USA - New crop insurance math, new challenges for farmers
It’s not quite calculus, but it’s getting pretty close with all the bells and whistles Congress has added to the federal crop insurance program — now the biggest part of the safety net for American farmers.The newest refinement is something called yield exclusion, or YE for short, a little-debated provision in the 2014 farm bill which was added in the final talks on behalf of cotton and grain producers in the South and West hurt by the severe droughts of recent years.As its name suggests, the idea is to let growers exclude those especially bad years which lower their production score so important to calculating what level of revenue protection they can buy. Among the qualified counties, preliminary data from the Risk Management Agency released Tuesday shows that about 19 percent of the policies sold thus far have taken advantage of the new provision. But it’s corn, not cotton, leading the way — an added dividend on top of the concessions already won by corn growers in the commodity title.Among 410,771 corn policies, for example, 28 percent or 115,452 chose yield exclusion. But among 73,681 cotton policies, the RMA said 19 percent or 13,904 took advantage of the YE option.Soybeans are close behind at 16 percent. Together corn and beans — two mainstays in the Midwest — account for 78 percent of the policies excluding one or more years.For most Americans, crop insurance is one big rabbit hole better left to Alice — or at least the House and Senate Agriculture committees. But jumping into the numbers is also an education to the challenges faced in shaping a farm safety net that is meaningful for major crops from one region to the next.For policymakers, that’s more and more the bottom line, as crop insurance has surpassed traditional commodity price support programs. But it also raises questions about how to balance the risks to the producer versus those to the taxpayer subsidizing the system.A recent report from the Government Accountability Office warns that higher-risk regions are already costing the program well beyond the premiums set by the RMA. Add in the new YE provision, and it puts RMA in something of a bind, caught between what seem to be two conflicting mandates.For the farmer, it’s really a crash course in calculus. So many variables are in play, each impacting the optimal outcome.Take a look at the most common form of coverage today: revenue insurance. The two major elements are a farm’s expected yield, based on its average production history or APH, and the anticipated market price for the crop, which is based on futures contracts for each season. Multiplying these two establishes a farmer’s expected revenue. From that, he or she then decides what percentage or guarantee is affordable to keep the bankers at bay and ensure enough of a return to get back into the field next year.Since market prices are beyond a farmer’s control, APH becomes all the more important. And even prior to the new farm bill, there were provisions to allow a grower to sub out some bad years or take advantage of new multipliers to reflect improved technology that has increased yields for many crops.But YE goes a big step further, and when RMA released its multicolored maps this winter, the numbers for some regions were frighteningly high for insurance companies. Dry land cotton growers in West Texas could throw out as many as 10 years. For non-irrigated corn, big sections of Kansas, Nebraska and South Dakota qualify for five or more years.Critics argue it’s a new Wonderland and black eye for the larger crop insurance system.“It’s a little bit like saying I have to insure all the red Corvettes driven by 16-year-olds in the high school parking lot, but I’m going to exclude all the wrecks they have had when I come up with the rates,” said Bruce Sherrick, an agriculture economist at the University of Illinois. “It’s not a good actuarially conceived program. It’s not sound at all.”Proponents of YE counter that the car insurance analogy breaks down on two points.First, nothing about YE changes the critical “rate yield” index in RMA’s premium formula — the factor best measuring the “crash” history for an individual farmer. “Those zeroes do count,” said Darren Hudson, a Texas Tech economist in the heart of cotton country. And the premiums set by RMA are already such that the added cost of the YE option scared off many cotton growers in what are already hard times.“We are at a break-even price right now for cotton production,” said Gid Moore, a West Texas crop insurance agent. “You’re watching every penny you can, and you certainly can’t afford to pay that much more.”But the second and bigger philosophical point goes to the question of what crop insurance is all about.In the case of car insurance, Hudson said, “you are insuring the full value of the vehicle and you are hoping you don’t have a loss. But the premium is for the full value of the vehicle.”For crop insurance, the farmer is looking to protect only a percentage of his or her revenues. “If you are at a 50 percent coverage level, you have to lose 50 percent of your revenue before you get the insurance to pay anything,” Hudson said. But if a farmer’s APH keeps falling with every drought year, even that 50 percent is not adequate as a safety net. “What you end up doing is lowering the potential coverage that [the farmer] can purchase, which prevents that safety net mechanism from being a reality,” he added.