JUST THE FACTS

The crop insurance program is now the centerpiece of the U.S. agriculture safety net.

Below are some of the most common questions about crop insurance, which farmers have called their most important risk management tool. The answers to each, including useful links to additional information, are just a click away. If you still cannot find what you are looking for, feel free to contact Laurie Langstraat at (913) 685-2767 or contact here.

How have the crop insurance companies fared financially under the new SRA that was implemented beginning in 2011?

The financial performance of the crop insurance industry since the negotiation of the financial terms of the 2011 SRA has been poor. Returns are far below the levels expected at the time of the negotiation and well short of a reasonable return on capital. Several factors account for this outcome. Despite higher acreage covered since 2011, premium dollars have declined from $12 billion in 2011 to $10 billion in 2014, reflecting lower market prices and reduced premium rates. During this period, indemnities reached record high levels caused by widespread drought in the Corn Belt and Southern Plains and a sharp drop in commodity prices during 2013. Total claims exceeded total premiums in 2012 and 2013, the first time for such an occurrence since 1999 and 2000. The rate of return on retained premium (company underwriting gains as a percent of their retained premiums) plunged to -15% in 2012, is estimated at 6.3% in 2013 and has averaged only 3.4% during 2011 through 2013. After accounting for the statutory equity required, actual A&O expenses exceeding A&O payments, investment income and taxes, NCIS estimates the rate of return on equity for the industry averaged -2.2% during 2011 through 2013. The low returns since 2011 are insufficient to build needed surplus and retain and attract capital in the industry.

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What is crop insurance?

There are two types of crop insurance. First, U.S. multi-peril crop insurance is a risk management tool that producers purchase to protect against the loss of their crops due to natural disasters such as hail, drought, freezes, floods, fire, insects, disease and wildlife, or the loss of revenue due to a decline in price. Crop insurance is federally supported and regulated and is sold and serviced by private-sector crop insurance companies and agents. In 2014, 1.2 million polices were sold protecting more than 120 different crops covering 294 million acres, an area larger than Texas and California combined, with an insured value of $110 billion.

Second, Crop-Hail policies, which are not part of the Federal Crop Insurance Program, are sold by private insurers to farmers and regulated by individual state insurance departments. Many farmers purchase Crop-Hail coverage because hail has the unique ability to totally destroy a significant part of a planted field while leaving the rest undamaged. In areas of the country where hail is a frequent event, farmers often purchase a Crop-Hail policy to protect high-yielding crops. In 2014, Crop-Hail liability was $39.5 billion, and premium was $992 million.

The Federal program came to prominence following years of costly, inefficient ad hoc disaster bills as a way to speed assistance to farmers when they need it most while reducing taxpayer risk exposure. Today, crop insurance is the cornerstone of farmers and ranchers risk management portfolios. To read more about the history of crop insurance, click here.

See a video overview of crop insurance here.

Read more about crop insurance in general here.

 

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How does crop insurance benefit the public?

Not only does agriculture feed and clothe us all, but the food and fiber system accounts for roughly 15 percent of the U.S. economy. Therefore, it is in the public interest to have a financially stable agricultural sector that produces the nation’s safe and affordable food and fiber supply and supports the rural economy. That necessitates the presence of a publicly-supported safety net for farmers, who increasingly face variable weather patterns that challenge the food production system. In the United States, this safety net is the crop insurance program, whose need was most recently demonstrated by floods and drought in 2011 and the widespread drought of 2012.

Crop insurance is the primary risk management tool farmers use to financially recover from natural disasters and volatile market fluctuations; pay their bankers, fertilizer suppliers, equipment providers and landlords; purchase their production inputs for the next season; and give them the confidence to make longer term investments that will increase their production efficiency. Without effective and affordable crop insurance, catastrophic production losses would sap the rural economy by setting in motion a series of harmful events: farm failures and consolidation, job losses, farm-related small business failures, financial stress on rural banks and reduced investment in U.S. agriculture. A financially healthy rural economy requires a financially healthy farm production sector.

By 2050, the United Nations projects a 34 percent increase in global population and a 70 percent increase in demand for food (see this. ) As the number of consumers expands globally and the climate continues to exhibit more intense weather events, there will be increasing pressure on the global food production system.

