Mid-February: Farm Risk Management in the Crosshairs

Mid-February: Farm Risk Management in the Crosshairs

Here is our full Q and A with crop insurance guru Art Barnaby

In 1980 Art Barnaby, fresh out of graduate school and the most junior faculty member at Kansas State University, was assigned to stay up-to-speed on crop insurance, a very small government program at the time. Over the past 30 years he's been at the forefront of changes in the program, providing farmers a better risk management tool as operations grew and markets became more volatile. We caught up with Barnaby last month to find out where he believes this government program is headed.

Q: What policy changes do you see coming down the pipeline?

CROP INSURANCE EXPERT: Art Barnaby knows crop insurance inside and out, and his look at the 2012 Farm Bill and how it may impact the future of the program is just part of what he covers in this Q and A session.

A: I expect additional budget cuts are coming. Crop insurance saw a $6 billion cut a year ago, which impacted farmers minimally. Farmers already have been paying higher premium costs without always experiencing a loss, which makes those costs harder to swallow.

Up to this point, the budget hasn't driven what's been done on insurance. I think it will in the next fight. With the budget battle it will be interesting to see if improvements can actually happen.

The government did reduce premium costs on corn and soybeans. And a new program could adjust yield for the APH (Actual Production History). When I looked at numbers nationally for 2012, in some cases it only adjusted yields by 0.2 bu./year. But in other locations it was as much as 2.5 bu./year.

Q: What changes do you expect to see in the farm bill?

A: Most of the discussion from farmers is a desire to keep the program in its current form. But then organizations out there like the Environmental Working Group want more conservation funding.

Rep. Randy Neugebauer of Texas has proposed three big changes to the insurance program. His proposal would be insurance contract improvements, but if it costs money that would be another story.

He first changes the APH from a 10-year simple average to a 7-year Olympic average. For instance, a wheat county in Oklahoma ended up with ½ of a crop, but higher prices in 2011. The ½ crop experienced a big yield loss, but with the deductible, didn't get much, if any, insurance payment. Because the prices went up, there was no payment. The APH was low because of a 2009 and 2007 freeze. With an Olympic-average, one of those two years would have been dropped out of the history.

Neugebauer's CROP Act would enable producers to insure crops against shallow losses, which can be 25%-30% of a farmer's expected production. Additional coverage allowed under the Neugebauer bill would trigger when county losses reach 10%, and indemnities under the additional coverage are limited to the amount of the deductible under the underlying individual policy. Premium subsidies for the additional area coverage would not be less than 60%.

Q: What tweaks would you like to see to the current crop insurance program?

A: The Great Plains is seeing a declining APH. If you get a couple yield losses in a row, it really pulls down the guarantee and raises rates. The Neugebauer proposal would merge together a GRIP type contact and combine it with revenue protection coverage or APH coverage.

If their APH was low, farmers could shift more of their protection to the county trigger area coverage and less coverage tied to tier "low" APH. NASS has a nasty habit of not publishing county yields every year. Under Neugebauer's proposal USDA will have the ability to utilize farmer reported crop yields for crop insurance for developing a county yield, and it would help generate more accurate county yield data.

Q: Regionally is crop insurance equal?

A: From a farmer perspective, it is fair to say rates are probably too high in the Corn Belt. RMA is adjusting those down now. One hopes they continue to build in rate for catastrophe load.

Rates in the Great Plains have increased because they automatically increase with crop losses but that doesn't necessarily mean they had claims. However, it looks like additional rate increases may happen in the Great Plains.

Q: What myths exist from the public about crop insurance?

A: That farmers are making profits from crop insurance. In most cases, because of the deductible, farmers will likely have financial losses when their crop fails. Sometimes they gain additional revenue from other government programs. But the really big loss happens when farmer produce half of a crop, not a total crop failure.

There are also a significant number of farmers in low risk areas buying crop insurance but have had no claims. That may change because those rates are being lowered and they receive the largest trend adjustment to their APH. However, those farmers are clearly buying risk management rather than expecting a "government" check.

Q: How did you first start educating farmers and the government about improving crop insurance?

A: When I first started at Kansas State I received word that the Secretary of Agriculture wanted a representative from Kansas on their extension advisory committee. People in Washington were making statements that more farmers should be buying crop insurance because the government was subsidizing it.

However, once I started talking with farmers, I started to hear about the holes in crop insurance and found myself agreeing with farmers, not the people in Washington. At that time, the guarantee was based off a county average rather than individual proven yield. Anybody who had production levels greater than the county level didn't participate. This brought about one of the biggest fundamental changes in crop insurance in 1984-85.

Q: When was the first time price risk was included in the insurance contract?

A: In 1988 Iowa was struck with a drought and in 1989 Kansas was hit with a major wheat loss. A committee comprised of 20 members looked at ways to fix crop insurance that dealt with a short crop that also caused prices to increase when the loan deficiency payments didn't kick in. I proposed an idea of changing insurance to a replacement guarantee rather than just a yield guarantee. It never made it into the commission report, but an insurance company approached me about the idea.

First introduced in 1990, the company provided a replacement insurance contract when market prices went up; it replaced all bushels lost at the higher market price. It was a perfect offset for hedging grain.

The same company proposed putting in a revenue endorsement with price protection on both ends in one package. We initiated a trial project in Iowa with corn and soybeans only and then added Nebraska. Within two weeks, the product became the top seller in both states despite premiums doubling from what farmers were paying.

Q: How are farmers increasing their understanding of how to best utilize crop insurance?

A: Farmers have made tremendous progress over the years, which is partially shown by the tremendous growth in the number of insurance contracts. Over the last 10 years, insured acres have increased by 30%. There is a lot more liability now than there was 10 years ago. In that same 10-year period, there has been a 300% increase in dollars of coverage.

In 2002, a law was passed with the goal to increase participation in buy-up coverage. Farmer-paid premiums increased, as opposed to free CAT coverage, but the number of buy-up insured acres jumped. Coverage increased because market prices went up, but that is only part of the story. One reason farmers bought insurance is when a farmer gets a good price offer, a farmer may not raise the bushels. An insurance contract answers that question and provides new revenue protection. Effectively what it does for a farmer is expand the marketing window.

We see commodity brokers involved in selling crop insurance, which shows they've seen the benefits of combining them together. With the contract, farmers will either have bushels to offset the hedge position or enough dollars to buy them back to make the farmer whole. With on-farm storage today, farmers have 18-24 months before harvest and 6-8 months after harvest to make a sale providing a lot of time to look for a profitable selling price.

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