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Farmers to Face Tough Decisions For 2011 Crop Insurance

tax questions for farmers
 USDA is cutting the administrative fees paid to the insurance companies USDA is setting variable commission rates for various crop insurance policies The money limit USDA pays to crop insurance companies for administrative/operating costs complicates issues

Crop insurance users will be learning new lingo and new policies for row crops in 2011, and if you have planted wheat, you already have an introduction to the new process. However, other changes are being made, which will impact your crop insurance agent, and may impact farmers, as well. The USDA’s effort to modernize the crop insurance policy also comes with changes to the commissions that agents receive. How that will affect the grower is uncertain.

The USDA and the crop insurance companies have had a love-hate relationship. Since the crop insurance companies are needed by USDA to sell and administer the policies they are needed. However, the companies have profited from the service they provide. While there is nothing wrong with making a profit, critics have complained the taxpayer is paying too much for that service and profits are too high. That is an argument for another time and place, but the one in the middle is the crop insurance agent. Many farmers have insurance sales licenses and crop insurance provides extra income. In a nightmare year like 2009, agents worked overtime and their commission was probably small compensation compared to the time required.

At issue as the 2011 crop insurance year begins to roll are the cuts that USDA is making in the administrative fees paid to the insurance companies, which are used for agent commissions. But additionally, the USDA is setting variable commission rates for various crop insurance policies. In other words, agents will make more money selling one type over another, and the question becomes will that impact the types of crop insurance policies that are in place when the crop is insured?

Weighing in on that is Kansas State University Ag Economist Art Barnaby, whose presentations for a multi-state crop insurance workshop raise the issue about the types of policies that agents will want to sell for 2011 crops. He says that commission rates were raised on the higher coverage levels for policies, such as 80% and 85%, but that more policies are sold at lower rates of coverage. Additionally, higher potential commissions were authorized by USDA; but Barnaby says the maximum commission is rarely paid in the Great Plains, but would benefit agents in the Corn Belt.

Complicating the issue is a limit of how much money USDA pays out to crop insurance companies for their administrative and operating costs. If that upper limit is reached, crop insurance agents will see their commission rate decline in some cases, depending on the policies. Barnaby says for such a cut not to happen, corn futures have to fall below $3.09 by March 1. Currently, the national yield estimates for corn are declining, along with the stocks to use ratio, both of which point toward higher prices and increased volatility, which Barnaby says will increase the likelihood of reduced fees paid to insurance companies and reduced commissions paid to agents. Barnaby calculates commissions for crop insurance agents to fall below 10% for the 2011 spring planted crops, a drop of 4-6% from what is now computed in the agreement between USDA and the insurance carriers. While the agreement says agent commissions will be raised to 14.8%, the market scenario says commissions will really decline. Barnaby calculates that agents will have to increase their premium volume by 29% over last year to maintain a steady income level, but if there is a $1.50 increase in market prices, that premium volume will need to increase by 39%.

An alternative to selling more policies is to sell policies that return a higher premium from higher coverage levels or sell GRIP policies. In areas of high yield risk, agents are penalized with lower commission rates if they sell a revenue policy with the harvest price option. Barnaby says, “If the incentive is to sell other types of coverage, is that in the best interest of the farmer?”

Many farmers will depend on their crop insurance agent to guide them through the increasingly complicated process, along with new terminology for 2011 spring planted crops. However, the USDA effort to restrict the amount of tax dollars going to crop insurance companies will also impact the way crop insurance agents receive their commission incentives. The question becomes, is that in the best interest of farmers, who are trying to manage their revenue risk?

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