Crop insurance facing a crisis from proposed budget cuts, low harvest prices

Crop insurance is taking a hit from proposed budget cuts and low harvest prices, Harwood D. Schaffer and Daryll E. Ray write for Policy Pennings. Harvest-time prices for corn yields are $3.83 per bushel on a $4.15 projected price and are $8.91 for soybean per bushel harvest price on a $9.74 projected price, according to Gary Schnitkey at the University of Illinois.

"Corn yields will need to be at least 8 percent below the production history specified in the policy for revenue insurance to make a payment—and that is at the 85 percent coverage level," Schaffer and Ray write. "For coverage levels below 85 percent, the yield has to be even lower than that, dropping to 54 percent of production history before a payment is made on 50 percent coverage policies. Soybean yields would have to be at least 7 percent below the production history specified in the policy for farmers to receive an insurance payment. The problem with the situation that farmers find themselves in this year is that low prices generally indicate they will find themselves with average or higher than average yields."

"Higher soybean yields overall suggest that the farmers with yields 7 percent below their historic average will be relatively few in number," Schaffer and Ray write. "Farmers who bought 50 percent coverage on their revenue policies will need yields below 55 percent of their production history figure to collect an insurance payment; no one wants to be in that situation. Individually, when prices are low, farmers seek high yields—not low yields—to maintain per acre revenue."

"While the recent budget agreement between Congress and the White House prevented a default on the national debt and reduced chances of an immediate government shutdown, it came at a price," Schaffer and Ray write. "Part of that price was a cut to the overall rate of return for crop insurers from 14.5 percent to 8.9 percent. This raises the concern of farmers who fear that with a lower overall rate of return, some crop insurers will drop out of the market, making crop insurance harder to obtain."

"If the current low prices continue into the third and fourth years of the 2014 Farm Bill, there will be significant pressure from agriculture to find ways to provide risk management tools other than crop insurance," Schaffer and Ray write. "The Average Revenue Coverage (ARC) and Price Loss Coverage (PLC) were supposed to provide for price risk, but most farmers chose ARC, and if prices are stable at a low level, it, too, is an inadequate risk management tool. Unless there is a sudden increase in demand or a significant crop failure somewhere in the world, the next two years may begin to look like 1998." (Read more)