Can Crop Insurance Work as the Only Safety Net?

DC Dialogue

Economist questions whether yield-only protection is enough in today’s futures-friendly environment.

Published on: September 2, 2011

Commodity groups are consistently calling for a “safety net” and see crop insurance as the pillar.

“Today we have no justification for Title 1 of the farm bill as a safety net. We have a safety net – it is crop insurance,” says Bruce Babcock, director of Iowa State University Center for Agricultural and Rural Development.

Farmers pay on average 42% of the premium and taxpayers pick up the remaining 58%.

Babcock states the government’s share actually encourages producers to buy higher coverage than they may need. He argues that crop insurance doesn’t need the revenue protection component because farmers are already using forward contracts at their local elevator or the Chicago Board of Trade to lock in prices.

He suggests offering producers a decoupled risk management payment to buy crop insurance and likely farmers would just buy the basic level. “If a farmer chooses to buy the revenue protection, he wouldn’t be looking to the taxpayer to take on that higher cost. He’d have to put the pencil to the paper and with an eye towards the costs of benefits versus the overall cost,” Babcock states.

Babcock states the only hole left in the safety net of crop insurance comes from a multi-year calamitous drop in market prices whereas input prices don’t drop as fast. If farmers face a two to three year period of high input costs, they could be facing tight margin squeezes. Then loan rates would need to kick in to help out if this occurs.

So tell me what you think. Do you buy the higher level of crop insurance because it works best on your farm? Or because the government pays a larger portion of those costs and it’s not that much more for you to buy up?

Is the crop insurance adequate if there wasn’t revenue protection included within it?

Just click on “Add a comment” to share your thoughts. You do not need to be registered. Thanks for your time and insight.

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  1. Anonymous says:

    Irene Victim!!! No we need something else 2million dollars worth of damage 175,000 dollars worth of premium now the companies dont want to pay never collected before farmed for 31 years will be lucky to collect 300,000 dollars.

  2. Anonymous says:

    Crop insurance will come under more and more scrutiny as our country's budget woes worsen. Crop insurance will continue to be around but the users will change they way they make use of it. The changes will be due to how the program will be funded and rule changes. Funding weight will be on basic limits and rules to guarantee that producers must participate in the crop insurance program in order to qualify for other disaster programs available. This will drive many to purchase CAT coverage type policies. Less funding will result in higher cost to the producer for this coverage and will guarantee less claim payments also. Well all this will make the crop insurance program less costly for the government it may result is less crop land being utilized. For 2011 there was three percent less corn planted in the USA. The impact on the corn price is nearly double. Corn is predicted to exceed $7.50/ bu at harvest this is up from $3.50/ bu. All this with just a three percent drop in production. Coupled with higher production costs to begin with, the real disaster is yet to come; that being the price at the store shelves. Many factors have led to our situation. We'll work out of it but not without a little pain to go around. Hopefully those in Washington will start to feel it sooner than later. Kingsley Blasco Newville, PA

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  3. Anonymous says:

    In 2007 drought and heat burnt up cotton and beans here. lost $200 to $250 an acre on cotton and bout 125 on beans. 70% RA and CRC .After premiums i didnt even get enough to pay crop loan at the bank.Still had BIG bill from chemical supplier ,equip notes,land notes . my "safety net" was every bit of equity i had in my land to mortgage and an emergency loan at FSA which basicly means i get to pay for most all of my equipment again...as well as my farm which at the time,of course, were all nearly paid for.In 2008 yields were average to good but price swings paid me about 30% of the loss payment i got in a FREAKING DISASTER the year before!!Same policy!THAT AINT RIGHT! RIGHT? Was going to change in 2009to a GRIP.less expensive,higher buy up,paid out better in disaster year,but its no longer sold on cotton in my area.guess it paid out a lil too much! . 70% coverage on my 2/3 share of rented farmland that i pay 100% of expenses( minus landowners 1/3 of fertilize bill)doesnt cover me but is better than nothing, but i dont sleep easy at nite thinking my Revenue Protection policy has me "covered". A policy that will really cover expense and offer income protection and be cheap enough for us to buy doesnt exist.

