Crop insurance a viable, economical risk-management tool
By Doug Rich
The Federal Crop Insurance program has evolved from what was basically an experiment started to help farmers recover from the Great Depression and Dust Bowl to one of the most vital programs offered to farmers. Producers and their bankers rely heavily on crop insurance to provide a reliable safety net for crop production.
Art Barnaby, professor of agricultural economics at Kansas State University, gave an overview of the crop insurance program and the changes it has gone through for Sorghum U, an educational series sponsored by the Sorghum Checkoff, Sorghum Partners LLC, and High Plains Journal.
Crop insurance dates back to the 1930s when it was a government-run program with government employees doing both sales and service. Barnaby said that changed in 1980 when a public/private partnership was established with the passage of the Federal Crop Insurance Act. Four years later another major change came along with proven yields.
“Prior to that everything was set on a county yield number,” Barnaby said. “Those with lower yield tended to buy insurance and those with higher yields did not buy insurance. This led to unintended subsidies.”
Crop insurance continued to change with the addition of Market Value Protection in 1991, and Crop Revenue Coverage/Revenue Protection in 1996. The Agricultural Risk Protection Act came along in 2000 to encourage a greater number of farmers to participate, Barnaby said. The Federal Crop Insurance Reform Act of 1994 was passed, making participation in the crop insurance program mandatory for farmers to be eligible for deficiency payments under price support program, certain loans, and other benefits.
“Now about 270 million acres are insured,” Barnaby said. “A large number of farmers are now enrolled in the program largely due to the law change in 2000.”
In the last farm bill debate there were several proposals to reduce the costs of crops. These included limiting the premium subsidy for farmers and having a means test.
“It was forecast, as we saw the drought developing, that this would cost the government $40 billion, but that was clearly nonsense from the start,” Barnaby said. “It was a near impossibility, in fact.”
Barnaby pointed out that ad hoc disaster aid, Supplemental Revenue Election, and Agriculture Risk Coverage are just free crop revenue insurance.
“If you took the crop insurance program as it is and provided a 100 percent subsidy that would in effect be a disaster program,” Barnaby said.
The use of put options in crop insurance is another recent change. Barnaby said all USDA risk management tools including the Average Crop Revenue Election; Supplemental Revenue Election, marketing loans and ARC are derivatives of options and insurance. Adding put options and insurance to revenue insurance is more efficient than insuring price and yield separately. A major change from previous crop insurance contracts is that all contracts now use the same projected price based on new crop futures prices.
“As a result all Common Crop Insurance Policy contracts have the same yield guarantee,” Barnaby said.
Beginning in 2011 with CCIP contracts any additional revenue that is coming from revenue protection has to be due to the put derivative that is built inside the insurance contract.
“So if prices go down the payment will be higher under this contract than under yield only, but all of the additional payment has to come from the price component,” according to Barnaby.
Out of the top 12 most common crop insurance contracts for grain sorghum in South Dakota the top three were revenue protection contracts. Barnaby said this is the case all across the country.
“This is the cheapest form of price protection you will ever get at less than one cent per bushel,” Barnaby said.
Many farmers who would never have used crop insurance in the past have changed their minds. According to the Risk Management Association in 2012 farmers invested more than $12 million in premium for more than 6,600 crop insurance policies. Last year Federal Crop Insurance protected nearly 70 percent of all corn acres, 80 percent of all soybean acres, and 50 percent of all wheat acres.
Doug Rich can be reached by phone at 785-749-5304, or by email at email@example.com.