FarmPolicy

July 15, 2019

Crop Insurance; Farm Bill Issues; and Regulations

Categories: Budget /Farm Bill

Crop Insurance

As the Farm Bill debate continues to unfold, increased attention has focused on crop insurance.

Crop insurance is a key variable in the farm safety net and the industry has provided an illuminating perspective on recent news associated with the program.  This additional outlook and assessment from the crop insurance industry is available here:

The Environmental Working Group (EWG) on Thursday released a paper criticizing crop insurance as excessive in the payments made under the program to both farmers and insurance companies. Unfortunately, the paper is based on misleading data, presents a biased, one-sided view of the nation’s crop insurance program, ignores program improvements underway and recommends a variety of changes that would sharply reduce the protection of U.S. agriculture from market risks and natural disasters.

The EWG paper uses data from 2007 to 2010 to claim crop insurance company returns are excessive.  Company returns reflect two primary variables:  (1) the indemnities paid to producers to cover insurance losses and (2) the premiums paid for insurance protection. During 2007 to 2010, the losses in agriculture were unusually low relative to history. Since the modern crop insurance program began 30 years ago, three of the four lowest loss years occurred in 2007, 2009 and 2010. It is simply unsound analytics to base expectations on future performance of an insurance program on such a very small sample of highly favorable experiences. Sound actuarial analysis of expected losses takes into account decades of data when establishing premium rates that are expected to cover future losses.

The EWG paper also fails to recognize that the government is under a mandate to operate the crop insurance program in a financially sound manner and is continually exercising flexibility to correct excesses that occur. Setting appropriate premium rates is an important factor in determining producer demand for insurance and company revenues. In 2010 and 2011, the government initiated a process to review and alter its rating methods, which will likely affect future premium rates and company revenues. Also in 2010, the government renegotiated its contract with the companies to deliver the program, and payments to companies are being reduced by an estimated $6 billion over 10 years.  The effect of these cuts on future profitability is unknown and cannot be judged by cherry picking recent past experience to claim these cuts are insignificant.

EWG argues against government support of revenue insurance by, once again, using a select sample–one year, 2008. While the use of futures prices may be improved, basing conclusions on one year ignores the fact that changes in farm level and futures prices have been correlated historically, and that it is efficient to combine yield and price protection into one insurance product. When U.S. prices decline, it is usually because yields increase, and when yields drop, that usually raises prices.  These offsetting effects can reduce farm revenue losses, an impact not captured by focusing on yields alone.

A variety of recommendations are made in the EWG paper including Federal insurance for yield losses only; 100-percent subsidized, low level insurance; partially subsidized insurance using vouchers; and elimination of Federal oversight of private crop insurance companies.  They reject any Federal protection for farmers from successive years modest losses that can be cumulatively injurious.

Policy leaders should reject the EWG recommendations. The Federal Crop Insurance Program is now the centerpiece of risk management for U.S. agriculture because it has proven its role in stabilizing U.S. agriculture. Farmers value the program, buying increasingly more protection and putting their own dollars to work. The program has grown from 84 million acres in 1993 to 262 million this year. This growth, and the protection it affords U.S. producers and consumers, is importantly attributable to the private delivery system that allows agents to work with producers to provide tailored coverage to their needs. Crop insurance is essential to making farmers credit worthy and enabling them to secure and repay loans to run their farms, modernize their businesses and remain in operation.

Separate industry analysis recently indicated that: EWG cherry picks the data to attempt to make their point.  For example, the paper uses data from 2007 to 2010 to claim crop insurance company returns are expected to be excessive.  During that time period, from 2007 to 2010, the losses in agriculture were unusually low relative to history. Since the modern crop insurance program began 30 years ago,three of the four lowest loss years occurred in 2007, 2009 and 2010.Curiously, they make no mention of 2011, a year with unusually high payments to farmers.

EWG fails to recognize that the government must operate crop insurance in a fiscally sound manner.  To accomplish this, the government is continually exercising flexibility to correct excesses that occur.  Setting appropriate premium rates is an important factor in determining producer demand for insurance and company revenues.  Recently, a review process was initiated to review and alter rating methods, which will likely affect future premium rates and company revenues.

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