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A golden harvest near Oakesdale.
Photo by Teresa Hodges





AMMO: Counting on crop insurance

Ag economist Art Barnaby emphasizes importance of harvest price option

April 2018
By Trista Crossley

While Dr. Art Barnaby, an ag economist from Kansas State University, addressed a wide variety of topics related to crop insurance at the second of 2018’s Agricultural Marketing and Management seminars, it was the potential impact of losing the harvest price option (HPO) that he wanted to drive home.

“If that option is taken out of insurance, it affects this part of the country because they are settling their claims based off Portland prices, and you can’t effectively do that with hedging on the board. There’s not enough of a relationship between those two numbers,” he said in an interview after his presentation. “These guys are farmers, and they are all well aware of how these things work, so it’s a pretty easy group to explain to why the harvest price option is important to them. I wish it were that easy to explain to the policymakers who are talking about removing it.”

The HPO is revenue coverage within a crop insurance policy that provides protection on lost production at the higher of the projected price or the price at harvest; farmers pay an additional premium for this type of price protection. HPO is designed to protect farmers who preharvest hedge. Hedging in drought years often results in large losses, potentially leaving farmers facing huge debts. Some policymakers, including the president, have called for eliminating the HPO to save money, saying private companies will pick up the slack.

Barnaby used two slides to illustrate how revenue protection with the harvest price exclusion (in other words, forgoing the HPO) would impact farmers. As Barnaby pointed out, revenue protection with the harvest price exclusion can leave a “doughnut hole” in producers’ yield coverage (see Slides 1 and 2).

“It should not take a genius to see that’s going to cost more in premiums,” he said. “People that are wanting to either eliminate the HPO or remove the subsidy from the HPO really don’t understand what the HPO guarantees. It’s yield and it’s price, both. I don’t think that’s well understood by the people that are making decisions on this.”

Barnaby also made the argument that taking away the HPO will mess with the insurance pool itself, because most farmers’ marketing plans are tied to their crop insurance coverage. Without a way to guarantee the ability to meet forward contracts, as can happen due to natural disasters, farmers may be less likely to purchase adequate crop insurance.

Barnaby also addressed proposed means testing, telling attendees that research has shown that the bigger farmers tend to have a lower risk. He pointed out that removing those producers out of the insurance pool will likely raise rates for everybody else.

“If we had one auto insurance pool, and we put all the teenage drivers into your insurance pool, guess what would happen to your rates. Same thing here,” he said.

Policymakers have also suggested putting a $40,000 limit on premium discounts. Barnaby said that in Kansas, studies based on 2016 prices show that producers will hit that limit with 2,000 acres. Producers with high value crops, such as those grown in California, will hit the limit with as little as 200 acres. In Washington, the limit would hit at about 1,813 acres.

The other crop insurance ideas being discussed in the next farm bill, according to Barnaby, are:

• Replacing private crop insurance with a “free” program administered by the Farm Service Agency that would be based on county yields; and

• Adding a cotton program and making improvements to the dairy program.

Selecting the best level of crop insurance coverage was another topic Barnaby touched on. He said because farmers are paying a premium, they tend to pick the optimum level of coverage for their insurance budget instead of buying the maximum coverage because the cost of the premium is more than the benefit that is gained. In the example shown (see Slide 3), a farmer who elects 85 percent coverage will pay $8.07 per acre, but if he drops to an 80 percent coverage, his premium drops to $3.77.

“That last dollar of coverage is the most expensive you are going to buy,” he said.

In 2012, farmers saw record farm incomes with record crop insurance payments. Crop insurance critics argue that crop insurance isn’t needed in those times. Barnaby had a simple answer.

“It’s not the same farmer,” he explained. “The farmers that didn’t have crop losses were getting record prices for their corn, soybeans, and as long as they had yields, they are making record farm incomes. Remember, when price goes up, you absolutely have to have a yield loss to trigger payments. So payments only went to farms that actually had losses.” Barnaby said that policymakers have a tendency to look only at aggregate numbers, which can lead to conclusions that don’t make sense.

Finally Barnaby touched on the commodity programs, Agriculture Risk Coverage (ARC) and Price Loss Coverage (PLC). His thoughts included:

• Will 2017/18 corn PLC payments exceed ARC? Likely many corn counties will generate no ARC payments, even with low prices, because of high yields.

• Two or three bad yields in a county’s yield history lowers the ARC guarantee and lowers the probability of collecting ARC payments.

• A large number of counties don’t have a National Agricultural Statistics Service (NASS) county yield because not enough surveys were returned by farmers. The suggestion has been made to use Risk Management Agency (RMA) yields instead of NASS yields for ARC, but the problem, Barnaby said, is that if there isn’t enough insured farmers to develop a county yield, RMA pulls yields in from neighboring counties. “It works if you’ve got large participation in insurance and you’ve got large acreage, but when you get into minor crops, it starts to fall apart.”