Managing Risk

Crop insurance, growers’ most important risk-management tool, faces threats in the new budget.

Published online: Jan 09, 2018 Articles Suzanne Bopp
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This article appears in the January 2018 issue of Potato Grower.

The disastrous effects of the Great Depression and the Dust Bowl initially drove Congress to authorize the federal crop insurance program. Since then, the program has been a critical tool to help growers affordably manage the many risks that come with farming. Today, it’s widely acknowledged to be the best risk management tool crop producers have; it protects 90 percent of U.S. cropland. 

“Almost any farmer you talk to across the country will tell you crop insurance is the primary risk management tool that they need,” says Ryan Findlay, industry relations lead for Syngenta. “We can talk about trade. We can talk about prices. We can talk about farm bill support programs. But farmers will tell you they need to have crop insurance.”

But today, farm operators are concerned about its future, because the Trump administration’s budget has called for $29 billion in cuts to the crop insurance program over the next 10 years. 

 

Cuts to Premium Subsidies 

The bulk of those cuts—$16 billion—would come from enacting a $40,000 limit on crop insurance premium subsidies. Currently, there is no limit, and the federal government pays approximately 60 percent of the premium cost for most common levels of crop insurance coverage. 

Data from the Government Accountability Office in 2011 showed that 26 percent of crops covered would be negatively impacted by a $40,000 cap.

“It actually hits a lot of farmers,” says Tara Smith, vice president of federal affairs at Michael Torrey Associates, a Washington, D.C.-based agricultural lobbying firm. “It’s not just big farmers; it’s not just wealthy farmers. It disproportionately hits farmers who grow high-value crops and farmers who are in high-risk areas and need crop insurance the most.” Those are also the reasons the USDA has cited in calling this idea “ill-advised.”

And although every grower wouldn’t hit the cap, every grower would be affected by it through the weakening of the overall insurance pool, says Laura Peterson, head of federal government relations at Syngenta.

“The crop insurance program is dependent on a lot of people participating; that’s how you manage the cost of the program. If we start taking people out of the program, it would impact every farmer.” 

The cap would also trigger a paper trail, says Sam Willett, senior director of public policy with the National Corn Growers Association (NCGA). “A lot of farms would be reorganized and restructured so that they would not be subject to that cap. It would create a lot of work for accountants and lawyers.” 

 

Cuts to the Harvest Price Option

Another proposed $11 billion in cuts to the crop insurance program would come from eliminating the subsidy for the harvest price option, which many growers say allows them to make better decisions and take some of the risk off the table. That’s because it provides protection on lost production at the higher of the price projected, just before planting time or the price at harvest. This option is especially important for young and beginning farmers who might be more leveraged, Peterson says. 

Opponents of crop insurance have long vilified the harvest price option, Smith says: “There’s a lot of misunderstanding about its purpose. It isn’t about creating a Cadillac policy for farmers that’s going to make them money; it’s about being able to get the replacement value for your crop when you lose your crop.” 

That becomes crucial if a grower, for example, uses forward contracting as a risk-management tool, as many do.

“If you don’t have enough corn to meet that contract because you’ve had a disaster, you have to go into the open market to purchase that corn, and that replacement value is extremely important,” Smith says. “Farmers still have to meet a deductible; they have to pay an actuarially sound premium. But there are very real reasons why that policy exists.” 

 

An Actuarially Sound Program

Recently, the NCGA hired Integrated Financial Analytics Research to look at the crop insurance program.

“They concluded that the program is a superior risk management tool for a variety of reasons,” Willett says. “Their report underscores that the program does a very, very effective job targeting losses, both in a drop year as well as in a very good year.”

In 2016, for example, the loss ratio—the indemnity payments divided by the total premium paid—was 0.27. So for every dollar that went in the program, only 27 cents went out for indemnity payments.

Right now, crop insurance is actuarially sound, Smith agrees.

“But any time you change that risk pool, you change the premiums for every single producer who remains,” she says. “If you’re a small farm, you might think you’re in the clear because you’re under that cap, but you’re only in the clear until you get your bill for crop insurance next year.” 

Smith encourages everyone in agriculture to stay engaged on the subject.

“They know the benefits of crop insurance, and they understand the value. But in D.C. that doesn’t necessarily translate,” she says. “We’re encouraging folks to reach out to their members of Congress to be sure they are hearing what folks in the country already know—that crop insurance works, it’s vital, and we need to maintain it appropriately.” 

To find out how to reach their congressional representatives in the U.S. Senate and House, growers can visit www.contactingcongress.org.  

 

This article first appeared in Thrive, the Syngenta magazine and website for growers and other ag professionals.