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In defense of crop insurance

REUTERS/Adrees Latif
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.

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.

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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.

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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Comments (3)

  1. Submitted by Rachel Kahler on 06/18/2013 - 09:35 am.

    Crop insurance

    Here’s the problem: insurance shouldn’t lose money for the insurer. Although I have no problem with government-based insurance, I have a problem with presuming that it should be provided at a cost to the taxpayers in general. I don’t think that the formulation needs to be set in stone as it is. A sliding scale of cost over ability to pay should be put in place. A startup farmer shouldn’t have the same insurance costs as one that’s making hundreds of thousands of dollars (or more!) a year. Reducing the cap doesn’t necessarily reduce the insurance options, it just means that farmers are going to have to either pay more for insurance and/or take a bigger hit should the crop fail. Farming isn’t a guaranteed payout. Farmers used to know that and plan for it. Any given year could be a failure, though with modern equipment and seed it’s less likely that an entire crop would fail. I don’t think that farmers should necessarily have to go bankrupt should that happen, but I also think that there are definitely some farmers who do well enough not to need insurance assistance.

  2. Submitted by Greg Kapphahn on 06/18/2013 - 10:11 am.

    Are There Built-in Limitations Based on Changing Climate?

    It would already appear that some areas of the US that have been marginal for farming for decades are now, due to persistent drought and heat, or, by contrast, due to persistent patterns of excessive rainfall, being rendered impossible for crop farming or grazing of animals. If these areas expand, (which it seems likely they will do) it’s possible the entire farm production insurance system could become impossibly inadequate, or impossibly expensive. How do we take this reality into account and adjust the insurance program so that we only insure attempts at production in areas where production can be reasonably assured to be successful?

    What do we do with the farmers and farm workers who have owned, lived on and worked on land which is no longer able to reliably support a crop or supply sufficient food to graze animals on it each year?

    I’m convinced that shifts in the climate will be a massive issue for farmers and for US food production in the near future. Are we planning for how to address these changes when they come?

  3. Submitted by Jim Mork on 06/24/2013 - 10:05 am.

    Limit The Coverage

    Many farmers live close to the success/failure boundary. But there are extremely large operations with deep pockets. I really think premiums should be on a sliding scale. We can’t have with farms what we have with banks where we treat them all the same, no matter how big they are. That one size fits all approach resulted in a $700 billion bailout to the biggest banks. Maybe the premium should be a fixed percentage of the assets of the farmer. That way, small farmers would get affordable insurance, but Big Ag operations would help fill the fund to help keep it solvent. There is NO WAY the taxpayer should fork out money to large farming operations. I think there’s a moral hazard to that. Plus, there’s a temptation to corrupt the congressional process in order to keep cheap money flowing.

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