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Tough Decisions: Improving your understanding of risk exposure when using risk mitigation financial tools leads to better farm decisions.

March 4, 2024

5 Min Read
Farmstead and cornfields
BIG NUMBERS: More than 2.1 million federal crop insurance policies are sold annually, with a percentage of policies indemnified compared to policies earning premium running at 33% over the period from 2018 to 2022. Curt Arens

by Jay Parsons, John Hewlett and Jeff Tranel

Crop insurance has become an established part of managing risk for many agricultural producers. The USDA Risk Management Agency serves America’s farmers by managing market-based federal crop insurance products made available to farmers and ranchers through Approved Insurance Providers.

For the period from 2018 to 2022, the number of federal crop insurance policies sold has remained above 2.1 million nationwide, with the use of crop insurance growing in 2021 and 2022 (See Table 1). The percentage of policies indemnified compared to policies earning premium is 33% for the five-year period, with the particularly bad crop years of 2019 and 2022 each having 39% percent of policies indemnified.

United crops and livestock insurance  poliytable

Overall, the loss ratio was 0.89 for the period from 2018 to 2022 (89 cents paid out for every premium dollar received). This indicates that premiums are falling in line with targets established to maintain actuarial fairness.

Livestock policies

Use of livestock insurance policies has grown significantly in the past five years. These policies include Livestock Gross Margin insurance available for cattle, swine and dairy production; Livestock Risk Protection available for cattle and swine; and Dairy Revenue Protection. The DRP program started in 2019, helping explain a jump in use of livestock insurance programs from 2018 to 2019.

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Risk Management Agency changes to the LRP insurance program to increase accessibility and use attributes to the recent growth in use of these livestock policies. These changes included a significant increase in the premium subsidies attached to the program. However, in the big picture, livestock insurance programs make up a small portion of the overall crop insurance program.

Experiences for producers using livestock insurance programs from 2018 to 2022 have varied from year to year, with 2018 and 2020 paying out losses that exceeded total premiums collected and the other years with premiums quite a bit above the indemnities paid out. Overall, 60% of policies earning premium from 2018 to 2022 realized an indemnity, and the loss ratio for federal livestock insurance programs was 0.70.

Other livestock programs

Other crop insurance programs targeted toward livestock producers are the Rainfall Index (RI) products Pasture, Rangeland, Forage and Annual Forage insurance programs.

Both programs use precipitation data from the National Oceanic and Atmospheric Administration Climate Prediction Center for grids 0.25 degrees longitude by 0.25 degrees latitude. Producers can insure up to 90% of the Expected Grid Index Precipitation across a series of two-month intervals.

PRF insurance is for perennial forage intended for use as livestock feed, and it is widely used by livestock producers. In contrast, AF insurance is for annually planted forage crops intended for use as livestock feed. AF insurance is only available across eight states in the middle of the country, and its use in terms of acres covered is only about 2% to 3% of what is insured under PRF.

However, because of the higher dollar value per acre that can be insured under AF versus PRF, the dollar amount of total premiums for AF coverage is about one-third of the total for PRF, even though it is available in less than 10% of the states.

Use of these RI insurance products doubled over the period from 2018 to 2022 and is up again in 2023. The widespread drought conditions of the past three years have led to high loss ratios and driven much of the increase in interest. Overall, 90% of the policies earning premium from 2018 to 2022 were paid at least some indemnity, and the overall loss ratio was 1.20.

Despite the increase in the use of livestock and RI insurance programs over the past few years, most of the growth in federal crop insurance program participation is explained by the other more traditional crop insurance plans.

Seventy percent of the growth from 2020 to 2022 in insurance policies earning premiums and 86% of the growth in total premiums (Table 1) can be explained by growth in crop insurance plans. The growth in total crop insurance premiums is a combination of this growth in policies earning premiums and the high commodity prices for corn, soybeans, wheat and other crops that has driven up the amount of liability coverage.

The whole farm

The Whole Farm Revenue Protection insurance program was developed to provide a safety net for all commodities on a farm under one insurance policy. Nationally, it has struggled to gain much in the way of widespread use.

About half of the use of WFRP is concentrated in two states, Washington and California. In particular, Washington apple growers have found it to be a useful policy for providing risk management protection for their farms.

WFRP coverage is tied to annual tax returns. To date, one-fourth of the WFRP policies sold for the 2018-22 crop years have been indemnified, and the loss ratio over that period is 0.91. However, WFRP is heavily subsidized, and the average premium subsidy over that same period is over 71%.

This lowers the producer premium and increases the loss ratio experienced by the producer to 3.19. With a robust and established federal crop insurance program for the commodity crops grown on many acres across the country, use of WFRP has been isolated mainly to specialty crop production.

However, it is an interesting thought experiment to think about the potential role for whole farm protection products in relation to efforts such as new and beginning farmer initiatives to help support the next generation of farmers and ranchers.

See the Risk Management Agency website at rma.usda.gov for comprehensive access to crop insurance tools.

Parsons is a Nebraska Extension risk management specialist. Hewlett is a University of Wyoming ranch and farm management specialist. Tranel is a Colorado State University ag and business management specialist.

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