Insuring Farm Risk

By Gantz, Eugene | Independent Banker, May 1999 | Go to article overview

Insuring Farm Risk


Gantz, Eugene, Independent Banker


Time is ripe for significant crop insurance reform

rop insurance is the centerpiece of risk management planning for many farmers. Farmers use it to protect about 80 percent of the eligible crop acreage in the United States and it provides a variety of protection choices to growers on about 80 different crops. The $27 billion of crop insurance liability provides economic security to the farm, the community and the local bank.

After Congress passed the $6 billion farm aid package last fall, which contained $2.25 billion for disaster losses, the Clinton administration and the Congress both showed genuine interest in improving the crop insurance program. Generally, proposals have focused on ways to increase coverages while making the program more affordable to producers. The House and Senate Agriculture committees have conducted field hearings in rural areas and oversight hearings in Washington, D.C. At a House subcommittee hearing in early March, the administration presented a detailed view of changes it was urging Congress to adopt-at a cost of up to $2.5 billion annually.

Why the Interest in Reform?

The 1996 "Freedom to Farm" law began phasing out traditional farmprice safety nets at a time when farm level prices were high and export demand was strong. Today neither is the case, and $6 billion in additional farm aid was deemed necessary when the triple whammy of declining exports, weather-related disasters and low market prices all converged.

End of year crop carry-over levels are approaching record levels for several major commodities, and U.S. farm exports continue their downward spiral dropping to a projected $49 billion this year from a record $60 billion in 1996. Congressional leaders are asking whether crop insurance can provide the risk management tools necessary for growers to manage their risk exposures in the current environment.

Congress is looking at crop insurance as the key program for strengthening the farm safety net for six main reasons: most growers are already enrolled in the crop insurance program; crop insurance, although partially subsidized, requires growers to pay a portion of the program costs through premiums; crop insurance could have the flexibility to give growers several options from which to choose as they consider various risk management plans to fit their financial needs and risk preferences; crop insurance is GATT and free-trade-agreement friendly; crop insurance is delivered efficiently and effectively by the private sector that provides professional counseling to growers based on individual needs; and crop insurance provides excellent collateral to secure credit and enhance producers' loan repayment capacity.

Ideas for Improvements

The Clinton administration's proposal unveiled in March encompassed a number of popular reform ideas. First is the proposal to raise the coverage floor. In 1998, 32 percent of the crop insurance policies were covered by catastrophic coverage. However, the catastrophic and the noninsured assistance program protects less than one third of the crop's value. Therefore the proposal would raise coverage to 60 percent of yield indemnified at 70 percent of expected market price, a SO percent increase.

Also included is a proposal to make higher-level coverage more affordable in three ways: subsidize the premiums on higher buy-up coverage levels by increasing premiums to provide coverage at 70 percent of yield at 100 percent of expected market price; provide 50 percent additional premium for coverage above the 70/100 level; and make the premiums equal for all types of insurance coverage. …

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