Zulauf makes the case that 85 percent coverage at the harvest price returned 112 percent of what was expected in the spring for corn, and 104 percent of what was expected in the spring for soybeans. His research report is focused on farmers who used the spring guarantee to forward contract their production. He demonstrates that pre-harvest sales usually occurred between 1974 and 2006, when farmers could be guaranteed of their crop insurance to cover any financial penalty for over-selling their production.
Zulauf observes that: “The harvest price option can result in a situation where a farm has more revenue at harvest than the revenue that was expected prior to planting, even after experiencing a decline in yield. This situation has occurred in 2012. Critics are asking whether this situation is fair and whether the definition of loss is appropriate.” He follows that up with another observation: “While underscoring the simplicity of this analysis, it suggests that offering the harvest price option on all insured production may lead farmers to sell more than is consistent with appropriate risk management.” In other words, Zulauf says critics are wondering if their tax money is subsidizing crop insurance that will allow farmers to sell more grain than they normally would, because they have the fall guarantee.
But how much is the public really underwriting the cost of crop insurance? Kansas State University ag economist Art Barnaby says the total amount is declining substantially, following the better than expected yields for soybeans that are being reported.
While one of his colleagues, Iowa State’s ag economist Bruce Babcock had predicted a $30-$40 billion dollar crop insurance payout earlier in the summer, Barnaby now estimates the underwriting loss to be in the $5-$6 billion range. The Standard Reinsurance Agreement between USDA and the crop insurance providers calls for different participation ratios between each one. While many of the companies will have a loss, he says some companies will actually have a gain in income this year, depending on the states they serve.
But Barnaby also reminds crop insurance critics of the money that crop insurance has generated for many years. While insurance companies can roll that into retained earnings and bolster their reserves, the government cannot claim a profit, even though it may not have paid out more than its premium income for many years. Although the crop insurance system is supposed to be set up to pay out the same amount it takes in, Barnaby uses Illinois as an example. He says, “For the 23 years prior to 2012, farmer paid premiums in Illinois on all crops and insurance contract types exceeded the claims, meaning in the aggregate, Illinois farmers netted none of the subsidy.