A Drought Isn’t A Disaster if the Right Tools Are in Place
A drought specialist with the national weather service recently compared the drought and heat wave here in the Midwest with the catastrophic dry period of 1988 that at the time cost agriculture $78 billion. This year’s weather pattern, which settled into the Great Plains and the Southwest last year and has spread into the Corn Belt, resembles those of a quarter century ago, he noted.
USDA Chief Economist Joe Glauber recently said that “49 percent of the corn crop, 50 percent of the soybean crop, and 45 percent of the hay crop are all in areas that are experiencing drought,” adding that a lot of that area is actually in the “severe drought” category. For consumers, this drought could spell higher food prices as food and feed supplies tighten further and global demand continues to rise.
For farmers and ranchers who in 2011 experienced one of the most disastrous weather years in history this could mean yet another year of dismal harvests and dashed hopes. Thankfully, the vast majority of U.S. farmers purchase crop insurance policies, which last year covered 84 percent of eligible lands, protecting 266 million acres of crops.
But the agricultural destruction experienced in 2011 — which ranged from drought in the plains to flooding in the Midwest and Delta regions to freezes in Florida and Hurricane Irene on the East Cost — differed from previous years. In the past, large natural disasters would have triggered nearly immediate and always expensive ad hoc farm disaster bills in Congress. Last year, there were none.
Why? Because crop insurance, the public-private partnership designed to encourage the private sector to sell and service policies, was in place and working to help America¹s farmers pick themselves up when Mother Nature struck. Crop insurance is the most widely used and popular risk management tool available to farmers today.
This past year, as Congress began writing the 2012 Farm Bill, farmers and ranchers from each corner of the country and nearly every major commodity group came to Washington to testify about what that Farm Bill needed to do. There was one main theme that threaded through their testimony: “Do no harm to crop insurance.”
Unfortunately, an amendment in the recently passed Senate Farm Bill could harm the crop insurance system by mandating means testing to farmers who seek to purchase crop insurance. This might sound like a common-sense amendment at first glance, but what is important to remember is that crop insurance is purchased by the farmers themselves, so trying to make crop insurance sound like some government handout is very misleading.
Means testing could potentially disrupt the whole system because crop insurance, like other forms of insurance, relies on large pools of policy holders, who are all interconnected, meaning that less risky producers make policies more affordable for the riskier producers. In laymen¹s terms, that means that the well-financed, established farmers make policies more affordable for the less established, heavily-leveraged farmers or new farmers seeking to enter agriculture for the first time.
For those of you who don¹t farm, think of it this way. If a car insurance plan removed all of the most experienced and safest drivers from the pool of the insured, the cost for the remaining participants would increase because the low cost members were no longer there to balance out the high cost members. The same is true with crop insurance.
Without an adequate pool of insured participants, the whole system could collapse, making it much more difficult to secure insurance policies or to quickly collect indemnities when disaster strikes.
It’s important that this idea gets stopped in its tracks in the House Farm Bill, which will soon be written and then debated later this summer. An effective insurance program requires more acres in the program, not less. Means testing and arbitrary caps on crop insurance will reduce participation and hurt everyone in the system, including consumers.
The crop insurance system has helped American farmers survive the mishaps of Mother Nature last year, and it will do it again if it’s not undermined. Last year, farmers received nearly $11 billion in indemnities for the damages and losses they incurred over the course of the year. And hopefully, we can maintain crop insurance in its current form, because the current system works for both farmers and consumers.
Mike Pfantz is a crop insurance agent from Omaha, Nebraska. This op-ed appeared in the Lincoln Journal-Star on July 13, 2012.
