Why Farm Revenue Protection Matters
If you think the unfolding debate in Washington about subsidies for Revenue Protection (RP) doesn't matter, think again. The 2012 drought and its impact on farm income and farmer attitude should be proof positive of their value. To imagine the alternative, recall the cropping disasters of 1988 and 1993 and think Hurricane Sandy.
This weather event has drained available aid and raised calls for $40 billion to $60 billion or more in disaster aid.
©ISTOCKPHOTO.COM/GHORNEPHOTO By contrast, the worst drought in decades has crop producers and those ag professionals who rely on income from farmers relatively unruffled, thanks to a program that works, suggested Art Barnaby, Extension specialist, risk management, Kansas State University.
"More than 80 percent of growers in the affected areas were insured, and the vast majority had some level of revenue protection," reported Barnaby. "People had coverage that simply wasn't there in 1988 or 1993. Because they had revenue protection, their payment wasn't eliminated when the price went up."
Under traditional Multi-Peril Crop Insurance, yield losses alone were covered with elections from 50 to 85 percent of yield. With CRC/RP, which automatically includes the Harvest Price option, growers were not only protected against production losses, but also received much of the gain they would have made with higher prices at harvest had their crops produced as expected. This is vital to producers who market through livestock. Without revenue protection, they would have had to buy back higher priced corn and other feed grains to replace what they couldn't grow. However, livestock producers weren't the only ones to benefit. Barnaby pointed out that having revenue protection raises the comfort level for pricing the crop ahead of harvest. Not insignificantly for full-service ag retailers, that raises the comfort level when investing in high cost inputs for servicing farmers.
"Every single marketing plan out there assumes production and has a physical bushel at the end of the day," said Barnaby. "Revenue Protection with the Harvest Option gives you that less the yield deductible."
PROGRAM UNDER FIRE
Ironically, a program that appears to be working as planned is under fire. Critics have suggested the program could put the federal government on the hook for $30 billion to $40 billion in payouts to farmers. Other news stories have suggested a large bailout of insuring companies will be required. Barnaby argued that neither claim has a basis in fact. He pointed out that payouts to farmers aren't losses to the companies until they exceed the premium. Even then, insurance companies are prepared to handle losses to the point required by the program.
"The latest I have seen out of the USDA is for $15 billion to $16 billion in claims," he said. "With $10 billion in premiums, that leaves an underwriting loss of $5 billion to $6 billion. Some of that will be paid by the insurance companies, with the biggest hit to them in Iowa, though Indiana had greater losses."
Barnaby based his argument on the reinsurance agreement between the private insurance companies and the USDA Risk Management Agency (RMA) and projected loss ratios. For group 1 states, which include Iowa, Illinois, Indiana and Nebraska, a loss ratio of 160 would require companies to pay 65 percent of the underwriting loss. For that portion of the loss ratio over 160 and under 220, the company share drops to 55 percent. For the portion of loss ratios over 220, they would pay 10 percent.
"The loss ratio is across all crops, and better than expected soybean yields are having an impact there, as had falling prices in October," said Barnaby. "The truth is a 220 loss ratio doesn't happen very often."
Art Barnaby As of September, Carl Ashenbrenner, a consultant with Milliman, an independent actuarial product and service provider to the insurance industry, released forecasts for 12 major corn and soybean producing states. He projected an underwriting loss ratio of 226 for corn and soybeans combined. However, with higher than expected yields in many areas, the loss ratio across the board may be significantly less. Even though it is likely to remain very high in Indiana, a less hard hit state like Iowa, which has twice the premium base, has losses falling mostly on the companies, not the taxpayer.
"We're anticipating a loss ratio of less than 220 for most companies in Iowa, and as a result, the approved insurance providers (AIPs) will pay most of the loss," said Barnaby.
Even if the Indiana loss ratio is above 220 and the taxpayer picks up 90 percent of the underwriting loss, it will still likely be less than the losses the AIPs absorb in Iowa. If these prove out to be accurate, the actual underwriting loss picked up by taxpayers will be a fraction of the earlier projected costs, perhaps $4 billion or $5 billion. If the RMA had been allowed to bank the $1.4 billion in underwriting gains it received in 2010 and that of other years past, underwriting losses would be even less. Of course, if the RMA even got credit for gains, the perceived subsidy for farm premiums of around $6 billion would also be less. Unfortunately, any gains go directly to the general fund.
What adds insult to injury for Barnaby is the idea that growers are cashing in on a subsidy from the taxpayers. He points out that for many growers, this may be the first time they have collected in 20 years or more of paying for crop insurance. Perhaps it would be more appropriate to refer to crop revenue coverage subsidies as co-insurance, with growers paying a portion to protect their potential revenue and taxpayers paying a portion to protect against large disaster payment programs.
THE FUTURE OF CROP INSURANCE IS UNCERTAIN
That said, any subsidy or government program, especially one in agriculture, is under threat in the current Washington mentality of chop first and issue regrets later. Critics suggest a variety of options as related to crop insurance generally and CRC/RC specifically. One is eliminating the Harvest Price option, without which the drought would have required a disaster program on top of crop insurance, according to Barnaby.
Other suggested options include squeezing growers, insurance companies and insurance agents. Growers have indeed benefitted in recent years, as their share of premiums has dropped from 60 percent in 2000 to 38 percent today. Catastrophic insured growers have benefitted even more as 100 percent of their premium is subsidized.
"Insurance providers could have rates cut, while insurance agents could have their commissions reduced," explained Barnaby. "However, insurance agents in the Midwest already had their commissions cut in half in 2012."
One of the arguments being presented is for insurance to be eliminated altogether, to be replaced by disaster programs administered by USDA Farm Service Administration (FSA) employees as in the past. Barnaby argued that this could be a problem with current staffing, both at sign up and also in claims adjusting. While private companies have systems in place to move adjustors around from state to state as needed, no such system is in place for USDA FSA workers.
Barnaby suggested that should the Harvest Price option be eliminated, demand for insurance will likely fall, reducing interest from insurance companies. This could result in a strictly government-run program. A government-run program also raises the question of pricing versus free (known as universal, single payer in health insurance parlance) coverage. Free coverage, Barnaby argued, would likely result in means tested payment caps and limiting coverage to base acres. Neither option would be good for larger or expanding growers.
"The best option would be for growers and the insurance industry to find solutions and present a united front," said Barnaby.
Whatever the solution, the retention of CRC/RP with a Harvest Price option is important to growers as well as full-service input suppliers and service suppliers. It covers yield and potential income loss and creates a more secure environment for producers planning their inputs and marketing. This, not incidentally, creates a more secure environment for their input and service providers as well.
- U.S. farmers seen cutting fertilizer use as crop prices slide
- Newly revised “Midwest Cover Crops Field Guide” released
- Automated imaging system looks underground to improve crops
- Understand and adapt to different communication styles
- Take That, Red Baron
- FCC aims to offer high-speed internet to rural America
- East-West Seed signs marketing collaboration with Monsanto
- How much corn can the ethanol industry use?
- USDA releases 2012 cash rents data report
- Commentary: Government wants farmers to quit farming
- Economist: Taxing P could reduce risk of algal blooms
- Resistant weeds not controlled by fall residuals