Strong Financial Underpinning A Key Requisite to Strong Crop Insurance Policy

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Because of the magnitude of risk inherent in U.S. agriculture, combined with the large volume of commodities produced, companies that participate in the Federal crop insurance program are mandated by law to have ready access to large pools of liquid capital so they can meet their obligations if disaster strikes the farming sector. These rigorous financial requisites all but demand the involvement of reinsurers – large, financially fortified companies that provide insurance to insurance companies – to ensure that payments arrive to farmers for the policies they purchase in a timely fashion.

Never before in the history of the Federal Crop Insurance Program was the extent of the risk and financial exposure so evident as in 2011, which saw record indemnities in excess of $10.4 billion paid by private companies to farmers for their losses. This makes 2011 the most expensive year ever, topping the old record set in 2008 of $8.67 billion in indemnities by 20 percent. And with commodity prices rising due to tight markets and increased domestic and global demand, there will likely be an increased need for crop insurance, which protected over $113 billion worth of crops in 2011.

Although crop insurance has already been subjected to $12 billion in federal funding reductions, further reductions could raise questions of the federal commitment to the existence of a robust and effective crop insurance policy. “An unrecognized danger is that additional budget cuts will prove counterproductive in the long run, driving away the reinsurance companies that have long played a crucial role in the program’s growth by putting a substantial amount of their capital at risk,” says Jim Christianson, Managing Director, Guy Carpenter & Company, LLC.

Christianson notes that any pullback by reinsurers would have serious repercussions in the market and would, in the end, leave the federal government and the U.S. taxpayer to shoulder a greater portion of the cost of future catastrophes that hit the country’s agriculture sector.

As recently as the early 1990s, farmers purchasing crop insurance hovered around 30 percent. But the program has expanded dramatically since and in 2011, more than 1.1 million policies were written, covering 83 percent of eligible farmland and 128 crops in all 50 states. And the continued climb in commodity prices means an increase in the amount of risk that will be protected annually.

“Today, reinsurers from around the world find the U.S. crop insurance market to be a welcome addition to their portfolios,” said Christianson.

Reinsurers are keeping a watchful eye on Congress and lawmakers as they write the 2012 Farm Bill. ”Congress should be very cautious about considering the adoption of any other policies that would weaken the already over-extended crop insurance infrastructure or divert the much needed reinsurance investments elsewhere,” he added.

What Does 2012 Hold for Crop Insurance? 

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With 2011 indemnities quickly approaching the all-time record of $10 billion, and farmers preparing to plant another impressive crop just months after the worst weather year in U.S. history, the current crop insurance system is earning high praise from agricultural leaders and lawmakers alike.

But in a new peer-reviewed analysis that appeared in January’s Choices magazine, former USDA Chief Economist Keith Collins and Harun Bulut, National Crop Insurance Services (NCIS) senior economist, explained that many proposals to alter crop insurance policy in the 2012 Farm Bill could hold serious ramifications for farmers and taxpayers, and could weaken the very system that proved so crucial last year.

Among the shortfalls they highlighted: Displacing private-sector crop insurance with duplicative government-run programs; saddling farmers and taxpayers with greater risk exposure; increasing program complexity; increasing taxpayer cost; and reducing farmer participation and coverage levels.

“With deficit reduction in prospect for years to come and insurance so fundamental to risk management in all economic areas, the long-term most sustainable safety net program for farmers may be enhanced crop insurance,” the authors wrote.

Collins, who attended an annual convention sponsored by NCIS, urged people to consider the past and present before writing the future.

“Let’s not lose sight of the fact that the current system took three decades to build and is working as designed,” he said at the conference. “The public-private partnership was created to reduce taxpayer risk by encouraging farmers to purchase insurance from professionals skilled in delivering private-sector payments quickly.”

Since modern-day crop insurance was first created in 1980, participation and coverage levels have grown dramatically. Nearly 265 million acres were insured by $114 billion worth of liability coverage in 2011, up from 45 million acres and $6 billion in coverage in 1981.

“My advice moving forward,” Collins concluded, “consider all consequences before restructuring crop insurance. The unintended consequences could harm three decades of success and upend some of the essential strengths that make the current system so great for farmers and taxpayers.”

 

Nation Cotton Council CEO Says Key Crop Insurance Strength Is Private Sector Delivery

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While a record amount of indemnities – approaching the $10 billion mark – are being paid to farmers for 2011, one of the key aspects of crop insurance that makes it a favorite among farmers is its private sector delivery, which sets crop insurance apart from all other policies, said Mark Lange, president and CEO of the National Cotton Council.

During a recent interview with the National Association of Farm Broadcasters, Lange pointed out that crop insurance’s speed of delivery was well on display in 2011 in West Texas – where many growers didn’t even see their fields sprout – but they had their indemnities in hand quickly, allowing them to farm yet another year. “They are dry land growers, and they are seeing crop indemnities paid prior to Labor Day,” he said.

