Crop Insurance Now Farmers’ Main Safety Net

By | February 20, 2014

U.S. farmers and bankers have almost a year to get ready for major changes in 2015 as crop insurance rather than direct cash payments to producers becomes the centerpiece of farm policy under the five-year farm bill signed by President Barack Obama earlier this month .

For 2014 plantings, analysts said there will be no major changes to crop insurance except sharply lower grain prices than in 2013, which will lower potential payments and premiums. Then in 2015, farmers will have a new insurance option for supplemental coverage based on local county yields.

“Other than commodity prices there is not a lot of difference between 2014 and 2013,” said Michael Barrett, senior vice president for crop insurance at Farm Credit Services of America, one of the biggest lenders to farmers in the Plains states. “The structure of the policies is pretty much the same. The cost sharing for the premium didn’t change.”

But this year will be a major transition for bankers, insurers and farmers, he said.

“The message is crop insurance does become the foundation of the farm bill and the primary safety net for producers because they have lost all those direct payments,” Barrett said.

Safety Nets

The farm bill was delayed for nearly two years by wrangling over proposed cuts in food stamps and other aid for the poor, which will still account for 75 percent of the estimated $956 billion budget over 10 years.

But for farmers, the key debate was crop insurance. Among the burning issues were what is covered, who pays and how much, especially after five years of record farm earnings and two years after the worst drought in half a century.

The U.S. Agriculture Department has traditionally subsidized farmers’ insurance costs for planting crops from grains and oilseeds to cotton, peanuts, fruits and vegetables. But it also bolstered farm finances through complicated systems of direct cash payments for farmers who signed up for programs like conservation policies.

“That has changed,” said Chris Hurt, extension economist at Purdue University, who said that previous farm bills’ automatic payments, regardless of good times or bad times, had been doomed politically. “This program does shift us back to counter-cyclical. It will be some kind of need, whether low yield or low revenue, to get payments.

“That keeps urban legislators feeling more positive about a program for both social and farm safety nets,” said Hurt.

Dale Moore, executive director for public policy at the American Farm Bureau Federation, said: “What we’ve seen over the past couple of decades regarding the trend in farm policy is a highlight of this bill: moving farther away from the income transfer programs toward an insurance model.”

High Risk, High Subsidies

Bankers and analysts said the key element of crop insurance – how much the government will subsidize farmers’ insurance premiums – had not been weakened in the long budget wrangle. USDA will still pay up to two-thirds of the price for crop insurance premiums, with the subsidy going directly to the insurers.

“Generally the cost sharing is about 60 percent by USDA,” said Barrett, using a premium example for farmers in Nebraska of $60 an acre “where they are paying $22-24 an acre out of their pocket.”

Farm bankers and farm industry groups argue that the weather risk in farming, aside from any crop pests or disease, requires substantial insurance aid for farmers.

“Without government backing, it is unlikely that any insurance company would offer the coverage because the risk is too high,” the National Corn Growers Association said in a statement. “Most farmers in the Midwest have paid far more in crop insurance premiums than they have received in claims.”

Gary Schnitkey, extension economist at the University of Illinois, said that since the farm bill does not change any crop insurance programs for 2014 from 2013, most grain farmers in Illinois, the No. 2 corn and soybean state behind Iowa, will use a standard revenue protection (RP) policy covering 80 to 85 percent of projected earnings, based on historical yields and prices.

Asked if bankers, with the recent drought, would demand that grain farmers buy crop insurance before obtaining loans for planting, Farm Credit’s Barrett said: “Each loan request is looked at on its own merit. There are some loans that we would require crop insurance. But we cannot require that they purchase crop insurance from us.”

For the 2012 crop, a drought year, insurance payments totaled $17.4 billion, or 12 percent of USDA’s annual budget of about $150 billion. In 2013, with a bumper harvest, payments were $10.7 billion.

(Editing by Matthew Lewis)

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