November 3, 2017
Editor’s Note: This is a guest blog written by Jeff Schahczenski, an agricultural and natural resource economist with the National Center for Appropriate Technology (NCAT) and the ATTRA Sustainable Agriculture program (ATTRA). A substantial update to his 2012 ATTRA publication, Crop Insurance Options for Specialty, Diversified, and Organic Farmers, will be available this December.
Federal crop insurance is an important part of the farm safety net. As the program is currently structured, however, whether it is more of a constraint or benefit to a more sustainable agriculture system is open to debate. While agriculture sustainability is a multifaceted concept, if we look specifically at the diversification of cropping and livestock systems of production, publicly subsidized crop insurance may be inhibiting needed sustainable diversification of systems of production. A recent report published by the U.S. Department of Agriculture’s (USDA) Risk Management Agency (RMA), The Risk Management Safety Net: Market Penetration and Market Potential, provides useful information on the current status of the complex array of insurance products available to US farmers. The report also provides insight into the direction and impact of crop insurance on agriculture sustainability. Highlights of the report are outlined below.
The report states that crop insurance products in 2015 have penetrated agricultural markets by protecting a record 86 percent of the total U.S. crop acreage for which insurance was available. In 2015, crop insurance products provided protection for 123 different crops with the insurability of an additional 473 differentiated “types” of products. Types of products refer to varieties of a commodity, such as commodity soybeans versus food grade soybeans or those differentiated by agricultural practices such as irrigated corn versus non-irrigated corn.
Individual crop revenue policies, which give protection against price changes as well as the yield impact of the many multiple perils of farming (e.g., flood, hail, drought, disease, insects, and cold), represent 84 percent of the total premiums paid by producers. Also, five crops – corn, soybeans, wheat, almonds and cotton – represented 77 percent of total crop liability in 2015 and 76 percent in 2016. Price and yield protection (aka “revenue insurance”) greatly benefits those who grow only a few crops.
The loss ratio is a measure of crop insurance performance, or its actuarial soundness. It is measured by dividing the total indemnity (loss) payments paid to farmers by the total premiums they paid. A loss ratio of one means that loss payments are equal to premiums collected and a loss ratio of more than one means payouts out were more than premiums collected.
Over all polices offered, crop insurance loss ratios have declined since 2012 with a five year average (2012-2017) of 0.91. Also, it is important to note that because crop insurance is federally subsidized, when loss ratios exceed one losses paid out involve federal expenditures termed “net indemnity payments”. These are the total loss payments paid out minus the sum of producer paid premiums along with some underwriting losses that the private insurance companies delivering crop insurance pay. This means that the federal budgetary consequences of crop insurance are unstable with billions of dollars of cost swings from year to year.
With new additions expected in 2018, organic price elections will be available for 79 organic crops. Price elections are the prices used for a crop in calculating premiums and indemnities. For organic crops these come from private data sources or are based on a price factor. An organic price factor is based on conventional prices and assumes organic crops prices are higher by some estimated amount. Also, in some cases organic policies can be written based on actual producer contracted prices for a crop, through a feature known as the Contract Price Addendum (CPA). The CPA is capped so the insured contract price is not exactly the actual contract price received. This option is currently limited to 73 crops.
WFRP takes a significantly different approach to crop insurance by insuring the average adjusted gross revenue of the farm regardless of the variety of livestock and crop products the farmer grows. Insuring whole-farm revenue, rather than taking out policies for separate crops and livestock, is generally less expensive because the risks of loss are pooled across the various crops and livestock products. Also, increased cropping and livestock product diversity on a given farm results in lower premium costs thereby providing an incentive for diversity.
The report identifies 89 new crops for possible insurance coverage. It also suggests the potential expansion of 26 existing policies to states where they are not currently available.
Taken together, these points present a conflicted view of the federal crop insurance program’s support for sustainable agriculture diversity. On one hand, there is no doubt that RMA has continued to respond to the great diversity of crop and livestock products grown in the United States. RMA has made significant progress by offering more policies for individual crop and livestock products and by attempting to expand the availability of existing policies to more parts of the country. Indeed, with the nationwide availability of WFRP, one could almost say that all crops or livestock production in the United States could be covered by federally subsidized insurance to some degree.
Nonetheless, with the exception of WFRP, all policies are based on individual products and are available mostly in places where higher volumes and largely wholesale-marketed production of a crop is located. For instance, only 57 counties of the 3,142 counties in the United States offer fresh market tomato insurance policies. More importantly, the level of subsidization and protection can be so good for a particular crop that there is little motivation to diversify cropping systems.
An easy example of this can be seen by looking at the availability of corn revenue insurance in the United States. While not available in every county, its availability and subsidized support is exceptional; policies are even available in unlikely states for corn production like Montana and Utah. Furthermore, the revenue protection for corn provides for not only yield loss protection but protection from price changes that could occur between planting and harvest. Why add diversity to a corn cropping system, when corn insurance is so beneficial?
Finally, despite expanding market penetration of new and existing crop and livestock insurance policies, only a little more than 16 percent of farm households participated in the crop insurance program in 2015 (ERS, 2016). Even among midsize family farms, crop insurance program participation is only 26 percent in 2015 (ERS, 2016). While it is hard to substantiate, could it be that the remaining 84 percent of farm households represent farms of greater crop and livestock diversity and therefore enhanced sustainability? Perhaps for these farms, crop diversity itself may be the most significant form of crop insurance.
The whole-farm revenue approach offers great promise for insuring the many who are left without subsidized crop and livestock protection. The idea that farmers should concern themselves primarily with what set of crops and livestock will promote greater profitability and sustainability is paramount. Too often, farmers are trapped into growing the same few crops or livestock because they are the only options for which “too good” insurance is available. The risk of changing to and adding even potentially profitable enterprises can be significant, but it also is limiting. Insuring the whole farm’s revenue is perhaps the best way to offer greater opportunity, profitability, and diversity without literally “risking the farm.”
Categories: Commodity, Crop Insurance & Credit Programs
Nice article! Especially that last section on supporting sustainability. You explained the phenomenon of “too-good” insurance for a single commodity deterring crop diversification in a way that I finally and thoroughly understand how the crop insurance can be an unintended barrier to diversification in production systems.
I wonder if this could be addressed through crop insurance reform the way NSAC farm bill platform addresses the remaining barriers to conservation practices (such as cover cropping) in the current Farm Bill Insurance Title.