USDA has an open-ended commitment to back up claims
Do crop insurance companies have enough money to pay out billions of dollars in claims? Absolutely, says William Murphy, administrator of USDA’s Risk Management Agency (RMA), adding that in his 30 years in the business, he’s never fielded so many questions from farmers on the subject.
First, insurance companies are coming off 15 profitable years and should have the means to pay claims. USDA is there to back the claims if they lack the resources to pay up. RMA "stress-tests" companies annually to make sure they can handle back-to-back years of crop calamities, such as this one, before reinsuring them. Finally, USDA steps in to partially pay claims when they far exceed premiums, so companies are not put out of business and farmers get their money.
Losses to balloon. The big question is whether premiums for 2013 will hit the roof due to be record payouts this year. Surprisingly, rates are unlikely to move up sharply in 2013. At press time, it was uncertain whether the new rates, to be announced in September or October, will include this year’s losses. "We don’t adjust rates every year," Murphy says.
One year of losses is not expected to have a major impact on rates, which are calculated using up to 20 years of data. In 2011, RMA lowered rates for corn and soybeans based on lower losses in recent years than the historical average. The calculation will continue next year, as only part of the new and lower rates were introduced in 2012. Lower rates using the new methodology will be offered for the first time in 2013 for wheat, grain sorghum, rice, cotton and camelina.
|Estimates for final loss numbers range from $10 billion to $40 billion.
Rex Williamson, a crop insurance agent in Payne, Ohio, acknowledges that rates could go up in some areas. But in his market area in the eastern Corn Belt, he says, "I don’t think rates will go up for 2013."
Premiums might be another matter, says Tom Zacharias, president of National Crop Insurance Services.
Because premiums are based on both rates and insured liability, they could be higher in 2013 because the price of grain is likely to be higher in early 2013 than it was last year. Liability levels are based on February futures prices and the coverage farmers choose.
Zacharias says it’s like insuring a 2013 Lexus versus a 2000 Honda Civic. The rate might be the same, but because the value of the Lexus is higher, it costs more in total dollars to insure it. Similarly, higher-value crops cost more to insure, but your payout is much higher in years you face losses.
Another reason rates are not likely to skyrocket is politics, in the view of Dan Sumner, ag economist at the University of California, Davis. "If [RMA] starts putting rates up, there will be some political pushback," he says.
Beyond the new rate methodology, Murphy sees few changes for 2013. But one thing is certain: "The 75% of crop growers who participated this year will go up in 2013. It always does in the year following a crop failure."
Get Ready for Means Testing
Government support for crop insurance, both rate subsidies and payments, is under attack. But the 2012 farm bill is unlikely to contain a cap on subsidies by size of operation or income level, says Michael Parrish, director of government affairs for Monsanto. "This will be one of the major fights, however."
Parrish notes that the Environmental Working Group (EWG), a critic of direct payments, shifted its emphasis to crop insurance subsidies once direct payments were stripped from the bills that passed the Senate and the House Agriculture Committee. Anything is possible in the Senate-House conference committee, but most do not see a cap on crop insurance in the final bill. However, Parrish expects other critics of farm program spending to join EWG in calling for a cap on crop insurance subsidies and payouts.
"I think [Congress] will go to means testing for crop insurance in 2014–15," says Farm Journal economist Bob Utterback. The reason is exposure to the increasing national debt following enormous claim payouts this year by the government.
"This is the real story," Utterback adds. "We can’t expect open-ended liability."