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Future challenges for crop insurance

The federal crop insurance program is the main risk management program that is used by most crop farmers in Minnesota, Iowa and throughout the Midwest. In Minnesota, nearly 95% of the state's major crop acreage is covered by crop insurance. The Obama Administration and some members of Congress are currently proposing some major changes in the federal crop insurance program. At the same time, other members of Congress and agricultural leaders are stressing the need to maintain a strong crop insurance program as the centerpiece of a risk protection program for U.S. crop producers.

In the late 1990s and early 2000s, the federal government offered increased premium subsidies and developed new products in order to encourage greater participation in the federal crop insurance program. The concept was to have a self-selected risk management program that allowed farm operators to make individual decisions on crop insurance coverage for their various farm units. The federal government also wanted to eliminate the need for ad-hoc disaster programs that were enacted on annual basis several times during that time period, as a result of natural disasters in varying crop producing areas of the U.S. There have been very limited ad-hoc federal disaster programs related to crop production in recent years, even though the U.S. has experienced some major natural disasters. 

Most corn and soybean producers in Minnesota buy revenue protection (RP) crop insurance policies, which protect against the combination of yield losses and price reductions during the growing season. A base revenue level is established on a farm unit using the historic average crop yield times the average crop price at the beginning of the crop insurance coverage period. For RP policies, the insurance coverage level purchased by farm operators is a percentage of that base revenue, ranging from 50 % up to 85 %; however, the 80% and 85% coverage levels have become quite popular for corn and soybean producers in recent years. The final crop revenue on the insured farm unit is the actual crop yield times the crop price at harvest time. If the actual crop revenue is lower than the guaranteed insurance coverage, a crop insurance indemnity payment is made for that crop on that farm unit.

In 2013, crop insurance policies protected nearly $10 billion of liability for growing crops in Minnesota, on 17.5 million crop acres. This included $6.3 billion of liability protection on 8.6 million acres of corn, $2.7 billion on 6.6 million soybean acres, and $364 million on 1.2 million acres of wheat. Crop insurance coverage is also important for producers of sugar beets, canning crops, and other crops.

In 2013, Minnesota farmers received over $1.2 billion in crop insurance indemnity payments to offset crop production losses and revenue reductions, resulting from natural disasters and reduced crop prices. Minnesota producers are likely to receive significant indemnity payments again for the 2014 crop year, as a result of lower than average yields in many areas of the state, along with lower crop prices in fall 2014. However, back in the drought year of 2012, when many areas of the U.S. incurred major crop losses, crop insurance indemnity payments in Minnesota were much lower than other areas, due to more favorable growing conditions and better crop yields in most areas of the State.

The premiums paid by farm operators for crop insurance coverage are subsidized by the federal government, with an average subsidization rate of near 62% of the total premium amount in 2014. Typical expected farmer-paid premiums for 2015 corn crop insurance coverage are about $6 per acre for 75% RP coverage, $11.00 per acre for 80% RP coverage, and $21 per acre for 85% RP coverage. Many times farm operators purchase additional hail and wind insurance coverage.

The 2014 Farm Bill included payment limits of $125,000 per eligible individual for commodity farm program payments, but did not include any limits on crop insurance premium subsidy levels or indemnity payments. Beginning in 2015, the farm bill requires producers to comply with federal conservation and wetland requirements on their crop acres in order to receive crop insurance premium benefits. Otherwise, the farm operator will need to pay the full premium cost for crop insurance. Farm size, crop value, and individual adjusted gross income (AGI) have never been criteria for receiving federal crop insurance benefits.

The Obama Administration recently proposed a crop insurance spending reduction of $16 billion over the next 10 years (2016-2025), or an average reduction of $1.6 billion per year, which is a 17% reduction in spending allocation. The current projected federal spending on crop insurance programs is estimated at about $9 billion annually. If food and nutrition programs are excluded from proposed spending for the 2014 Farm Bill, approximately 45% of the remaining spending is allocated to crop insurance programs. This compares to the proposed farm bill spending of 23% for the commodity programs, 28% for conservation programs, and 4% for other USDA programs.

The spending reductions proposed by the Obama Administration would be accomplished by reducing the premium subsidy levels on some crop insurance products, and limiting prevented planting coverage. There are also proposals to put restrictions on subsidizing the popular harvest-price option that is available with revenue-protection (RP) policies, and is utilized by a majority of Midwest corn and soybean producers. The harvest-price option permits producers that incur yield reductions greater than their coverage level (example: 80% of average yield) to have added crop insurance protection if crop prices are higher at harvest time than the base price on March 1. This option allows farm operators to forward price a higher percentage of their crop production at profitable prices, while still having insurance protection against the possibility of very low crop yields at harvest time. This was extremely important in 2012 in areas of the U.S. that were impacted by the major drought that year.

In recent years, there have been other proposals to reduce or restrict crop insurance benefits; however, these proposals have never gotten too far in Congress. However, there now seems to a bit more momentum behind proposals to change crop insurance, with support from the Obama Administration, as well as from some budget conservatives in Congress. Due to the current and expected future low commodity price levels, Federal spending on the commodity programs in the Farm Bill over the next few years is expected to significantly exceed the original spending targets. This will likely further increase the call to enact crop insurance reductions.

Members of Congress from major agriculture production states, such as Minnesota and Iowa, are likely to defend the current crop insurance program, and try to minimize any federal spending reductions for crop insurance. Most Midwestern crop producers view the current crop insurance program as their most important farm risk management tool.  

TAGS: Soybean Corn
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