Crop Insurance is Just That – Insurance

Drought damaged corn

Farmers utilize crop insurance to manage their risk of not being able to produce a crop, like with this drought damaged corn from 2012.

Despite the misconceptions, crop insurance is just that – insurance. Insurance as a whole is complicated and intricate; however, crop insurance is like any other segment of insurance. Farmers rely on crop insurance when Mother Nature turns on them, just like homeowners, car owners, business owners and all other insurance claim holders. Farmers must pay a premium for crop insurance. 

The major difference between your car’s insurance and crop insurance is that crop insurance is a private pubic partnership between the federal government and private crop insurance companies. Crop insurance cannot compete on price, as it is government backed. The government backs the private crop insurance companies because unlike hail damage on your car, there are no rentals available for the world’s food supply.

And to a point, the crop insurance system is working – despite the fact that the U.S. has faced two of the worst farming years in decades with a devastating drought in the Southern Plains and flooding in the Midwest in 2011 and widespread drought over major corn and soybean growing regions in 2012, there has not been a single call for an ad hoc disaster bill from America’s farmers.

There is no call for disaster assistance from farmers because 86 percent of planted farmland in 2012 was protected by crop insurance, the best risk management tool available to farmers. Before crop insurance was widely available, natural disasters would have triggered a very costly, unbudgeted ad hoc disaster bill.

Page 15 - Crop Insurance Hail Corn

Crop insurance was designed by Congress to replace the need for ad hoc disaster legislation; helping shelter taxpayers from the full cost of agricultural disasters like hail featured above on corn plants.

Crop insurance was designed by Congress to replace the need for ad hoc disaster legislation; helping shelter taxpayers from the full cost of agricultural disasters by avoiding the need to enact new disaster assistance following major farm disasters, like was recently experienced with Hurricane Sandy. The Hurricane Sandy relief bill took the federal government three months to pass.

Farmers rely on crop insurance to manage their investment risk of seed, fertilizer and machinery, often investing more than $750 per planted acre . In fact, since 2000, farmers have spent nearly $30 billion out of their own pockets to purchase protection through crop insurance. Crop insurance premiums are partially discounted by the federal government, but first and foremost, farmers must put money in the game.

Farmers must suffer a verifiable loss to collect any payment from the crop insurance program (indemnity). Contrary to allegations, most farmers purchase crop insurance and do not collect any indemnity. In fact, of the nearly 1.1 million policies purchased in 2012 during the worst drought faced in decades, less than half of the policies were indemnified. And that was a really bad year.

In unusual and catastrophic years like 2012, there will be heavy losses and all participants will feel the pinch. That is how all types of insurance work. In crop insurance, losses are shared by farmers, who pay premiums — $4.1 billion in 2012 — and who have deductibles, thus shouldering a percentage of loss. But losses by the federal government are buffered by underwriting gains that they make during the good years, from 2001-2010 the government saw $3.99 billion in underwriting gains.

So while opponents of crop insurance criticize a policy that has been embraced by farmers, farm groups, bankers and politicians of all political stripes, it is noteworthy that critics have left out the fact that crop insurance ensures taxpayers are never stuck with the whole tab, as they are with ad hoc disaster assistance, and rest assured that the food production system is stable.

Sources:

Iowa State University Extension

AgProfessional

Farmers Rely on Crop Insurance” by Tom Zacharias, president, National Crop Insurance Services

 

–Kassi Williams is a proud farmer’s daughter growing up on a cow/calf and grain farm in Iowa. She earned a Bachelor of Science from Iowa State University, majoring in both animal science and public relations. She has been involved with agriculture from birth, working in multiple facets of the industry including the USDA and Extension. Kassi relocated to Nebraska in 2010 to work for a marketing communications agency for a multitude of agriculture clients.

One response to “Crop Insurance is Just That – Insurance

  1. Pingback: Farmers Busy Planting Future | // Farm Meets Fork

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