Does Everyone Really Need Crop Insurance?

Crop insurance, who needs it? Also, how does the government subsidize the crop insurance program? Those are two of several questions Wallaces Farmer received this week. An Iowa State University Extension specialist offers insight and observations.

Published on: May 20, 2011

Question: We own our land debt free and don't borrow money. We've only bought hail insurance in the past, and collected in 2009. In 2011 we're using Revenue Protection but only at the 65% coverage level. I feel I might have been sold a bill of goods by my insurance agent, and talking to farmers and agents is confusing and detrimental to clear thinking. Why should a farmer with no debt even use the federal crop insurance policies?

Answer: Provided by Steve Johnson, Iowa State University Extension farm management specialist in central Iowa.

Farming is still a risk, even though you have no debt. Most Iowa farmers have realized the benefit of crop insurance coverage with much of their premiums being subsidized by the federal government. All federal multi-peril products (both yield & revenue guarantee products) have the subsidized premiums regardless of which crop insurance company you are buying them from.

You elect which of the federal crop insurance products to use and at what level on or before March 15 annually for spring planted crops. But for hail coverage, it's a little different.

The hail coverage is an option and can be added on or adjusted after March 15. Hail products are not subsidized, so hail polices and premiums can vary by crop insurance provider.  

ISU Extension estimates that 89% of all Iowa farmers carry some form of crop insurance, believed to be mostly Revenue Protection policies in 2011. With the change to revenue coverage (both yield and price) in the mid-1990s, followed by increased government subsidies in 2001 and the enterprise unit discount in 2009, it's somewhat rare to see farmers balk at buying crop insurance coverage.

Five reasons why I suggest that a farmer should carry crop insurance:

1) Peace of mind. Crop insurance protects against adverse conditions (such as weather) that can limit crop yield.

2) Protection against higher costs. The non-land cost of crop production has increased over 50% in the past 10 years, which means not having crop insurance coverage is a large risk. Cash renting farmland or borrowing necessary operating funds are examples of increased risks and not being able to cover the cost of production.

3) Risk management tool. Using Revenue Protection or Revenue Protection with the Harvest Price Exclusion (RPE) policies guarantee both yield and price should adverse growing conditions or market prices develop. The likelihood of triggering a revenue loss from a decline in grain prices is likely to be more common in a year like 2011. These products use the Projected Price (December corn or November soybean futures price average in February) that is used for crop insurance purposes. This year the spring projected prices are record-high; $6.01 per bushel for corn and $13.49 per bushel for soybeans, respectively.

4) Pre-harvest marketing. Using Revenue Protection guarantees both yield (your APH, actual production history times the level of coverage you elect) as well as the higher of the Projected Price (futures price average in February) or Harvest Price (futures price average in October). Since both yield and price are protected, farmers using RP tend to be more aggressive in the pre-harvest sale for delivery of their APH bushels times the level of coverage they elect, often referred to as crop insurance guaranteed bushels.

5) Government subsidizes crop insurance premiums. A farmer who elects a federal crop policy likely is paying 50% or less of the actual premium. The government covers the balance of the actual premium cost and the farmer doesn't have to claim this subsidy as income.

How does the government subsidize the crop insurance program?

As a way to get farmers to use crop insurance products, the government has long subsidized the federal multi-peril products whether that is at farm levels (Revenue Protection (RP), Revenue Protection with Harvest Price Exclusion and Yield Protection or county level products such as Group Revenue Policy and Group Revenue Insurance Protection. 

Annually, the government subsidy for crop insurance products is in excess of $7 billion. The level of subsidy varies, but a Revenue Protection product at the 75% level of coverage would be subsidized with over 50% of the insurance premium paid by the federal government.

For farm management information and analysis, go to ISU's Ag Decision Maker site www.extension.iastate.edu/agdm and ISU Extension farm management specialist Steve Johnson's site www.extension.iastate.edu/polk/farmmanagement.htm.