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In defense of crop insurance

Most producers need some type of protection. Therefore, their profit margins would be further reduced if premiums are raised.

Crop insurance protects a producer’s yield and price, as well as providing collateral and a repayment source for operating loans, term loans for machinery, livestock, facilities and real-estate loans.
REUTERS/Adrees Latif

As the U.S. House of Representatives begins consideration of the House version of the 2013 Farm Bill, veteran observers of the process are closely watching the policy shift toward enhanced risk-management tools for producers.

ladd portrait
Dave Ladd

With direct payments soon to be a thing of the past, the largest “pot of money” on the table is the crop insurance program. As such, it has drawn attention from all quarters – in much the same way bees are drawn to honey.

As producers continue to face higher input costs, risk-management tools such as crop insurance continue to be a critical component of their marketing plan. Crop insurance protects a producer’s yield and price, as well as providing collateral and a repayment source for operating loans, term loans for machinery, livestock, facilities and real-estate loans.

The greater coverage provided by higher levels of revenue policy coverage means significantly greater protection for the producer’s revenue stream, as producers have shifted to protecting income rather than yield.

Crop insurance amendments

Another part of the equation (but no less important) is the delivery mechanism for crop insurance – crop insurance companies. The two primary revenue sources for a crop insurance company are Administrative and Operating (A&O) reimbursement and underwriting of gains and/or losses. Two of the amendments related to crop insurance expected to be offered on the House floor include one that would reduce the cap of government funding for crop insurance companies from $1.3 billion to $900 million per year and another that would reduce the guaranteed rate of return for crop insurers from 14 percent to 12 percent.

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The 2008 Farm Bill included reductions to the crop insurance program of approximately $6 billion over a 10-year period and the 2011 Standard Reinsurance Agreement (SRA) that went into effect on July 1, 2010, includes an additional $6 billion in estimated funding reductions the crop insurance program over 10 years. The combined impact of the 2008 Farm Bill and 2011 SRA reductions could lead to consolidation in the industry, thereby leaving producers with fewer risk-management options.

Particularly important now

A wide range of strong risk-management tools for producers, including a viable crop insurance program, is more important than at any time in recent memory. As such, proposed reductions in the crop insurance program would adversely impact producers and hinder their ability to manage risk.

The proposed reductions via floor amendments hold the potential to reduce the number of companies offering risk-management tools such as crop insurance. With a viable program, it is likely that lending standards would need to be much more stringent in order to maintain sound credit quality.

Potential effects

It is unclear as to what the aggregate national impact of reductions to producer premium subsidies and A & O reimbursements would be on producers and those entities that currently serve the crop insurance marketplace. It is likely, however, that lower producer premium subsidies would stifle producer utilization of crop insurance as a risk-management tool. Likewise, lower reimbursement rates would most likely be passed along to producers in the form of higher premiums or diminished service.

It is important to remember that most producers cannot afford not to have some type of protection. Therefore, their profit margins would be further reduced if premiums are raised. In addition, many young and beginning producers (who traditionally have less collateral and equity) would face additional challenges in obtaining financing.

Dave Ladd, president of RDL & Associates, is a frequent commentator regarding public policy and the political environment and is a co-author of the book, “LIKE: Seven Rules and 10 Simple Steps for Social Media in Your Campaign.” He received his B.A. degree from Moorhead State University and his Masters in Public Administration from Hamline University. Ladd is a native of Hutchinson, Minn., and lives in Woodbury.

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