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Crop insurance: Vital tool for growers

Daniel Acker/Stringer/Getty Images News Corn plants lie on the ground following a derecho storm near Polo, Illinois, on Aug. 10, 2020. The storm brought wind gusts of near 100 mph to Iowa and Illinois.
Corn plants lie on the ground following a derecho storm near Polo, Illinois, on Aug. 10, 2020.
Congress first authorized crop insurance in the 1930s, but participation didn't take off until decades later.

When Dr. Keith Coble was a graduate student looking for a topic to work on, he settled on crop insurance, in part because he'd become fascinated with risk and it seemed so relevant to agriculture.

Coble, now a Giles Distinguished Professor and professor in the Agricultural Economic Department at Mississippi State University, started looking at the questions surrounding crop insurance, which at the time in the 1980s was a small program with a reputation for being actuarially unsound with low participation.

Coble spoke about his crop insurance research during a Council on Food, Agricultural and Resource Economics webinar earlier this year.

A short history of crop insurance

Crop insurance is purchased by agricultural producers to either protect against the loss of crops due to natural disasters or the loss of revenue due to declines in the prices of agricultural commodities. It was first authorized by Congress in the 1930s to help agriculture recover from the Great Depression and the Dust Bowl. The Federal Crop Insurance Corporation was created in 1938 to administer the program. The program was started as an experiment and mostly limited to major crops until passage of the Federal Crop Insurance Act of 1980.

The Federal Crop Insurance Act of 1980 expanded the crop insurance program to many more crops and more regions of the country. The 1980 Act also authorized a subsidy equal to 30% of the crop insurance premium limited to the dollar amount at 65% coverage.

In 1994, following several ad hoc disaster bills, Congress passed the Federal Crop Insurance Reform Act of 1994. The reform bill made participation in the crop insurance program mandatory for farmers to be eligible for deficiency payments under price support programs. In 1996, Congress repealed the mandatory participation requirement and created the Risk Management Agency. Beginning in 1996, Congress required farmers to purchase crop insurance or waive their eligibility for any disaster benefits that may be made available from the federal government.

The crop insurance loss ratio

Actuaries regard crop insurance as a bit of a strange beast, Coble said, while crop insurance research was a natural fit for agricultural economists.

Over time, the program loss ratio – the indemnities divided by the premium collected – has trended down and the program has grown, said Coble, who is also the vice president of the MSU Division of Agriculture, Forestry, and Veterinary Medicine and president-elect of the Agricultural and Applied Economics Association.

A loss ratio of 1.0 means that crop insurance indemnity payments are equal to total premiums, according to farmdocdaily. Ratios above 1.0 indicate that payments exceed the premium, while loss ratios less than 1.0 indicate that payments are less than the premium. Given the way that RMA sets premiums according to legislative mandates, loss ratios should average slightly less than 1.0 over time.

According to farmdocdaily, the loss ratio for all United States federal crop insurance policies in 2019 was 1.01. This is higher than expected given the late planting issues several growers faced. The 2019 ratio of 1.01 is above the 2002-2019 average of .82 and the ten-year average ratio of .83. Crop insurance loss ratios were less than 1.0 from 2014 to 2018.  The largest loss ratio since 2002 was 1.57, which occurred in the 2012 drought year.

Who buys crop insurance?

Crop insurance participation has grown significantly since 1994. In 1998, more than 180 million acres of farmland were insured, according to RMA, which is more than three times the acreage insured in 1988.

By 2018, crop insurance use has expanded to 87% of planted acres, according to USDA's Economic Research Service. Crop insurance was purchased on 77.9 million acres of corn, 78.7 million acres of soybeans, 13.1 million acres of cotton and 38.7 million acres of wheat.

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