In the United States, the ability for farmers to purchase crop insurance is this nation’s “insurance policy” against disruption and financial instability in the food production sector. Crop insurance is also critical in helping new and beginning farmers obtain credit, enter farming and become the next generation of producers that meet the growing global food and energy needs – provisions that were strengthened in the 2014 Farm Bill.

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How does crop insurance benefit taxpayers?

Crop insurance is an effective taxpayer investment that helps ensure the stability of America’s producers of food, feed, fiber and fuel supply and promotes rural economic growth.

Absent crop insurance, the cost of natural disasters that cripple America’s farmers would fall directly on the laps of taxpayers, which happened repeatedly before the widespread use and availability of crop insurance. In fact, 42 emergency disaster bills in agriculture have cost taxpayers $70 billion since 1989, according to the Congressional Research Service.

The 2014 Farm Bill cemented crop insurance as the cornerstone of farm policy.  Under this policy, farmers shoulder a portion of the risk along with participating companies. Unlike the past, farmers must first purchase crop insurance — putting “skin in the game” — before being protected, and must shoulder a portion of the losses through deductibles. This ensures that farmers are active participants in risk management and that taxpayers are not being asked to bear all the burden of natural disasters in farming.

Congress eliminated direct payments and has moved farm support from traditional price support programs towards private sector-delivered crop insurance.  The net effect has been a downward trend in farm safety net spending.

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How does the 2014 Farm Bill change crop insurance?

The 2014 Farm Bill accelerates 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 commence with the 2014 crop year: 1) Price Loss Coverage (PLC), a program that makes a payment to a producer 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 or the county’s revenue for a crop (the farmer may choose which alternative) is below 86 percent of a predetermined or benchmark level of revenue. The maximum coverage band is 10 percentage points (76 percent to 86 percent of benchmark revenue). These two programs are designed to supplement crop insurance by providing support in periods of multiyear price declines and helping producers cover the crop insurance policy’s deductible. 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 substantially strengthens crop insurance by adding several new products and requiring a number of program revisions to strengthen 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) and is available for sale beginning with the 2015 crop year. STAX will be 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 as applied to the individual coverage of the producer, except that indemnities may not include or overlap the producer’s selected deductible. 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. Because STAX replaces major farm programs for upland cotton producers but will not be in place for the 2014 crop year, producers will receive a transition payment for 2014.

The second program, the Supplemental Coverage Option, or SCO, provides all 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 the policy or plan of insurance. SCO is available for sale beginning with the 2015 crop year for spring barley, corn, soybeans, wheat, sorghum, cotton, and rice. SCO will be available in specific counties, depending on the availability of data. Additional crops and counties are being reviewed for inclusion in SCO beginning with the 2016 crop year. 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.

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In addition to SCO and STAX what other new crop insurance products did the 2014 Farm Bill provide?

The 2014 Farm Bill may result in a number of new crop insurance products coming to market. One new type of product authorized for commodities is margin protection, which would protect the difference between price or revenue and some measure of production expenses. Research and development of rice and catfish margin insurance products is specifically required. New product priorities are placed on policies that increase participation by producers of underserved agricultural commodities, including sweet sorghum, biomass sorghum, rice, peanuts, sugarcane, alfalfa, pennycress, dedicated energy crops, and specialty crops. Insurance products specifically identified for approval for sale, or research and development, include peanut revenue, alfalfa, whole farm risk management, and biomass sorghum and sweet sorghum for use in renewable energy and bio products. Peanut Revenue and Whole-Farm Revenue Protection policies were in development prior to enactment of the 2014 Farm Bill and are available for sale beginning with the 2015 crop year.

The Farm Bill also requires several studies of the feasibility of insuring selected risks, including swine producers from a catastrophic event, commercial poultry producers against business interruption caused by integrator bankruptcy, and specialty crops from impacts of food safety and contamination issues such as recalls or advisories. Feasibility studies usually precede research and development of a marketable insurance product and identify any statutory changes that would need to be made to authorize such products. In addition, the Farm Bill authorizes premium support for up to two small pilot programs to provide producers of underserved specialty crops and livestock commodities with index-based weather insurance.

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Crop insurance is important for beginning farmers. Are there any 2014 Farm Bill provisions to help them?

Yes. The Farm Bill identifies a “beginning farmer or rancher” as a farmer or rancher who has not actively operated and managed a farm or ranch with a bona fide insurable interest in a crop or livestock as an owner-operator, landlord, tenant or sharecropper for more than five crop years. A beginning farmer will receive a premium discount that is 10 percentage points greater than would otherwise be available. In addition, the beginning farmer will receive the benefit of higher insurable yields.