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  4. Anonymous says:

    Here in the Northeast, most farmers never seem to get anything out of the crop insurance they buy, at least to my knowledge. I don't advocate big govt, but i think in this case the FSA would be better served to oversee at least the data used for crop insurance because they dont have to make a profit, and i'd rather have the county committee make decisions since they are farmers as much as possible. just my opinion.

  5. Anonymous says:

    Private sector crop insurance handling promotes competition resulting in better service to the farmer. Every area has it's issues but most farmers would not be in business here in the Southeast without crop insurance. Most crop insurance agencies could do more work and cost the tax payer much less than the FSA office. Farmers who remember the late 70's when FSA handled the program should recall the disaster that was. I think the private sector has proven that it can do more with less and be very efficient in doing so. Revenue options do help reduce the impact of price swings which are the new norm as well as cover those futures contracts when production is not there. Just my humble opinion.

  6. Anonymous says:

    not being a fan of crop insurance I feel money could be much better if we let fsa sell crop insurance they all ready have the records Some of the highest paid in our little town work for crop insurance agences

  7. Anonymous says:

    I AM A FARMER AS WELL AS AN OWNER OF A CROP INSURANCE AGENCY. OUR NATIONAL DEBT SITUATION NEEDS TO BE ADDRESSED AND WE NEED TO GET THE PRIVATE SECTOR MORE INVOLVED AND HAVE LESS GOVERNMENT AND THE REGULATIONS THAT GO WITH IT. AS A FARMER I WOULD LIKE TO NEVER ENTER A FSA BUILDING AND WOULD LIKE TO GET MY PRICE IN THE MARKET INSTEAD OF THE DIRECT PAYMENTS WHICH ARE A JOKE. ALSO, THE FSA OFFICE NEEDS TO TURN OVER THE SURE PROGRAM TO THE CROP INSURANCE COMPANIES TO ISSUE ANY DISASTER PAYMENTS THAT MAY OCCUR. THE FSA OFFICES ARE ALREADY TWO YEARS BEHING ON PAYMENTS AND THE PRIVATE SECTOR CANNOT OPERATE THAT WAY. THE COMPANIES WOULD BE ABLE TO GET THOSE PAYMENTS TO THE FARMERS IN THE SAME YEAR THE DISASTER OCCURRED. ALSO, THEY NEED TO TURN OVER THE ACREAGE REPORTING TO THE AGENTS AND THE COMPANIES THEY REPRESENT AND NOT MAKE FARMERS HAVE TO REPORT TO BOTH THE COMPANIES AND THE FSA. THERE IS JUST SO MUCH MORE EFFICENCY IN THE PRIVATE SECTOR VERSUS THE FEDERAL GOVERNMENT.

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  8. Anonymous says:

    It would be tough for younger farmers. I buy the highest coverage I can with the subsidy. I could not afford to buy any without it. I buy the highest guaruntee I can afford to. Our premiums are too high now for what we usually get out of it. Everybody thinks farmers are making too much and get too many handouts in government support. From my point of view this is not the case for me. Everybody has a hand in the pot. If markets are good fertilizer goes up,seed goes up, rents go up, and insurance goes up. I only make out if I get good yields and do a good job of marketing. We have less reward than most realize. Most of America would not want our job. They don't have a clue of the pitfalls and great risk. The only farmers making good returns are those which own alot of their own land and have reasonable rents. This farmer does not need any insurance at all and will typically buy cheap policies to cover input expenses if they get no crop at all. If one looks at the cheap policies they rarely pay anything, even when one really needs the help. I would sooner set my prices so I can make it without any help at all. But the truth is I am a price taker not setter. A lot of things need changed in Washington.