Power Hour: Crop Insurance Losses Lower than Predicted

March 1, 2013 08:30 AM
Power Hour: Crop Insurance Losses Lower than Predicted

Crop insurance indemnities hit a record high for 2012 losses, but the taxpayer portion will be much lower than some predicted last summer.

The 2012 indemnities hit $14.7 billion as of Feb. 25, and will certainly climb higher as more claims are finalized over the next few weeks. Some government losses will occur, for sure, but it will be mitigated by the $4.1 billion in farmer paid premiums as well as losses absorbed by crop insurance companies, says the National Crop Insurance Services.

Fast forward to today: Last year may be fresh in everyone’s mind still, but growers need to think 2013. Midwest farmers only have until March 15 to make crop insurance election changes for this year’s crops. Non-subsidized insurance options, such as hail and wind, can be added later, however.

In good production years with few losses, the government keeps part of the premium and can end up as much as $3.5 billion to the plus side. As a result of this, farmer premiums paid and losses absorbed by insurance companies, government losses for 2012 could be as low as $3.5 to $4 billion, although possibly higher, still a far cry from the $30 billion or even more that some were suggesting last summer. Interestingly, unlike previous disasters, there were no calls for additional ad hoc disaster assistance last year.

"I never thought I would live long enough to have a year like this (2012) and no calls for additional assistance in an election year," says Art Barnaby, ag economist at Kansas State University.

Past droughts were almost always accompanied by additional federal assistance of various types. The lack of that in 2012 is a testament to high crop insurance program participation, high levels of coverage, and the fact that many growers opted for the harvest price option. While many farmers were not made whole, indemnities at least covered production costs for many.

Looking at the future, the Congressional Budget Office (CBO) foresees a sharp decline in indemnities in 2013 and has lowered its projections for total federal outlays for crop insurance by nearly $8 billion over the next 10 years. Of course, the CBO cannot predict the weather.

However, there will be attempts in Congress to reduce federal outlays for crop insurance in the future as a way to shave government costs, Barnaby says. These could include a reduction of the subsidy portion of the premium that farmers pay, means testing and payment caps. One of the dangers of payment caps, he says, is that they could be whittled down over time by Congress.

There also will be attempts to link crop insurance program participation to conservation compliance, Barnaby says, even though such proposals are highly opposed both by farm groups, as well as crop insurance companies.

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