ABOUT CROP INSURANCE
Crop Insurance: A Look Back
Because of the inherent risks and potential for widespread catastrophic losses associated with agricultural production, insuring farmers and ranchers has always posed a challenge.
Early 20th Century
Before the Federal Crop Insurance Program was established, private insurers had difficulty providing affordable insurance products to producers. In 1938, Congress passed the Federal Crop Insurance Act, which established the first Federal Crop Insurance Program. These early efforts were not particularly successful due to high program costs and low participation rates among farmers. The program had difficulty amassing sufficient reserves to pay claims and was not financially viable.
Congress recognized that other ways of assisting farmers through direct payments and disaster assistance needed to be created.
Federal Crop Insurance Act of 1980
In 1980, Congress passed legislation to increase participation in the Federal Crop Insurance Program and make it more affordable and accessible. This modern era of crop insurance was marked by the introduction of a public-private partnership between the U.S. government and private insurance companies. Bringing the efficiencies of a private sector delivery system together with the regulatory and financial support of the federal government formed the basis of a new and innovative approach to solving a long-standing problem.
While the 1980 Act expanded the program by increasing the number of commodities insured, participation remained lower than Congress had hoped for. Members of Congress were growing weary of repeated requests for ad hoc disaster assistance and emergency loans that served to undermine the crop insurance program. Even as late as the early 1990’s, crop insurance participation rates hovered in the 30 percent range and Congress was often spending considerably more each year in disaster relief expenditures than it was on crop insurance.
The Federal Crop Insurance Reform Act of 1994 and the Creation of the Risk Management Agency
The Federal Crop Insurance Reform Act of 1994 dramatically restructured the program. And in 1996, the Risk Management Agency (RMA) was created in the U.S. Department of Agriculture to administer the Federal Crop Insurance Program. Through subsidies built into the new program guidelines, participation increased dramatically. By 1998, more than 180 million acres of farmland were insured under the program, representing a three-fold increase over 1988.
The Agricultural Risk Protection Act (ARPA)
In May of 2000, Congress approved another important piece of legislation: the Agricultural Risk Protection Act (ARPA). The provisions of ARPA made it easier for farmers to access different types of insurance products including revenue insurance and protection based on historical yields. ARPA also increased premium subsidy levels to farmers to encourage greater participation and included provisions designed to reduce fraud, waste and abuse.
2014 Farm Bill
The 2014 Farm Bill accelerated the evolution from traditional farm price and income support to risk management, solidifying crop insurance as the primary tool for farmers in dealing with production and price risk.
The 2008 Farm Bill’s direct and countercyclical payment programs and the state-based revenue program known as ACRE (Average Crop Revenue Enhancement Program) were eliminated. In their place, a farmer may choose one of two new farm programs that commenced with the 2014 crop year: 1) Price Loss Coverage (PLC), a program that makes a payment to a producer (at 85 percent of base acres) when the market price for a covered crop is below a fixed reference price; or 2) Agriculture Risk Protection (ARC), a program that makes a payment when either the farm’s revenue from all crops (ARC Individual) or the county’s revenue for a crop (ARC County) falls below 86 percent of a respective or benchmark-level of revenue. The maximum coverage band is 10 percentage points (76 percent to 86 percent of benchmark revenue). (ARC Individual pays at the 65 percent level while ARC County pays at 85 percent of base acres. The famer cannot have both.) ARC (either Individual or County) and PLC are designed to supplement crop insurance by providing support in periods of multi-year price declines and helping producers cover the crop insurance policy’s deductible. Both ARC and PLC are subject to payment limits. Together these two farm programs are projected over time to spend substantially less than the programs they replaced.
In addition to these two new farm programs, the 2014 Farm Bill strengthened crop insurance by adding several new products and requiring a number of program revisions to increase crop insurance’s role as the primary component of the farm safety net. The major enhancement to crop insurance is the addition of two supplemental policies that will help producers expand their protection against losses due to natural disasters or price declines.
The first program, the Stacked Income Protection Plan, or STAX, is for upland cotton acreage only, as cotton producers are not eligible for ARC or PLC. STAX is an area revenue plan that a cotton producer may use alone or in combination with an underlying policy or plan of insurance. STAX is similar in design to the existing area plan called Area Revenue Protection (ARP)can be chosen as a stand-alone policy or in combination with an individual or area plan of insurance. STAX is available in all counties where Federal crop insurance coverage is available for upland cotton. It is also available by practice, irrigated or non-irrigated. STAX covers revenue losses of not less than 10 percent and not more than 30 percent of expected county revenue. An indemnity is paid based on the amount that expected county revenue exceeds actual county revenue. Producers receive a premium discount equal to 80 percent of the STAX premium, and on behalf of the producer, an administrative and operating expense payment is made to the crop insurance companies to compensate for a portion of delivery expenses.
The second program, the Supplemental Coverage Option, or SCO, provides certain crop producers with the option to purchase area coverage in combination with an underlying individual policy or plan of insurance that would allow indemnities to be equal to a part of the deductible on the underlying individual plan of insurance. SCO indemnities are triggered if area losses exceed 14 percent of expected levels, with SCO coverage not to exceed the difference between 86 percent and the coverage level selected by the producer for the underlying policy. SCO coverage is not available for crops enrolled in ARC or acreage that is enrolled in STAX. Producers receive a premium discount equal to 65 percent of the SCO premium, and on behalf of the producer, an administrative and operating expense payment is made to the crop insurance companies to compensate for a portion of delivery expenses.