The ERS report does not address income from crop insurance, other than to say crop losses will be more than covered by indemnity payments. While farmers who neither have crop insurance or their losses are pasture and livestock related will rail at the ERS estimate, that estimate is corroborated by Ohio State University ag economist Carl Zulauf.
His analysis casts a dark shadow on the harvest price option for crop insurance. Calculating potential insurance indemnity payments as of August 28, Zulauf says compared to the spring guarantee or the base price, corn prices have risen 40% and soybean prices have risen 37%. He notes, “For the average U.S. acre of corn and soybeans, the higher price resulting from the drought has more than offset the decline in yield resulting from the drought.”
Zulauf further calculates, “For example, as of August 28, if a farm has at least 75% insurance coverage and no forward contracting, crop insurance will guarantee a per acre revenue that exceeds the per acre revenue expected at planting.” (His graph indicates 103 %.)
The Crop Insurance HPO Factor
The Ohio State ag economist says the harvest price option may have enticed more farmers to sign up for crop insurance because of the reduced risk, and he adds, “The availability of the harvest price option in crop insurance further means that, depending on the size of the increase in price, and assuming that a high enough insurance coverage level was purchased, a farm may have minimum revenue at harvest that exceeds the revenue expected when the crop was planted no matter what yield is, including zero.” And that is what he believes will cause the public (and Congress) to begin a policy discussion over whether the harvest price option should receive the same USDA premium subsidy as the rest of the crop insurance program.
Zulauf says he agrees with the principle of both arguments, pro and con:
- Advocates for the harvest price option point out that it allows crop farms to feel more comfortable forward contracting grain. The harvest price option covers the financial risk exposure of having to buy grain in the market to cover their inability to fulfill their forward contracts.
- The counterpoint is that the harvest price option can encourage farmers to forward contract more than is consistent with prudent risk management, especially in years of sizable yield declines.
He says for farmers to determine how they feel about the issue, they should emotionally remove themselves from agriculture, assume the role of a taxpayer, and ask whether they would still support the concept and cost of the harvest price option.
While the drought has reduced crop yields, commodity prices have risen more than yields have declined, subsequently, net farm income is expected to increase in 2012 over 2011. One of the reasons is the expectation that crop insurance will pay farmers the price at harvest, which is more than what was expected when they signed up for the crop insurance program. That being the case, taxpayers have funded the crop insurance program, and may begin to ask whether they or the producer should fund the premium for the harvest price option.