Are federal crop insurance programs about to take center stage in the national farm policy debate?
For years, crop insurance has been treated almost like a stepchild by all but a handful of members of Congress, USDA's Risk Management Agency (RMA) and those who sell and service multi-peril crop insurance policies.
But that appears to be changing because of farmers' growing interest in new crop insurance products and the increasing share of farm program spending for crop insurance premium subsidies.
“We're seeing more producers integrate crop insurance into their risk-management plans,” says Dennis Daggett, a 32-year veteran of the crop insurance industry who works for John Deere Risk Protection. “At least 80% of the crop acres are now covered by some form of federal crop insurance.”
Even farmers in the South, where federal crop insurance coverage participation has been lower than in other parts of farm country, are beginning to show more interest in crop insurance.
“Two straight years of disasters are forcing our growers to take another look at crop insurance,” says Roger Carter, a crop consultant from Clayton in northeast Louisiana where unusual amounts of rainfall have hammered crops and farmers' bottom lines.
“We've had disasters in six of the past 12 years that have decimated farmers' annual production history, or APH. Currently, growers can only insure their portion of the crop, but are responsible for 100% of the inputs. We need a change that would allow farmers to insure for the full amount available.”
On the flip side, spending for federal crop insurance premium subsidies is expected to draw more attention from Congress because of the record federal budget deficit of $1.147 trillion in fiscal year 2009 and predictions of continued high deficits.
The Food and Agricultural Policy Research Institute (FAPRI), which provides long-range forecasts of economic factors impacting the farm economy, projects spending for federal crop insurance subsidies could total $53.1 billion between 2009-2010 and 2017-2018. (Direct payments are expected to cost $45.4 billion; counter-cyclical payments, $6.4 billion; marketing loan benefits, $3.6 billion; and ACRE payments, $16.6 billion.)
“FARM PROGRAM PAYMENTS have been a very important segment of the agricultural economy over the years,” says Pat Westhoff, codirector of the University of Missouri's FAPRI. “If there were to be any cuts in farm programs in front of us, these are places where people could go to try to find savings.”
According to figures compiled by USDA's Risk Management Agency, farmers insured 264 million acres of cropland with federal crop insurance in 2009. That's up more than 60 million acres from 1998 when 180 million acres were covered. (The 264 million acres is about 83% of the total eligible acreage in the U.S.)
A portion of the increase to 180 million acres — which was nearly three times the participation level in 1988 — was due to the requirement in the Federal Crop Insurance Reform Act of 1994 that made the purchase of so-called catastrophic, or CAT, crop insurance mandatory. That was later changed to only those who received other farm program benefits.
Another reason was the introduction of a number of new crop insurance products that made coverage more enticing to growers; products that allowed them to protect against revenue losses as well as decreased yields and the addition of more crops that could be covered.
Besides the traditional APH (yield only) multi-peril insurance policies and the more recent revenue assurance and crop revenue coverage policies, the RMA has approved new products such as the Group Risk Plan (GRP), Group Risk Income Protection (GRIP) and the Enterprise Units plan.
ONE OF THE latest products is the Biotech Yield Endorsement (BYE) Crop Insurance option that RMA has approved for Minnesota, Iowa and other corn-producing states on biotech corn hybrids. The option was developed by Monsanto after growers asked why their premiums were not being reduced for planting corn hybrids that reduced risks.
Daggett, manager of crop insurance development for John Deere Risk Protection, says weather problems have plagued farmers across the nation's mid-section since the beginning of the 2009 growing season.
“Abnormal rainfall amounts have disrupted farming operations all through the soybean-producing area,” he notes. “We've heard reports of farmers having whole truckloads of grain rejected because of excessive damage due to the weather.”
Daggett says an increasing number of farmers have been moving to revenue coverage plans to try to help offset losses from lower yields and the problems of marketing damaged crops or crops in which prices have fallen dramatically. Others have been sticking with APH coverage, while the newer GRIP products have attracted the smallest participation.
“Historically, farmers have migrated to the maximum subsidy level to try to get the most coverage for the dollars spent,” he said.
Producers are also learning to use APH coverage as part of their marketing strategy. “In the past, farmers have been reluctant to price their crops too far ahead because they weren't sure what to count on. They can cover their production to make sure they have enough bushels or pounds to meet their forward contracts.”
The increased claims expected due to this year's wet, delayed harvest could add fuel to the fire of the issue of the cost of the federal crop insurance program. Some analysts argue farmers are paying too much for crop insurance, particularly in the Corn Belt where enrollment had traditionally been the highest.
“With the exception of 2008 when a large drop in price triggered payments, Corn Belt farmers have generally paid more into the program than they have gotten out,” says Bruce Babcock, director of Iowa State University's Center for Agricultural and Rural Development.
THE ISSUE GOES back to the way Congress set up the mechanism for funding the government-subsidized insurance program when it was created in 1938. It overhauled it in the Federal Crop Insurance Act of 1980 to help reduce farmers' dependence on ad hoc disaster assistance programs. To encourage participation in the program, Congress authorized a subsidy equal to 30% of the crop insurance premium limited to the dollar amount at 65% coverage. The government's role in this arrangement is to reimburse companies for their costs, provide reinsurance and set premiums.
“While most attention by the interested public has focused on companies' large underwriting profits and agents' extraordinary commissions in recent years, much less attention has been paid to the premium-setting part of the program,” says Babcock. “But how much the government says crop insurance companies can charge for the various insurance products plays a central role in determining how much farmers pay for their coverage and how much the overall program costs taxpayers.”
Babcock and Tian Yu, coauthors of a paper in the Fall 2009 Iowa Ag Review, argue that, generally, the risk of crop losses due to drought and adverse weather events has been declining, thus reducing the amount of risk that should be factored into federal crop insurance premiums.