Crop Insurance: A Standing Farm Price Disaster Program
by
Dr. David R.
Graves,
Manager/Secretary,
American Association of Crop Insurers
Background
The Federal crop insurance program (the program) is
structured, administered and operated to provide indemnity payments to the
nation’s farmers in an efficient and effective manner for a wide array of
disasters that can strike farming enterprises. Hence its name—multi-peril
crop insurance. To help accomplish the efficiency and integrity goals of
the federal program, the government partners with the private insurance
industry for promotion, outreach and delivery services.
Traditionally, the program has been thought of as a source
of protection for production or yield losses only. For more than a decade
that has not been the case. The focus of this paper is on the program’s
inclusion of price as one of the covered “perils.”
Dating from passage of the Federal Crop Insurance Act of
1980, Congress has continued to review and modify the program to improve and
enhance its value to farmers as a risk management tool. Today, the
program is considered to be the most broadly available and most widely utilized
risk management tool by the nation’s farmers. Furthermore, in many
instances, the program is required by farm lenders and landlords as collateral
protection for their respective interests. For the 2008 crop year, the
program insured more than 272 million acres, with liability protection totaling
almost $90 billion.
Revenue
Insurance
In the process of evolving the risk management effectiveness
of the modern program, Congress strongly encouraged and the administration
agreed to equip it with the nation’s first farm revenue protection
feature. This action was taken in January 1997. That year, for the
first time, the program offered wheat farmers the opportunity to secure
protection against revenue losses. In the ensuing years, the revenue
protection feature became popular with farmers and it has been added as an
option for other crops, especially including corn, soybeans and wheat.
For the 2008 crop year, 63 percent of the policies earning
premium provided some form of revenue protection. Moreover, for 2008,
revenue polices accounted for 74 percent of total program liability.
The Risk Management Agency (RMA) provides a brief
description of some of the major crop policies, including those with revenue
insurance options, at the following web link: http://www.rma.usda.gov/policies/
. RMA considers the following policies to offer some form of revenue
protection: Adjusted Gross Revenue (AGR), Adjusted Gross Revenue Lite (AGRLT), Avocado Revenue Coverage (ARC), Crop Revenue
Coverage (CRC), Dollar Plans of Coverage (DOL), Group Risk Income Protection
(GRIP), Indexed Income Protection (IIP), Income Protection (IP), Pecan Revenue
Coverage (PRV) and Revenue Assurance (RA).
2008 Crop
Indemnity Payments
Farmers are receiving a record level of indemnity payments
for the 2008 crop year. Although the final amount will not be known until
later in the year, a February 16, 2009 interim report by RMA shows the program
has already paid out nearly $6.5 billion in indemnity payments, which is
an 83 percent increase from 2007. Of the $6.5 billion already paid to
farmers, almost $5.5 billion or 85 percent was attributed to the revenue
insurance policies, as reported by RMA.
To view an RMA map showing indemnities by county, go to the
following web link: http://www.rma.usda.gov/data/indemnity/2009/020909map.pdf
(allow time for the map to load).
While official statistics are not available at this time, it
is likely that a significant share of the 2008 indemnity payments result from
the revenue protection options as impacted by the price variable. With
fair to normal national average yields, the commodity price collapse for the
2008 crop year is likely to prove to be the most significant driver of the
record indemnity amount for the program. This outcome is especially
likely to be the case for corn and soybean policies.
In Table 1 below, note the 2008 RMA approved price declines
for corn and soybeans for CRC and RA policies. The prices shown are
relevant for states like
|
Table 1: Selected 2008 Crop Insurance Prices |
||||||
|
|
CRC |
RA |
||||
|
Base Price |
Harvest Price |
Price Change |
Base Price |
Harvest Price |
Price Change |
|
|
Corn |
$5.40 |
$4.13 |
-23.5% |
$5.40 |
$3.74 |
-30.7% |
|
Soybeans |
$13.36 |
$10.36 |
-22.5% |
$13.36 |
$9.22 |
-31.0% |
|
Source: RMA |
||||||
Additionally and specifically, it should be noted, these
program indemnity payments were made without Congress having to debate a single
disaster assistance amendment for a single minute. Furthermore, the
timing of the payments did not depend on a lengthy USDA data compilation and
analysis procedure, which can and has delayed other federal farm program
payments.
Conclusion
The Federal crop insurance program has evolved to become the
nation’s premier risk management program for protection of both price and
production risks for farmers. In combination, the current scope,
operating characteristics and private sector delivery of the program make it
both an efficient and effective “standing multi-peril” disaster assistance /
insurance program. The inclusion of the price protection dimension has
proven to be a valuable feature for farmers. Furthermore, the performance
of the program in responding to the 2008 farm price disaster is likely to make
the revenue options even more popular among farmers. Given the program’s
performance for the 2008 crop year, there is likely to be additional interest
in expanding the revenue option to additional farm enterprises.