Lange noted that another strength of crop insurance, from the growers’ perspective, is that “crop insurance policies come in a vast array of styles and coverage and the grower can very closely tailor the specific policy that they are acquiring to their specific farm situation.”

Lange says that Congress has a daunting challenge, since crafting a Farm Bill with elections fast approaching and with budgets declining will not be easy. But he believes that what emerges will preserve the public-private partnership of crop insurance and ensure the long-term viability of America’s food and fiber supply.

“I think it’s clear that the delivery of insurance or revenue programs from the government has a very chilling effect for agricultural producers,” he said, and it takes far too long for help to arrive into the hands of the farmers. “The SURE program, is just now providing benefits for losses that occurred in 2009,” he said. “So here it is in early 2012 and they’re just getting the benefits. That’s just too long.”

To listen to Lange’s interview in its entirety, click here.

Kansas Farmer: One Size Doesn’t Fit All When it Comes to Risk Management

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When it comes to risk management, one size does not fit all, said Kansas farmer Jay Armstrong during a recent radio interview with the National Association of Farm Broadcasters that ran nationally in early December. Armstrong noted that his 2,700-acre family farm is split between upland and bottomland. In years of drought, the upland withers while the bottomland blossoms. In years of wet weather, it’s the opposite.

“So no matter what extreme Mother Nature throws at me I will suffer losses,” he said, adding “my story is the story of many thousands of farmers across this country, who grow our nation’s food, feed, and fuel supply while dealing with Mother Nature’s tantrums, year in and year out.”

Armstrong says most farmers would agree that the single most important item in their risk management tool kit is crop insurance. He says that before federal crop insurance became widely available several decades ago, farming on land like his felt like playing Russian roulette. “It was nearly impossible to get any kind of coverage for managing risks on my farm where flooding or drought was an occasional occurrence because the private sector just wouldn’t offer it.”

“But federal crop insurance took the universality of the public sector and made these important risk management tools available to everyone willing to pay for them,” he said. Armstrong called crop insurance “the quintessential tool” for managing farms risks because each farmer can choose the plan that makes the most sense for their operation

Armstrong also said that crop insurance has made him a better businessman, allowing him to market his grains, including corn, soybeans and wheat, well in advance because they are insured. “If my crop comes up short at the end of the year because of poor weather – or fails altogether – the insurance indemnity is there to purchase the grain to fulfill my marketing contracts at the end of the year.”

Crop insurance was designed by Congress to shield taxpayers from costly weather-induced bailouts that became commonplace in past decades – and Armstrong says it’s working. 2011 might be regarded as one of the worst weather years on record, with crop insurance companies paying out more than $6 billion. But Armstrong points out that with roughly 80 percent of eligible acres covered by crop insurance, there is no need for disaster bills.

Crop Insurance: Private Sector Participation Enhances Policy Efficacy

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Most would agree that the private sector excels at some tasks while the government is better-suited for others. This melding of the private and public sectors has yielded a crop insurance policy with affordable premiums, personalized risk management solutions and a private delivery system that puts needed monies into the hands of farmers when timing is critical.

Crop insurance covers 128 crops, including all major grain crops and cotton, nursery, citrus, rice, potatoes, and livestock. Farmers can cover their crops for all natural disasters, including wildfire, earthquake, volcanic eruptions and even irrigated water issues. Because the policy is personalized, each farmer tailors the policy to match his specific risk and desired coverage.

To date for 2011, the crop insurance program has paid out over $5.7 billion in indemnity payments to America’s farmers and ranchers, and that number will continue to rise over the next few months.

Corn and soybean farmer Quentin Bowen, who operates a family-farm in Humboldt, Nebraska, says that when disaster strikes, the difference in delivery of benefits when comparing government-run programs to the private sector’s handling of crop insurance, is like comparing night to day. “The speed of delivery of crop insurance—because it’s administered by private sector companies—makes it a different kind of animal. In fact, if a natural disaster strikes and I’m covered by a crop insurance policy, typically the payment comes to me in one or two weeks, not in one or two years,” he said in a recent guest column.

Following the submission of recommendations to the Super Committee for cuts in agriculture, major farm groups made clear their strong feelings on crop insurance.

In a letter to House and Senate Ag leaders, The National Association of Wheat Growers (NAWG) stated that “our highest priority for federal investment in agriculture programs is the portion of crop insurance premiums subsidized by the federal government, the public part of one of the most well-functioning public-private partnerships undertaken by our government.” NAWG also reiterated its conviction that crop insurance is the cornerstone policy for risk management, adding, “We believe crop insurance is essential to the farm safety net and the reliable production of an abundant food supply.”

A similar statement from the National Corn Growers Association noted, “the highest priority for NCGA is securing a strong crop insurance program.”

And crop insurance is apparently working quite well this year for America’s farmers, particularly those farming corn, cotton, grain sorghum, soybeans and other crops in drought-ravaged Texas. The October 23 Houston Chronicle reported that more than 41,000 farmers in Texas have received $1.65 billion so far from the national crop insurance program to help compensate for disastrous low yields and other damage caused by the state’s worst drought in history.

