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Growers paid more to lock in profitsNew data indicates crop insurance growing as a marketing tool With higher grain prices this spring, many growers were faced with an interesting crop insurance choice. Do I reduce my level of crop insurance coverage because premiums will be higher? Or do I increase my level of crop insurance because there is so much more value at stake? The answer likely depended on whether or not they viewed the situation as a glass half empty or half full. Some producers view crop insurance as a "necessary evil" that should be kept to a minimum while others see the purchase as a marketing tool that can help them lock in future sales and be more profitable. Recent data from the U.S. Department of Agriculture's Risk Management Agency (RMA) indicates a larger number of growers fell into that latter category this year. Despite significantly higher premium costs, more growers bought revenue-based crop insurance policies in 2007 than ever before. "With the run up in many commodity prices going into this sales season, many wondered if more people would maybe self-insure or pursue other risk management alternatives and not put as much money into crop insurance," says RMA's Tim Witt. "That does not appear to be the case." Insurance Plan Policies Sold 2005 Policies Sold 2006 Policies Sold 2007 RMA sales data indicates growers have consistently moved away from standard APH policies and into revenue based products, such as Revenue Assurance (RA) and Crop Revenue Coverage (CRC). Witt says the biggest shift from 2006 to 2007 seems to be to RA policies at the 70% coverage level, followed by RA policies at 65% and 75%, respectively. But somewhat surprisingly, the number of RA policies purchased at the 85% coverage level dropped by only a few hundred policies. "Growers seem very willing to stick with the more expensive coverage levels in an effort to protect higher prices," adds Witt. Depending on the crop and coverage level, the cost of purchasing the same crop insurance coverage could have increased by over 60%, compared to last year. See table below: The higher levels of coverage also carry significantly more liability--in case of crop failures. The RMA estimates crop insurance companies may write between $65 to 66 billion in insurance coverage, compared to about $50 billion last year. As you can see from the top chart, the number of APH policies declined by about 106,019 over the last two years, while the number of CRC and RA policies increased by over 83,000 during that same time period. Last year, much of the growth was in CRC, while this year, RA is more popular--perhaps because there is no price movement limitation, explains Witt. The number of GRIP policies sold has also increased substantially over the last two years, but much of that growth can be attributed to expansion of the crops and geography covered by those policies. Examples of Premium Rate Changes from 2006 to 2007 Note: The premium increased by more than the liability because the price volatility factor for RA (and CRC) increased. The price volatility factor is based on option prices from the commodity exchange market. Source: RMA Editor's note: Columnist Sara Wyant is president of Agri-Pulse Communications, Inc. and publishes a bi-weekly newsletter, Agri-Pulse, on food and farm policy. For more information, you can e-mail her at Agripulse@aol.com. B 3 4/30/07 1 Star WK Date: 4/26/07
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