Crop Insurance at Interesting Point as 2012 Arrives

December 30, 2011 02:15 AM

Indemnities for 2011 crops are continuing to rise under the federal crop insurance program, with tallies now increasing weekly for corn and soybeans in particular. Losses paid out for cotton and pasture & rangeland have already exceeded the level of total premiums paid in (farmer premiums paid plus the subsidy) while wheat is approaching that mark, corn nearing the halfway point and soybeans nearing a loss ratio of 0.40.

Following are current-week data compared to week-ago levels:

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Total premiums paid of $11.829 billion include a subsidy of $7.373 billion,
meaning farmers have paid in $4.456 billion. The losses paid out have now exceeded the level of subsidy contributed by the government into the program. Overall, the average subsidy rate was 58% in 2008, 61% in 2009, and 62% in both 2010 and 2011, according to a recent report by the Congressional Research Service (CRS).

By crop, the bulk of producer subsidies are for corn, wheat, soybeans, and cotton, which together account for more than 80% of the subsidies and about three-quarters of total acres enrolled in the program, CRS noted. By state, premium subsidies are greatest in states where these crops are grown, primarily across the Great Plains, Corn Belt, and parts of the South.

Losses paid out for 2010 crops are at $4.238 billion with a loss ratio of 0.56.

For 2011 crops, a total of 263.265 million acres are covered, compared to 256.218 million acres in 2010.

For 2012, premiums paid into the program have reached $1.206 billion on 63.408 million acres, a 14% increase compared to last week.

For 2012, some changes have also been made the program, including shifts that are lowering premium costs for corn and soybean producers in several Midwest states.

CornPercentChange img2

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According to RMA, the adjustment should reduce farmer premiums by 7%, on average, for corn policies and by 9% for soybean policies. "Subsequently, crop insurance companies were concerned that the rating adjustment was announced after insurance providers had already submitted business plans to RMA for approval and during the same period that providers were acquiring commercial reinsurance for polices in 2012," CRS said.

Also for 2012, reporting dates for acreage have been merged with those for the bulk of farm programs, with the acreage reporting date for states like Minnesota and Iowa to change to July 15 from June 30 previously.
Also, the premium due date in areas where it was Oct. 1 before would shift to Aug. 15.

Another change for the 2012 crop season involves moving to a trend-adjusted actual production history (APH). This arose, according to CRS, due to farmers contending "their insurance guarantees are too low because the calculation uses 10 years of data, which gives insufficient weight to recent yield gains or the potential for such gains, given improved seeds or management practices." The result, according to CRS, is that "producers say insurance does not fully cover total production, and they must self-insure the remainder."

Starting with the 2012 crop year, farmers raising corn and soybeans in most counties in Minnesota, Iowa, Wisconsin, Illinois, Ohio, Nebraska, Indiana and Michigan will have an option which could boost their APH for guarantee purposes.

The new trend adjusted APH would take the current year subtract the crop year (year in farmer's data base), then take that times the TA factor (county specific multiplier) and that would be the bushel increase.

Current year: 2012
Crop year: 2008
TA factor: 2
Result: 2012 minus 2008 = 4, times 2 = 8 bushel increase in APH.

Here's how it would work:

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Under this example, the farmer's APH trend-adjusted yield would increase by 5 bu. per acre, to 185. The producer also has to make the decision on whether to take this option by their purchase date.

The effort, according to CRS, allows policyholders to elect to have their APH yield adjusted based on their county's historical yield trend.

As the next farm bill approaches, some have raised concern about the issue of a "shallow" loss program. CRS noted this in their recent report, pointing out the following:

"For several years, farmers have had concerns about "shallow losses," which occur when losses are significant but not enough to trigger an indemnity. Policymakers could reduce shallow losses by increasing subsidies for higher levels of coverage, but at a cost to the Treasury. An alternative is to pursue a farm commodity program (like the ACRE program) that would cover part of these losses. Several proposals for such "revenue" programs were unveiled by various commodity groups and Members of Congress in fall 2011 as the Joint Select Committee on Deficit Reduction began its deliberations on government-wide budget cuts. Some farm groups, including the American Farm Bureau Federation, have criticized proposed revenue programs designed to address shallow losses, saying that they would encourage producers to take more risk, knowing that the government will cover a large share of it.

"Separately, the National Farmers Union and others have sought a revised auditing procedure that could avoid duplicative reviews of records. Historically, RMA has required an automatic review if a farmer receives an indemnity exceeding $100,000. Reportedly the agency is increasing the amount.

"Finally, farm groups have identified the need for better information management. The National Association of Wheat Growers wants streamlined acreage reporting between crop insurance and other USDA farm programs, while the AFBF has asked Congress to push for USDA's completion of the Comprehensive Information Management System (CIMS) project. The project is designed to manage data used for both crop insurance and farm commodity programs, thereby reducing duplicative efforts by both producers and USDA personnel."

All this is converging as the farm bill process starts, with lawmakers on both sides of the political aisle backing the crop insurance program as a key component for the future.

Comments: A major "selling point" with the crop insurance program remains that producers are paying into the program to use it - in other words it is not entirely paid for by taxpayers. However, as the use of the program has risen, so have the level of premium subsidies. In the current climate, that so far has not been an area looked to for budget savings. But as budget cut requirements are not likely to shrink any time soon, this could be an area of focus in the future - either in the detailed debate via the 2012 farm bill or beyond.

Also at issue are programs for several commodities, such as rice, where typically insurance products have not been utilized nearly as much as for crops like corn, soybeans and wheat. In addition, livestock producers also are wanting additional options to use as risk-management tools in their operations.

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