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In addition to new products, does the 2014 Farm Bill make changes in existing plans of insurance to make them more effective and flexible for producers?

The Farm Bill will result in many new features for crop insurance. The Enterprise Unit discount, which has been a pilot program, is made permanent. Separate enterprise units will become available for irrigated and non-irrigated crops beginning in 2015. Producers will also be able to have separate coverage levels for irrigated and non-irrigated acres. A continuing issue has been the loss of insurable coverage a producer suffers as the result of low yields resulting from disaster. The new Farm Bill features a provision, the Actual Production History Yield Exclusion (APH Exclusion), which allows producers to exclude any year from their insurable production (APH) if the county’s yield per planted acre for the crop in that year is at least 50 percent below the simple average of the previous 10 consecutive years of the yield per planted acre for the crop in the county. This provision also applies to contiguous counties and allows for the separation of irrigated and non-irrigated acres. APH Exclusion is available for the spring 2015 crop year for corn, soybeans, wheat, cotton, grain sorghum, rice, barley, canola, sunflowers, peanuts, and popcorn with Yield Protection, Revenue Protection, and Revenue Protection with Harvest Price Exclusion policies. Additional crops are expected to be available beginning in 2016. Another provision enables price elections for all organic crops produced in compliance with USDA standards to reflect the actual retail or wholesale prices received by producers for their crop. Together, these and other changes in the Farm Bill will increase a producer’s ability to custom tailor their crop insurance risk management solutions to more precisely fit the needs of their operation.

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The Farm Bill debate featured much discussion about the link between conservation and crop insurance. How does the 2014 Farm Bill address that issue?

The conservation title of the 2014 Farm Bill requires that in order to be eligible for a premium discount, producers must adhere to conservation compliance requirements, intended to conserve highly erodible land and wetlands. To be eligible for a premium discount, the producer must farm according to an approved conservation plan if that producer plants an agricultural commodity on highly erodible land. An agricultural commodity is defined as an annually tilled crop or sugarcane. A producer not previously subject to this requirement has five years to develop and comply with an approved plan to maintain eligibility. Conservation compliance also requires that for a producer to be eligible for a premium discount, the producer cannot convert wetlands by draining or other means to make them farmable and cannot produce an agricultural commodity on converted wetlands. The wetlands provisions also provide time to comply, depending on whether the producer is covered for the first time and when conversion took place.

A producer previously subject to the requirement and who is currently in violation of highly erodible land conservation has two years to develop and comply with a conservation plan. Ineligibility for premium support applies only to years after the final determination of a violation, including all administrative appeals.

Native sod is protected by another Farm Bill provision in the crop insurance title. If a producer breaks native sod and purchases crop insurance on that land, the yields used to calculate the insurance guarantee will be 65 percent of the county average yield, and the premium discount will be reduced by 50 percentage points. This provision only applies to native sod in the states of Minnesota, Iowa, North Dakota, South Dakota, Montana and Nebraska.

For more information, click here.

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What is the role of the Federal government in crop insurance?

Congress created and provides funding for the modern-day crop insurance system through the Federal Crop Insurance Corporation (FCIC) as a way to help farmers manage the risks of natural disasters and market fluctuations. The activities of FCIC are carried out by the Risk Management Agency (RMA) of USDA. Lawmakers intended for the system to largely replace the need for ad hoc disaster legislation, thereby helping to shelter taxpayers from the full costs of agricultural disasters and avoiding the need to enact new disaster assistance following every major disaster.

To this end, FCIC/RMA sets program standards, approves new products, sets premium rates and discounts farmer premiums. The Federal government further makes crop insurance affordable for farmers by offsetting delivery costs that would otherwise be built into the premium. However, this Administrative and Operating (A&O) delivery cost reimbursement to the companies does not fully cover their actual delivery expenses. The Federal government also reinsures the crop insurance companies (known as approved insurance providers, or AIPs ). The reinsurance involves the government and the companies sharing in the underwriting gains and losses of the program.

Thanks to the success and effectiveness of crop insurance, there have not been any widespread calls for ad hoc crop disaster bills over the past several years, despite 2011 and 2012 being two of the worst weather years on record. By comparison, 42 emergency disaster bills in agriculture have cost taxpayers $70 billion since 1989, according to the Congressional Research Service.

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