Crop Insurance’s Growing Value

February 10, 2012

As a former chief economist for the U.S. Department of Agriculture I can attest to the fact that farming is indeed a risky business. News reports out of USDA’s Risk Management Agency underscore that point all too clearly: With some 15 percent of all crop insurance claims yet to be processed, crop insurance companies have paid out a record $9.1 billion so far in indemnity payments to America’s farmers for 2011 crop losses, surpassing the record set in 2008 by nearly half-a-billion dollars. And the 2011 figure will continue to climb.

But the economist in me wanted to dig into the data to better understand the damages reflected by the overall numbers. And there were a number of surprises. Most people might expect that, given the severity of the drought in the southern plains, farms with the greatest damages per dollar of premium for insurance would be there. But while farmers in those states did suffer greatly, it was actually the farmers in Vermont who saw the highest loss ratio last year.

Remember when Hurricane Irene slammed into New England? The farmers up there won’t soon forget it.

That finding underscores just how vulnerable farmers are, and how the federal government needs to have a hand in production agriculture. Farmers in 2011 were fortunate that crop insurance was available for more than 125 different crops and was purchased for 80 percent of eligible acreage.

But despite the success of the crop insurance program, many in Congress will be seeking even deeper cuts to this primary risk-management tool, even though program funding has already been reduced by $12 billion since 2008. Congress and the Obama administration need to remember that farm income stabilization through risk management programs like crop insurance is critical for ensuring continuous and stable growth in overall supplies of food, feed and, increasingly, fuel.

In the not too distant past, when Mother Nature struck America’s agriculture sector, it often resulted in ad hoc disaster packages from Congress to address the damage and help the farming sector recover. While those packages were greatly appreciated by farmers, Congress decided to push to make crop insurance more universally available and affordable, giving farmers the tools they need to manage their own risks while taking some of the burden of disaster assistance off the back of the public and putting it onto the lap of the private sector.

Today’s crop insurance policy makes more sense and works better because it puts the onus of managing risk on producers and farmers, not the government. The private sector crop insurance agent works directly with the producer to help put together an insurance plan that best meets their specific needs and is tailored to their comfort with risk. The outcome is a plan that protects physical and financial assets in the face of natural hazards and market risks.

Farmers and insurance agents alike recognize the wisdom in making farmers bear some of the risk and costs of the program. In order for a risk-management program to work efficiently, it cannot completely remove risk from the equation – risk-bearing ensures program accountability and discipline.

There are other surprises in the 2011 claims data.¬†Wouldn’t you expect that the ongoing drought in the southern plains would have meant that cotton and wheat were the most heavily damaged crops last year? But the hurricane that drowned out New England first passed over the Carolinas and severely damaged the flue-cured tobacco crop, which, combined with several other weather issues, resulted in the flue-cured tobacco crop having the highest loss ratio last year of any crop.

Of course, drought did heavily damage much of America’s cotton and wheat, as $3.7 billion in indemnities have been paid for those crops so far, but with crop insurance in place, farmers are able to bounce back. Wheat growers in Kansas, Oklahoma and Texas sowed 1.7 million more acres this fall than they did last year.

Hopefully, the rains will come and we will all see a bounty. But if they don’t, the farmers have something in place to keep the bottom from falling out.

About the author: Keith Collins is retired from USDA and now works part time as a consultant for the National Crop Insurance Services in Overland Park, Kan. He holds a Ph.D. in economics and statistics from N.C. State University.

Editor’s note: This article first appeared in the Feb. 8 edition of the Raleigh News & Observer.