurance indemnity payments for losses totaled 48% of the total insurance premiums. The premium subsidies help keep desirable levels of crop insurance affordable for producers of all sizes, and for a wide variety of crops.

The availability of affordable crop insurance is also very important to ag lenders that are funding farm operations. Sharp crop insurance premium increases, or restrictions in access to insurance coverage, could affect availability of ag credit in the future, especially for younger farm operators with a high amount of rented crop land. Fortunately, as a new farm bill is being developed, many members of Congress and agricultural leaders are pushing for maintaining a strong crop insurance program as the centerpiece of a risk protection program for U.S. crop producers.

 

Editor’s note: Kent Thiesse is a former University of Minnesota Extension educator and now is Vice President of MinnStar Bank, Lake Crystal, MN. You can contact him at 507-726-2137 or via e-mail at kent.thiesse@minnstarbank.com.

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