The Essential Strengths of Crop Insurance
By Laurie Langstraat of National Crop Insurance Services
It is often said that farming is a risky business, and many farmers would most likely argue that this is a gross understatement. While the risks caused by Mother Nature make the most news, there are many other risks involved that farmers must prepare to manage.
In 2011, farmers saw a string of major natural disasters, including early freezes, record floods, droughts, wildfires and hurricanes. Then, 2012 dealt farmers the worst drought in decades, with a majority of the continental U.S. experiencing some level of drought during most of the growing season. The drought continued in 2013-14, with almost 80 percent of California in “extreme drought” as of December 2, 2014.
The economic nature of farming, which consists of many people producing one common product with limited buyers, is itself susceptible to risk, since individual producers have very little, if any, influence over the prices they receive for their final products or what they pay for their production inputs. When you add this inability to influence a price to the volatility of the world market – where the price of a commodity changes by the minute – it is easy to understand why farmers are always thinking of ways to manage their risk.
While there are many ways to manage the economic, structural and environmental risks of farming and ranching, crop insurance is the most ubiquitous risk management tool used by farmers, with 90 percent of total planted acres insured in 2013. And time after time during the 2014 Farm Bill debates, farmers said, “do no harm” to crop insurance and willingly gave up direct payments in order to ensure access to a vital and effective crop insurance program.
Farmers and ranchers want and buy crop insurance to protect their livelihoods. If a natural disaster occurs or market prices plunge, crop insurance allows the producer to pay bills and remain in operation. Beyond this fundamental strength, there are many other benefits of crop insurance for producers, government and the public. This article talks about several of the essential strengths of the crop insurance program. For a complete list, or for more information, please visit our website at www.CropInsuranceInAmerica.org.
1) Producers Share in the Program Cost. When a producer wants crop insurance coverage, the producer must pay for it. While the program is partially subsidized by the government, producers have substantial “skin in the game.” Their financial contribution helps defray taxpayer costs and encourages financial discipline by producers.
2) Producers Must Take Active Personal Responsibility for Risk Management Choices. While farm programs help reduce farm financial risks and require producers to protect the land, producers have little to no role in designing a program shaped to their individual farm. Moreover, when participating in crop insurance, the producer must assess the farm’s risks and design a crop insurance program that mitigates those risks and is affordable. Crop insurance compels producers to become active risk managers and to operate proficiently.
3) Producers Receive Individualized Risk Management Solutions. Crop insurance covers the expected yield or revenue risk of each individual producer. The producer can select alternative coverage levels for the producer’s historical yield on the acres planted on a choice of insurable units. Additional rules cover new lands brought into production and production on high-risk land. The producer may also receive protection for prevented planting, replanting costs and quality losses. Most producers need and want individual risk protection matched to the risks and characteristics of their operations, and crop insurance provides it. Other safety net programs are generally structured to be similar across crops and producers for ease of delivery and wide application, and their payments may not fully reflect the individual losses borne by the producer.
4) Producers Receive Crop Insurance Indemnities in the Timeliest Way. While some farm programs may make payments fairly promptly, such as marketing loan benefits, others pay out long after the payments are needed. Crop insurance indemnities are paid out close to when the loss occurs. Crop insurance policies require the companies to pay within 30 days of claim settlement. Losses due to disasters like floods or hurricanes and prevented planting and replant payments may be paid well before harvest. Other payments are usually made shortly after harvest.
5) Producers Can Use Crop Insurance as Collateral for Loans. When bankers loan to a producer, they require an expectation that the loan can be repaid. Many producers use land, equipment or crops as collateral to secure the loan. Bankers prefer individual crop insurance to payments from some of the other farm programs. Subject to the provisions of the policy, individual crop insurance guarantees the financial performance of the business and can be counted on by the banker should production or prices go amiss for the borrower.
6) Producers Benefit from the Efficiencies and Service of the Private Sector Delivery System. Crop insurance policies are sold and serviced by 19 private sector insurance companies, some 12,000 agents and more than 5,000 certified loss adjusters. Agents and adjusters are generally licensed by state regulators and have annual training requirements imposed by states and USDA’s Risk Management Agency (RMA). Market incentives and competition have resulted in intense efforts by crop insurers to meet their customers’ needs in the most efficient and helpful ways. Companies have invested heavily in information technology and created an outstanding delivery infrastructure for crop insurance. Evidence indicates producers place a very high value on the timely, customer-centric services of private-sector delivered crop insurance.