From the Vine

Corn Crop Insurance Could Save Farmers from Likelihood of Massive US Crop Failure

Researchers modelling climate change weather trends say a catastrophic corn drought could be increasingly likely in the coming years.

Should that eventuate, the consumer would likely suffer, but about 90% of US corn farmers should be OK – because they’re insured

Dave Janson, agency president at Strategic Farm Marketing in Champaign, Illinois, said Corn Belt farmers would likely come out fine if there was a major crop failure, because the Government crop insurance program was so strong.

“Most corn crop insurance is sold under yield and revenue policies, so if the yield is very bad or if the crop price goes down, both of those things are covered,” he said. “And if we have a yield problem, the price is covered at the better of the February price or the October price.”

There are few agricultural products as omnipresent as corn. It’s in ketchup, soda, bread and candy. It is the US’s top feed grain, a dietary staple today for cows, pigs and chickens.

In 2016, the US harvested almost 87 million acres, producing 15.1 billion bushels, for a total value of $51.5 billion.

But a new study from the Met Office, the United Kingdom’s national weather service, says climate-induced drought could hit several of the world’s major corn producing regions all at once.

The Met Office used a novel approach to determine the probability of severe water stress in three major corn-producing regions that are responsible for 40% of global production, including the Corn Belt in the US (Illinois, Iowa, Ohio, Nebraska, Indiana, and Nebraska). Instead of relying on observed historical data – which the researchers found to seriously underestimate the impact of climate change – the new study used a model focusing on water stress.

“We haven’t seen a major drought in the US and China in the same year in the last 30 years,” said Chris Kent, the lead researcher on the study. “Our simulations indicate that that type of scenario is possible in the current climate.”

In the US, the chance of all six Corn Belt states simultaneously experiencing severe water stress is about 20% per decade. Similar events did conspire in 1988 and 2012, the researchers noted, leading to estimated losses of more than $30 billion worth of crops.

“Because the [crop insurance] program is so successful and so many acres are insured, I don’t think it [a massive crop failure] would be a big problem for the farming community,” Janson said. “2012 would be a good year to point to – it was an absolutely devastating year for much of the crop belt, but most farmers were protected because they purchased the crop insurance. That’s what it’s there for.”

Weather had been erratic in recent years, Janson said, although crop yields had been getting stronger – based largely on crop technology improvements. This year could actually turn out to be a rare poor year, though, he said.

“There are some parts of the country that are getting way too much rain and there are some parts of the country that are clearly not getting enough. So crop insurance [this year] could be a big deal when it comes to parts of Indiana, parts of Ohio, parts of the Dakotas and parts of Nebraska – they’re going to be affected. And maybe parts of Iowa, too.”

– with Deena Shanker, Bloomberg

 

Boyer, S. (n.d.). Corn crop insurance could save farmers from likelihood of massive US crop failure. Retrieved July 31, 2017, from http://www.insurancebusinessmag.com/us/news/catastrophe/corn-crop-insurance-could-save-farmers-from-likelihood-of-massive-us-crop-failure-74355.aspx

Crop Insurance Limits by County are Proposed

The Donald Trump administration is proposing crop insurance cuts, similar to the ones proposed earlier by Reps. James Sensenbrenner, R-WI, and Ron Kind, D-WI, as well as Sen. Jeff Flake, R-AZ.
Both proposals include the elimination of the Harvest Price Option, a limit on adjusted gross income, and a $40,000 limit on the government’s share of the premium. Once a farmer hits the $40,000 limit, the farmer would pay 100 percent of the premium cost for any covered acres above that level.
The $40,000 crop insurance “subsidy” cap results vary by county and by year. In Kansas in 2016, it required from a low of 1,166 acres to a high of 3,619 acres to hit the $40,000 cap, i.e. the government’s share of the premium costs, depending on the year and county. By contrast, in California the range was from 149 acres to 7,556 in a county to hit the limit.

