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Be Careful What You Wish For

Published on: 15:46PM Sep 05, 2014

As part of the new farm bill passed earlier this year is a provision that allows farmers to elect to adjust their APH for any years where the county yield (including contiguous counties) is less than 50% of a ten-year average. These rules were supposed to be put in place in time for the 2015 crop year. The USDA has indicated, so far, that implementation of this will most likely not happen until the 2016 crop year due to the complexity of (1) interpreting how the rules will work and (2) updating the database for all counties in the US for all crops grown and then doing the calculations.

FarmDoc Daily just issued a very informative analysis of how this new feature may impact producers and based upon my review of the article, in many cases, the impact may be negative, not positive. When this provision was being discussed by the House and Senate, there was no provision to adjust premiums based upon the new APH. Most producers and commentators assumed that a producer could throw out the bad yield, keep the new updated APH and pay a premium based on the "old" rate.

Well, the actual provision indicates that the premium must be updated to reflect actuarially reality. Thus, if the old premium per acre cost was $5 and the expectation was that about $5 would be paid out; if the elimination of the bad yields would result in an expectation that the payout would now be $15, then the premiums would need to be increased to $15 (this is before the adjustment for crop insurance subsidies by the RMA).

Therefore, most producers might how assumed that they would now get a potential $15 of expected return by paying $5. Under the new bill, it might cost $15 to get $15. I am not sure how many producers will be eager to pay additional premiums when the original goal was more coverage for about the same cost. Now, this is simplifying the process, but the results are probably very similar to this.

Also, the proposed details indicate that if producers are not in conservation compliance for 2015, then the producer would be denied premium assistance. However, USDA in an interim rule indicates that if a producer is not in compliance in 2015, they cannot re-enroll in crop insurance until the 2017 crop year. This would cause the non-compliant producer to be "naked" for one year. This results in both the loss of any premium subsidy for 2015 and no coverage for 2016.

As you can see from this post and reading the FarmDoc article, there is a lot of rules and procedures still to be hashed out and the final result may not be what producers originally anticipated. We will keep you posted.