#ICYMI: Crop Insurance Helps Farmers and Ag Lenders Manage Risk
Published on November 19, 2015
Weather anomalies have challenged farmers since the earliest days of agriculture. A flood, hail storm or drought can leave a farmer without a harvestable crop at the end of the season. In Central Kansas, producers have been fortunate in the fact that they have not had to endure multiple years of drought or poor production. However, neighboring areas such as Southwest Kansas, Oklahoma and Texas and areas further west have not been so lucky. There is no doubt that crop insurance has helped some farmers stay in business through the tough times.
The United States has learned in hindsight that providing retroactive disaster relief is not only destabilizing for farmers but also expensive for taxpayers. Prior to our current crop insurance system, it could have taken months if not years for farmers to receive relief payments following a disaster. While the support did not go unnoticed, there were many instances when the payments came too late to save a farmer from insolvency.
It is a fact that strong farm policy and support for crop insurance goes beyond the farmer, not only benefitting rural America but consumers as well. In the 2014 Farm Bill, crop insurance was recognized as the primary risk management tool for farmers, shifting a good share of the risks associated with farming away from the American taxpayer.
The key to a viable crop insurance system is the public-private partnership that makes it the success it has been. The private sector sells and services crop insurance policies and farmers pay premiums and have deductibles, just like other insurance policies. To incentivize farmers to buy crop insurance, the government partially discounts premiums to ensure that coverage is affordable, available to everyone, and economically viable.
Lenders also play a role in encouraging farmers to make informed decisions about managing their operating risk. At Central National Bank, we are agriculture lenders as well as licensed crop insurance agents. We encourage all of our farmer customers to protect their investment with crop insurance and as a financial institution, we may even be able to offer better loan terms to a producer that implements a solid risk management program.
It is important to keep in mind that crop insurance is a risk management tool, not a profit center. Some have charged that farmers would rather collect a crop insurance check than a good harvest. Nothing is further from the truth. Simple math suggests that “playing the crop insurance game” is not a sustainable business plan. In 10 years of working with producers, I’ve yet to meet anyone who would rather collect a crop insurance check than harvest a good crop.
As we enter into a period of declining margins, it will be important for producers to review all aspects of their operation, including risk management programs. Recently, the farm economy has seen double-digit declines in net farm income as well as increases in the number of short-term operating loans. Having access to viable risk management tools will not necessarily add to the bottom line, but it is important for producers to utilize tools such as crop insurance to protect revenue streams through a possible prolonged downturn in the farm economy.
Not only does a well thought-out crop insurance plan speak to a producer’s management skills, but crop insurance also provides a backstop so producers are able to meet their financial obligations. Ensuring farmers have access to affordable, viable crop insurance options is not only critical for the farm business, but it will certainly impact future ag lending decisions in terms of assessing operating risk for loans.
Aaron Gasper is an agriculture and commercial lender at Central National Bank in Salina, Kansas.