“The crop insurance is the linchpin and heartbeat of recovering and muscling through the disasters,” said Karis Gutter, the U.S. Department of Agriculture’s acting deputy undersecretary, who oversees all federal disaster relief efforts and foreign exports. “It will help folks get back to a semblance of normalcy in their lives.”

When farmers are trying to pick up the pieces after disaster strikes, an inefficient payment or delivery system is the last thing they need to be dealing with.

Living on a Prayer

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By John Thamert

Agriculture is collectively holding its breath as the “super committee” meets to determine where the $1.2 trillion worth of federal budget funds will be cut. Having already shouldered more than $12 billion in cuts for deficit reduction in the past several years, farmers and ranchers feel the pain that other sectors have yet to experience.

With this massive overhaul on the horizon, the Senate Agriculture Committee traveled to Wichita, Kansas, late last month to hear from farmers, bankers and local elected officials about what they thought were the necessary components of a strong and viable Farm Bill.

Farmers representing every crop from corn to cotton, bankers who loan to businesses of all sizes, and key elected officials all delivered one main message that was eventually heard all the way back to the halls of Congress: Crop insurance is one of the most important components of farm policy—it should not be touched.

Senator Debbie Stabenow (D-MI), the committee’s chair, recognizes that the upcoming farm bill will not only impact farmers and ranchers; it will also affect those workers who process, package and market agricultural products and services.

This is no small item when you consider that there are over 21 million jobs tied directly to the U.S. agricultural industry.
Obviously, crop insurance is not a policy used by every American—particularly those in urban areas who write about it. But as a banker, a farmer, and a resident of rural America, I see firsthand the benefits of crop insurance and its essential place in a farmer’s arsenal of risk management tools. “Some folks question the need for a Farm Bill with commodity prices where they are today,” Senator Pat Roberts (R-KS), the committee’s ranking member said. “I don’t have to tell this crowd that prices can fall much more quickly than they rise.”

So let me explain why farmers and agricultural lenders from all corners of the country are crying out in unison for maintaining crop insurance.

Crop insurance is a public-private partnership that combines the flexibility and efficiency of the free market with the support of the public sector, to ensure that a modest government investment is able to provide an economic “safety net” for a very unpredictable and high-risk industry.

In so doing, when farmers and/or ranchers experience a severe reduction in their cash flow due to a natural disaster they can depend on crop insurance to cover some of the loss. Any claim paid to a farmer or rancher will create dollars that can be used to cover operating loans from their bank, to pay for fuel, crop and machinery costs; all of which flow through the economies of our country’s small towns and rural communities.

Farmers need crop insurance as an economic “safety net”. Consumers need crop insurance so that they can take comfort in knowing that one of our nation’s premier industries, which provides an abundant and affordable food supply, will remain viable. And lenders need crop insurance in order to be confident that their investment in agriculture will be sound—and around it goes.

One other important consideration is helping the next generation of farmers and ranchers continue our nation’s dominance in food production. Finding a lender willing to invest in a young farmer is hard enough as it is. More often than not, they have very little capital. In these times of rising input costs, a volatile world economy and unpredictable weather patterns, the one thing that lenders and their young farm customers are able to rely on is the crop insurance policy.

“Certainly, farmers here in Kansas know the importance of a strong farm safety net,” Senator Stabenow said at the hearing. “You’ve been dealing with a record drought this year that is devastating crops and livestock production. Suffice it to say, if we ever needed a reminder about the risks farmers face, we got it this year.”

She’s right. Without crop insurance, I’m not sure that my operation would still exist—and the same goes for many of my neighbors—not just in Kansas but in the Texas panhandle where they haven’t seen a drop of rain since October 17, and Missouri, where flooding has left thousands of acres under water and unproductive.

The Senate Agriculture Committee asked for our input: “What are the risk management tools that farmers in the great state of Kansas need? What should an effective farm safety net look like? What are your priorities? What programs can we streamline or consolidate?” And the answer was nearly unanimous: No more cuts to one of the few remaining – and in most farmers’ judgment, the best – risk management tools. If you must cut from agriculture, do not cut crop insurance.

To our farmers and ranchers dealing with severe drought or other natural disasters, these are very trying times; to see high prices without any product to sell and yet have to put out next year’s crop with record high input costs. Without crop insurance, these producers would go out of business as well as cause economic harm to a number of their business providers. I would ask my fellow farmers and bankers to contact their senators and representatives and convey the magnitude of our concerns. Farming without strong farm policy, is nothing but living on a prayer.

John C. Thaemert is a Vice President & Trust Officer at Citizens State Bank & Trust Co. in Ellsworth, Kansas as well as past president of the National Association of Wheat Growers. Thaemert is a third generation farmer who resides in Sylvan Grove, Kansas.

This op-ed appeared in Agri-Pulse on September 6, 2011.