However, in most cases these outliers were based on very few insured acres in the county. Therefore, these county acre limits were capped at 200 acres and capped at 6,000 acres.
The county popup window will provide the unadjusted acres to hit the limit. These county level estimates are based on Risk Management Agency-published county-level crop insurance statistics by practice.
In 2016, the Kansas Farm Management Association’s average farm had 1,681 crop acres. Their average total acres were 2,427 acres. This is an average across the entire state. In western Kansas, farmers tend to have more crop acres and higher premium rates, so the $40,000 limit would have a greater impact.
However, the average farm in the KFMA is at the point where it would exceed the $40,000 limit in some years, but not in other years. Those KFMA farmers with above-average crop acres would be impacted immediately.
Unlike the Commodity Title that covers only a few crops, crop insurance covers over 100 different crops. What this national map really shows is the diversity of U.S. agriculture. In some counties producing high value crops, it only requires a couple of hundred crop acres to hit the limit, while in other counties it will require over 6,000 acres to hit the limit.
Hamilton County, Kansas, required 1,613 acres to hit the $40,000 limit providing $138 of coverage. Over 193,000 acres were insured. Doniphan County, Kansas, required 2,022 to hit the premium limit, providing $453 of coverage. Over 143,000 acres were insured. When comparing the two counties, Doniphan is smaller and is the reason for fewer total insured acres.
Will these cuts result in budget savings? These results were based on crop insurance coverage purchases for all counties for years 2005 to 2016. It is unlikely that this will be the result in the future because many farmers will likely make adjustments to avoid the subsidy limit. As a first step, they will likely create new “paper” farms. If they have a spouse, then farmers will try to get a second crop insurance policy for their spouse and divide the acres between two “farms.”
This should double the paperwork for the whole system, including agents, AIPs and RMA, with no new premium. Some farmers may encourage their landlords to change from cash rent to crop share rent in order to stay under the subsidy limit.
“Big” farmers will likely hire accountants and lawyers to create more entities. This will expand the administrative cost for farmers as these entities must be kept separate, and of course more paperwork for RMA, agents and AIPs with no new premium.
Farmers who are still over the limit may choose to cut coverage to stay under the limit. If still available, they could eliminate the HPO to get under the limit. They could also lower their percent coverage level. They might decide to insure their corn but leave their soybeans uninsured or only insure with CAT, which has a 100 percent premium subsidy.
I have received comments that these historical results will not be the expected result in the future because farmers will apply strategies to avoid the limit. This should likely result in less budget savings than advertised.

I agree with the critics, but these cuts will impact those middle-sized farmers because they will have to create new farms to avoid the limit. While it may not reduce benefits for this size farm, it will increase the paper work and that has a cost too. Also, this assumes that driving the really large farms out of the crop insurance program will have no impact on the insurance pool.
This case creates some interesting public policy questions. When prices fall, revenue insurance often overlaps with other government payments because those programs trigger payments when prices are low including payments from Price Loss Coverage, Loan Deficiency Payments, and—in many cases—Agriculture Risk Coverage.
In addition, the hedged farmers will also show gains in their brokerage account. The critics have incorrectly claimed that the HPO in RP competes with other USDA farm safety net programs and the CME, but it is clearly the opposite.
When prices increase, farmers receive few if any government payments, hedged farmers have margin losses, and higher prices reduce or eliminate revenue indemnity payments. Those farmers with the HPO will have their lost bushels, less the deductible, replaced at their current market value, offsetting margin losses and loss of government payments. When farmers have a crop failure and prices increase, farmers will lose their PLC payment when they most need it because they have nothing to sell at the higher prices.
It is important to remember that even in a bad year causing higher prices, not all farmers have a crop failure. Those farmers who don’t have a crop failure will have very “high” incomes and make the average U.S. farm income high.
This is the problem with making public policy decisions based on averages. Crop insurance targets the payment to only farmers who have losses. In 2012, all 80 percent coverage insured corn farmers who collected APH-based crop insurance payments had a crop loss that exceeded 20 percent of their average production including RP insured farmers. There are no exceptions under the APH plans.
A more detail presentation on the policy issues and alternatives are presented in a paper titled “Administration’s Proposed Crop Insurance Cuts Would Eliminate Harvest Price Option and Limit Farm Size (Updated Data).”

Art Barnaby, Kansas State University Department of Agricultural Economics. (2017, July 27). Crop insurance limits by county are proposed. Retrieved July 31, 2017, from http://www.hpj.com/crops/crop-insurance-limits-by-county-are-proposed/article_3dbdebc5-3eb3-5bbc-b5e0-0a726fde245b.html