Crop insurance importance grows with grain prices

The stakes for farmers are higher than ever.

While the federal crop insurance program changes from year to year, the game is much the same during the rushed two-week enrollment period in early March. Farmers sort through the myriad insurance options available to try to get just the right amount of crop protection they need without sacrificing too much potential profit.

But the cost of premiums are rising, due to higher prices for the grain the farmers raise. Rising land rents and prices for crop inputs such as seed, fertilizer, fuel and spraying also raise the stakes because they boost the cost of a crop that must be recovered at the end of the season.

“A lot of farmers will take their multi-peril coverage to the banks and use it as a guarantee,” said John Yundt, vice president of Hartz Insurance in Newhall, who sells crop insurance. “If the bank is going to loan $100,000 or $200,000 on the crop, they want a guarantee.”

Yundt said forward contracting of grain sales also has made insurance more important. If a farmer has contracted in advance to deliver a certain number of bushels, they have to have those bushels to deliver or the money to replace them.

“We have a couple of farmers who have already sold crops (for) 2012,” Yundt said.

These trends and others have increased participation in the federal crop insurance program.

The early spring floods of 1993, for example, came at one of the most vulnerable times in the crop cycle. Yields were reduced by 19 percent for corn and 18 percent for soybeans, cutting crop income by $916 million and $500 million respectively, according to a report by the Center for Agricultural and Rural Development at Iowa State University in October of that year.

Livestock producers lost about $157 million in income, much of it due to higher prices for grain to feed their livestock.

Because participation in federal crop insurance was so low at that time, farmers had to rely on disaster payments to survive the losses. They received only about $94 million in crop insurance payouts, compared to over $267 million in federal disaster assistance.

Crop insurance “has dramatically increased in importance over the past 20 years,” according to a report from the Food and Agricultural Policy Research Institute at the University of Missouri.

Crop insurance indemnities averaged about $1 billion per year between 1989 and 1994. Federal subsidies accounted for about one-quarter of total premiums.

Between 2000 and 2009, indemnities averaged about $4 billion per year and federal subsidies accounted for 48 percent of total premiums, according to the UM report.

Net outlays by the Federal Crop Insurance Corp. reached $7.9 billion in federal fiscal year 2009, after averaging $3.6 billion per year from 2000 through 2009.

“From an Iowa producers' standpoint, I think the crop insurance is a much more valuable subsidy program than the direct payment program,” said Johnson County Farm Bureau President Russell Meade, a grain farmer in the Oxford area who also has an accounting practice.

Farmers enroll their acreage in the federal crop insurance program by March 15. If they don't enroll, they could lose out on any payments in the event of a major natural disaster.

The minimal level of coverage required to receive disaster payments is the catastrophic coverage program. It costs only $300 per crop for all the acres a farmer has planted in one county - but covers only 55 percent of the projected price, and 50 percent of the average production history yield of that acreage.

Farmers don't have to pay the premium until fall, and premiums can be deducted from crop insurance claim payouts if necessary.

Most farmers in the Midwest choose a form of coverage called revenue protection. It primarily covers lost revenue due to reduced crop yields, non-planting or crop failure due to weather. Price and premium calculations are based on the projected price and the average production history of the acreage.

The projected price is the average closing future price during February, and farmers must take 100 percent coverage for projected price.

The other major types of federal crop insurance are now called revenue protection with harvest price exclusion, or RPE, and yield protection, or YP.

With revenue protection, farmers can guarantee from 65 percent to 85 percent of the revenue from the crop, depending largely on how much they want to pay. Farmers who want more complete coverage sometimes supplement their federal crop insurance coverage with private weather insurance, according to William Edwards, Iowa State University Extension economist.

The crop insurance program changes taking place this year included some terminology changes, simplification and streamlining of policy options, Edwards said. It now goes by the name, Common Crop Insurance Policy, or COMBO.

To Yundt, the only notable change was the replacement of two revenue protection options with relatively minor differences with one called Revenue Protection.

Meade laughed at the term simplification. “I would never use the words “crop insurance” and “simple” in the same sentence,” he said.