“Yes there is a tradeoff,” Hudson said. “There’s always the potential — when you are talking about a subsidized unit — of inducing moral hazard behavior … But for most producers they want to find the cheapest way they can to protect them from the catastrophic loss that kicks them out of business next year. And I think the yield exclusion helps. It gives them options on ways to manage that that they didn’t have before.”One such strategy is to use the new provision to increase a farm’s APH and then back down on the percentage guarantee required.Take for example, a dry land cotton grower whose actual production over the past 10 years has averaged about 235 pounds per acre. By taking advantage of all adjustments allowed before the 2014 farm bill, the farm’s APH could be increased to about 341 pounds. When YE is then added to the mix, that APH can jump as high as 580 pounds per acre — more than double the 235 pound average.For a 70 percent guarantee, the premium would be out of sight: more than $72 an acre. But if the farmer buys just a 50 percent guarantee, he or she can bring that premium back down to under $30 per acre. For a few extra dollars, that buys significantly more protection than the prior 70 percent guarantee on the lower 341 pound per acre APH.If it all seems a little wild, it is. But advocates of the new provision can also point to the same set of numbers to justify their case.Yes, the elevated APH is double the 10 year average for that same farm. But in at least three of those 10 years the farmer produced close to or far more than 580 pounds. That shows the potential is there in real life — and not some meaningless plug that rewards the good and bad.“This is actually what somebody produced. We might exclude some years here, but we are not deviating from the idea that this is somebody’s actual history,” said John Anderson, a top economist with the American Farm Bureau. “Yield exclusion wasn’t about trying to give people something for nothing. It was really about trying to help people maintain a yield history that would give some meaningful level of coverage.”“To the extent that crop insurance is part of that publicly-provided safety net, this issue of more or less universal access to it, is kind of important because that’s what we have always had,” Anderson said. “It would be a pretty big departure to say ‘We’re going to rely on crop insurance and not have anything else, but you guys out here in the West, it’s not going to work for you so we’re going to cut you off’.’”“Maybe it wasn’t as big a deal when there were other programs out there which were really carrying the load in terms of the farm income safety net. But now that we are primarily relying on crop insurance, these issues really do come to the fore.”In truth, the RMA numbers Tuesday are only a first glimpse of what lies ahead, and it is likely to take several years for the program to shake out.Moore concedes that YE may prove more valuable than cotton growers first realized. The higher rate of participation by corn is not entirely a surprise, but those cotton producers who participated very likely excluded more years.But the Midwest Corn Belt also has some built in cost advantages. As a rule, it’s judged a lower risk insurance area and enjoys lower premium rates. For $100 of coverage at a 75 percent guarantee level, it’s estimated that a Kansas corn farmer has to pay close to $3.22 compared to $1.25 for a farmer in Illinois. Add to this the fact that the Illinois farmer may only need to exclude one year, the devastating 2012 drought season That means the added YE premium is not a show stopper.“The farm side decision is easy: you almost always take it,” said Sherrick. And if the higher APH allows a farmer to buy a lower percentage guarantee, it also means the subsidy rate on his or her premium will be higher.“My personal opinion is it is not the right way to have coverage,” Sherrick said. “If the policy goal was to have higher coverage, it seems to me there are more direct ways to do that. I think the risk of a black eye to the crop insurance industry at large is pretty great with this program. … When somebody says it’s too expensive, they’re either lying or uninformed. It’s always cheaper for bushel for bushel coverage.”On this much at least Anderson agrees: “It’s more complicated than it used to be when you were talking about simple price-based systems” for commodity programs,” he said. “It’s just a more complex world.”Source - http://www.politico.com/
