2012 crop insurance: Will you have excessive profits?

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Your crops are withering in the field.  Crop insurance will not cover all of your losses.  And the headlines are accusing you of making more money than if you had produced a crop.  Talking heads on TV, agenda-driven experts at Washington news conferences, and slick magazine writers have laid waste to the honor and integrity of Cornbelt farmers.  If you would like to respond to some of the critics, there is plenty of ammunition available.

“Don’t worry about it.”  That is the advice of Art Barnaby, Kansas State University economist and risk management specialist.  Barnaby says the criticism leveled at agriculture is mostly Washington rhetoric from many critics who have other agenda.  And he adds that while big numbers are being tossed around in Washington, when it gets to the Cornbelt, the numbers “are likely to be small enough at the farm level that many farmers will have losses and not “excessive” profits as critics claim.”

In a newsletter written by Barnaby offers many opportunities to respond to the critics, and to assure farmers they are not greedy and money hungry as they are made out to be. 

  1. Using the example of an Illinois farmer with 80% Revenue Protection Coverage and a 178 bushel APH, Barnaby says that would generate expected revenue of $1014 per acre, based on the $5.68 spring price.  He says the criticism of not having to pay a deductible is based on the structure of the policy, but the harvest price would have to fall 20% below the base price of $5.68.  He says only 2 times in the past 40 years has corn seen such a price decline, and only 1 time in the past 40 years for soybeans.

    Barnaby says if that same farmer produces 80% of his APH yield and the market price increases more than 25% above the $5.68 base price ($7.10), the insurance policy will expire worthless because he exceeded expected revenue.  That farmer still ends the year with a 20% yield loss.  He says, “At the farm level, it still takes real cash to go to the bank and farmers will not receive any real cash until harvest or the insurance contract is settled and the harvest price does not settle until November 1, 2012.
  2. Barnaby says the good news is that crop insurance is better than it was in 1988 when only 13% of acres were covered, versus the 75% (or better) coverage in 2012.
  3. Are you getting excessive profits?  Barnaby provides data from USDA’s Risk Management Agency that is based on over half of the policy information that has been published.  He says one could show any results that are desired, but the data is from real farms, not theoretical farms.
  4. “Expected revenue” as defined by USDA and by the critics of crop insurance is not a practical definition, says Barnaby because the APH yield is not the expected yield and the price does not reflect the basis.  And he says if one does not need to cover hedging losses or replace feed supply at these higher prices, then expected revenue may be valid.
  5. Those farmers who are lucky enough to have a shower at the right time may be producing a normal yield, and will generate expected revenue if they produce more than 75% of their expected yield.  And with a normal yield at $8 corn, they have exceeded expected revenue by more than 139% says Barnaby. So, he rhetorically asks why there is so much concern about farmers with crop losses exceeding their “expected revenue?”
  6. Farmers without the trend adjusted yield policies will receive expected revenue that is based on a lower APH, and subsequently expected revenue will be less than others.  Farmers with GRP or GRIP policies could have a substantial loss and not get any indemnification.
  7. Illinois farmers, who on the surface have coverage that exceeds expected revenue, may have coverage levels that are actually less than 100%.  Barnaby lists 7 reasons, including some previously mentioned, but also some new points.  RP only covers the price risk during a growing season, not across production years. A corn indemnity may cover corn loss, but the soybean indemnity may not pay anything, subsequently the farm is not made whole.  Critics are treating crop insurance as income transfer payments, but have not said anything to their benefit in years when policies were purchased but indemnity checks never received.
  8. If farmers were not required to pay for the premium, it would be a free disaster program, which would benefit Great Plains farmers more frequently than Cornbelt farmers.  Because of the requirement the insurance model reduces the coverage percentage in the higher risk states versus a “free” disaster program where all farmers would select the maximum coverage.
  9. Many farmers have been paying premiums for year with no claims until this year, and farmer premiums have exceeded indemnity payments.  Barnaby says, “Effectively the amount of subsidy being claimed by crop insurance critics is overstated because there was no transfer payment in Illinois, neither to farmers nor to Approved Insurance Providers.”  Before this year, the farmer share of the premium covered the losses in Illinois and Iowa.
  10. Farmers are better off with a crop than with an insurance indemnity check, and in nearly all cases looking at the whole operation, few farmers are made whole with insurance.  And even if a farmer has had no claims in the past 10 years, does not mean he has not had crop losses in the past 10 years.  Using the example of an Oklahoma wheat grower, Barnaby said in the drought year of 2011his yield equaled guaranteed bushels.  There was no indemnity payment, but he still had a loss because of his deductible.  His 2012 APH was reduced because of the 2011 yield, but his 2012 premium cost increased as a result.  Barnaby says, “This is not the free lunch being pained by critics, and does not make farmers whole.”

Summary:
“Lost in all of the rhetoric about “mega-cost” there are lot of farmers who will receive indemnity checks that will allow them to keep their accounts current and be ready to plant next year’s crop. The Revenue Protection contract performed as expected when short Corn Belt crops often result in higher prices. For most farmers with crop losses, they will need the harvest price to be about 35% higher, if their revenue is going to exceed the “expected revenue”. While that level of price increase is rare, currently, the October average price is an unknown.  Nearly all farmers will be better off with a crop than insurance payments. Those who will have a crop are benefiting from receiving a critical rain shower combined with these drought-caused higher prices. There is some luck involved in agriculture.”

Source: FarmGate blog


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Ron Alford    
NYY Meto  |  August, 09, 2012 at 08:54 PM

As the drought continues and crops fail my question is So you have insurance .... NOW WHAT? How does a farmer go about proving losses in cases such as these? Who are the insurance companies who sold the contracts and who owns or re insures those bets. I am an expert in property losses and I am interested in the creditably of the companies who sold ya'll the converge. fee free to send me your experience in this matter and if you want to know more about what I do have a close look at www.theplan.org . This consumer's site is in the making and will be open for business on Sept 1


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