Farmers in drought-stricken regions of the United States relied on their investment in crop insurance to weather the effects of severe drought in 2012. At the same time, indemnity payments helped communities and states avoid some of the angst that would have accompanied significant crop and revenue losses, according to a study conducted by two University of Nebraska-Lincoln economists, Brad Lubben and Eric Thompson.
The study was underwritten by Farm Credit Services of America, which is based in Omaha.
Insurance payments not only helped ensure that most farmers will be able to plant another crop in 2013, the indemnities also produced a significant impact beyond the farm gate. According to the authors, indemnity payments generated off-farm economic impact of nearly $2.2 billion across Iowa, Nebraska, South Dakota and Wyoming. That figure includes $721 million of labor income that preserved 20,900 off-farm jobs in the region.
Thompson specializes in research on state and local economic growth and on economic impact analysis. Lubben focuses on policy and risk management in agriculture.
"This research helps us answer the question: 'What would have happened in both rural and urban communities if producers had not been protected by crop insurance during the severe drought last year?'" says Doug Stark, president and CEO of FCSAmerica. "The study shows that while crop insurance is critical for farmers, in years of significant loss it also helps stabilize jobs and incomes off the farm as well. Indemnity payments replace some of the income that farmers would have earned from a more normal crop, enabling them to continue investing in their businesses and households."
Key findings of the study include:
•Farmers paid $885 million in premiums during 2012 to insure nearly 54 million acres across Iowa, Nebraska, South Dakota and Wyoming, or 85 percent of insurable planted acres for principal crops.
•Through March 4, farmers in the four states had received a total of $4.482 billion in indemnity payments for the 2012 growing season (April 2012 through March 2013).
•Farmer purchases of goods and services attributable to the indemnity payments are estimated to yield nearly $2.2 billion in off-farm economic impact across the region. That includes $1 billion in Iowa, $780 million in Nebraska, $386 million in South Dakota and $4.7 million in Wyoming. The difference between the total net payments and the regional economic impact reflects savings by farmers and economic impact outside the four-state region, which was beyond the scope of the study.
•The economists estimate the number of off-farm jobs saved by farmers' investment in crop insurance total 20,900 across the territory, including 9,650 in Iowa, 7,450 in Nebraska, 3,750 in South Dakota and 50 in Wyoming.
"What's interesting is the number of jobs that would have been lost without crop insurance," Stark notes. "Indemnity payments replace some of the income lost to the drought, so money continues to flow throughout local economies as producers use the payments to support their households and businesses. And metropolitan areas benefit as well as rural communities. For example, net crop insurance indemnity payments saved an estimated 114 jobs in Omaha and Lincoln, and 129 in Des Moines, according to this study."
The ability to partially manage external risk with insurance is essential to managing family farms and farms in general and to make the types of major investment required in modern, efficient agriculture operations, the study's authors reported.
"On a more practical level, crop insurance is critical for agricultural producers and their communities during years when drought or other natural phenomena damage or destroy crops," Lubben and Thompson wrote. "The income from crop insurance payments can play a key role in stabilizing local economies both in the year of the drought and in subsequent years. In agricultural states such as Iowa, Nebraska, South Dakota and Wyoming, crop insurance can also play a key role in stabilizing the statewide economies."
According to Stark, "Most farmers purchase crop insurance every year, understanding they may have losses resulting in claims only a few times in their careers. Crop insurance has become a fundamental risk management tool for most operators.