K-State’s Barnaby: Corn crop underwriting losses near $10 billion
After a company failed about 10 years ago, he said, RMA put in into place much stronger financial requirements in order to be an approved insurance provider (AIP), including sufficient assets for reinsurance to cover at least two disasters in a row.
“The reinsurance market is a worldwide market, not just a U.S. market, so if one thing goes bad, it doesn’t bring down the whole market. For most of these companies, this is a very small part of their overall portfolio,” said he added.
Barnaby says he may get cards and letters reminding him that a large insurance company failed after the banking fiasco, but it was writing derivatives on housing loans and other products and the dollar amounts were much larger than the numbers affected by this year’s crop losses. Plus the $10 billion to $15 billion underwriting loss will not be completely borne by the insurance industry. The government will bear some of it.
He said that some wells have been shut off because farmers have hit their irrigation limits. He’s encouraging producers to talk to their insurance agent to make sure everything is handled and documented properly.
“The crop insurance portion of the farm bill that’s been in place for the past several years has been successful in this sense – it got a lot of people insured,” Barnaby said. “There’s no doubt that farmers with this crop loss in 2012 are going to be covered a lot better than farmers were in 1988. Congress and the USDA have put a lot of effort into moving farmers from “free” disaster to a farmer-RMA premium shared crop insurance program. I find it ironic that many people are criticizing the size of the insurance program’s participation and the resulting payments.”
K-State Ag Economist Discusses Ceiling on Revenue Protection Products
MANHATTAN, Kan. – In his role as a risk management specialist with K-State Research and Extension, agricultural economist Art Barnaby has been fielding many questions linked to this year’s drought and crop insurance. One of those questions is if the ceiling on payments on Revenue Protection products have been hitting their ceiling.
Barnaby said most of his calculations apply for most corn producers in the U.S. including Kansas, although not all areas.
“In Kansas, on corn the base price is $5.68. That was set on March 1 based on the February average of new crop corn futures prices. There is a price limit of revenue protection products to the upside that is two times the base price so the maximum corn price is $11.36. So if the price goes above $11.36, you’ll be paid $11.36 for each indemnified bushel (or each bushel lost). If the price goes to $14 you wouldn’t get $14,” he said.
For soybeans, the base price was $12.55 a bushel. Two times that means $25.10,” Barnaby said. “Right now I don’t see a scenario where we’ll see hitting either of these limits. If it’s a big concern you can buy call options on your guaranteed bushels.”