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Tuesday, July 24, 2012

Crop Insurance Will Pay Out A Lot, But Will The Check Clear?


Are crop insurance payments too high?  That is what many crop insurance critics contend, based on the fact that Revenue Protection will pay up to double the spring guarantee, which is $11.36 on corn and $25.10 on soybeans.   And with higher market prices, due to short crops, those levels are more in focus than ever before.
There is no indication that crop insurance subscribers would ever cash indemnity checks that are limited by the restricted payments, but no one was anticipating such a devastating drought this year either.  Nevertheless, Kansas State University risk management specialist Art Barnaby says many questions have been posed to him about the maximum levels that insurance would pay, which is twice the spring guarantee.  In his recent <a href=" " title="newsletter "><b>newsletter </b></a>Barnaby says many critics of crop insurance say the government should have a disaster program, but Barnaby says that is what the crop insurance program is.
But why would there ever be a need for crop insurance to pay as much as $11.36 for a lost bushel of corn and $25.10 for a lost bushel of soybeans?  Barnaby says that is an easy answer:
Farmers who feed their corn to livestock or dairy cows will need to replace their lost feed supply, caused by their corn crop failure, at the currently higher corn prices.  
Grain-only farmers that have some of their crop hedged or forward contracted will need to fill those contracts with higher priced grain, if their crop fails. These farmers will need those extra indemnity dollars to cover these additional costs.
He compares the Revenue Protection crop insurance to a homeowner’s insurance policy which covers higher repair or replacement costs for the home than when the policy was initially purchased.  Consequently, he says there are many reasons a farmer would be willing to pay a higher premium costs for the harvest-price option than reducing his premium cost by excluding the harvest price or opting for Yield Protection, which has no revenue element to accompany the replacement bushel indemnity.
The Kansas State economist also defended the crop insurance program’s indemnity payments, saying critics disregard the premiums that farmers pay, and cited the example of many Illinois farmers with 1,000 acres or more writing premium checks for well over $20,000, based on their $27.82 average per acre premium in 2011for corn and $16.42 per acre for soybeans.  
Barnaby also says a primary concern for many farmers is whether crop insurance companies have enough financial resources to pay out billions of dollars in indemnity checks when this crop is complete.  And he says they will be able to pay whatever is needed, based on their financial capability as certified to USDA.
That question comes in the wake of the failure of MF Global and PFG-Best, two futures commission merchants that tangled customer accounts and were unable to pay farmer clients who used their brokerage services.  Obviously, many farmers are becoming more concerned about the welfare of their assets.
Barnaby says the 2005 insolvency of American Growers Insurance Company spurred USDA to require any company that writes federal crop insurance to have the ability to cover two years of catastrophic losses.  And if an approved insurance company should be unable to cover its policy claims, then the Risk Management Agency will step in and make indemnity payments, but that may come quite late compared to other company payments.  
Prior years did not have the financial exposure that exists today for crop insurance companies, nearly all of which spread their risk in a wide variety of ways.  He says currently about 80% of Cornbelt farmers have crop insurance on at least one crop, and if it is corn, about 80% of those are the higher coverage buy-up policies of Revenue Protection.
Crop insurance indemnity payments could be large this year, approaching the payment limits of twice the spring guarantee.  Such higher levels of payments are needed because of the need to purchase expensive livestock feed, as well as replace any hedged bushels that cannot be delivered.  Crop insurance companies should not have problems paying out indemnity checks because of government oversight.

Posted by Stu Ellis on 07/24 at 10:39 PM | Permalink

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