Crop Insurance: A Standing Farm Price Disaster Program
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: RMA considers the following policies to offer some form of revenue protection: Adjusted Gross Revenue (AGR), Adjusted Gross Revenue Liter (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:
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 Iowa and Illinois that have a March 15 sales closing date and use the CBOT exchange for discovery. Price declines of the magnitude shown in Table 1 can be determinative in the computation of indemnity payments, which will likely be shown to be the case for the 2008 crop year.
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.
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: RMA considers the following policies to offer some form of revenue protection: Adjusted Gross Revenue (AGR), Adjusted Gross Revenue Liter (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:
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 Iowa and Illinois that have a March 15 sales closing date and use the CBOT exchange for discovery. Price declines of the magnitude shown in Table 1 can be determinative in the computation of indemnity payments, which will likely be shown to be the case for the 2008 crop year.
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.
Source...