Crop Insurance and Peace of Mind
Photo by kconnors/morguefile.com.
The U.S. Department of Agriculture and the Federal Crop Insurance Corporation make a number of different crop loss indemnity programs available. The three major categories of assistance are:
- Federal crop insurance: Producers choose an insurance policy through a private agency for an approved crop and pay part of the premium. Insured crops vary from state to state.
- Noninsured Crop Disaster Assistance Program (NAP): Limited assistance is also available for ineligible crops and completely funded by federal dollars.
- Emergency Farm Loans (EM): Low-interest loans are available to eligible farmers for the recovery of production and physical losses incurred during major disasters; these are completely funded by federal dollars.
The U.S. crop insurance program is unique in that it is a federal program that works in conjunction with the private sector. Private insurance companies provide federally designed insurance to farmers. Both the federal government and the insurance companies share in the underwriting of the contract. As they would be with any insurance policy, farmers are charged a fee for the insurance. Purchasing federal crop insurance is purely at the discretion of the farmer, and they must decide how much financial risk they are willing to take. However, in some cases banks will not offer operating loans to farmers unless they carry crop insurance.
The federal crop insurance program offers a variety of insurance policies:
- Actual Production History (APH)
- Revenue Protection (RP)
- Revenue Protection with Harvest Price Exclusion (RPHPE)
- Yield Protection (YP)
- Adjusted Gross Revenue (AGR)
- Group Risk Plan (GRP)
- Group Risk Income Protection (GRIP)
According to Colleen Kisselburgh of the Arthur Carroll Insurance Agency in Thomaston, Conn., crop insurance is a valuable risk management tool that's available to all farmers when they decide they need it. The purchased insurance is a risk management tool that farmers can incorporate into their overall farming management plan. Today's crop insurance program allows a producer growing an insurable crop to voluntarily select a level of crop yield and price coverage that they are comfortable with. The level of risk a farm is insured for is reflected in the premium payment. Farmers must decide for themselves how much financial risk they are exposed to for the crops they grow.
Not every farmer necessarily needs crop insurance. Crop diversification and the weather history at the farm are key elements in deciding whether or not crop insurance is appropriate for a farm. With a greater variety of crops, risk is spread out, and the failure of one specific crop will not have a dramatic effect on total income. If a farm has a long history of few or no weather-related problems that damage crops, then purchasing crop insurance may not be warranted. When it comes to deciding on investing in crop insurance, it all depends on how much risk a farmer is willing to take on.
While insurance of any kind comes with a cost, today's crop insurance program is designed to be affordable and flexible. Government subsidies enable insurance premiums to be much more affordable. Farmers then have the flexibility to choose the coverage level they are most comfortable with and can best afford. They can choose a higher level of coverage for a high-risk crop and less coverage for a low-risk crop. However, as the level of coverage increases, premiums will increase and government assistance declines.
Federal crop insurance is authorized by the U.S. Congress as part of the farm bill. The bill, which is supposed to be renewed every five years, has always been a political hot potato and has become even more so as the federal budget battle continues to rage. The farm bill was scheduled to be renewed in 2012, but a highly partisan Congress allowed it to expire during the government shutdown in 2013. At press time, the bill had yet to be renewed.
One of the main sticking points is how much money the federal crop insurance program should pay out year after year to cover farming losses. Weather-related losses - largely being blamed on climate change - continue to mount, and critics of agricultural subsidies believe that farmers are taking advantage of the system by not changing their farming practices. Those critics are encouraging lawmakers to consider limiting insurance coverage for farms unless farmers incorporate more environmentally friendly practices. They want to link qualifying for federal crop insurance to conservation programs. Critics think that forcing farmers to meet conservation program guidelines will somehow reduce increased crop insurance indemnities.
Kisselburgh explains that conservation programs are federal programs, while crop insurance policies are federally regulated contracts between a farmer and a private insurance company. Forcing farmers to comply with unrelated conservation programs puts unfair pressure on crop insurance as a risk management tool.
Another issue of debate is the "eligibility limits" of the insurance program. A recent report from Reuters stated that Congress is considering raising premiums and/or reducing subsidies to the wealthiest of farmers. Kisselburgh comments that this may have the unwanted result of the largest farms not purchasing insurance. This would be counterproductive, since the largest farms currently pay the most into the premium pool, and it's that pooled money that pays for the crop losses across the nation. The larger farms are needed to keep the revenue up, and there should be no discrimination based on the size of a farm.
Honest farmers are not in the farming business to purchase crop insurance with the hope of seeing their crops fail and collecting the insurance money. Crop insurance should be seen for what it is: insurance against the unforeseen weather events or catastrophes that may put a business out of business. Crop insurance protects forward-thinking farmers who apply new technologies to preserve soil and water resources. The modern federal crop insurance program has proven itself to be one of the best risk management tools that farmers have.
The author works for Central Connecticut Cooperative Farmers Association in Manchester, Conn.