August 21, 2013
Crop Insurance, the New Face of Farm PolicyBy Andrew Bowman
From walking on soil baked into near-concrete during the worst drought in over 50 years in 2012, to dredging across flooded fields this soggy spring, farmers continue to face uncertainty. And that’s just weather.
In just the last decade, corn prices have been under $2 and over $8 per bushel, land prices have nearly tripled, more regulations point to greater expense without offsetting revenue, and farm policy has evolved from focusing on price supports and direct payments toward a more market-oriented risk management tool called crop insurance. Crop insurance is a public-private partnership whereby farmers purchase policies and only receive a payment if there is a documented loss.
Given our new “normal” characterized by volatility everywhere – in weather, markets and regulation – farmers would struggle without access to crop insurance, a vital tool for rural America and the new face of farm policy.
The farm bill, which will guide American agriculture for the next five years, was recently debated in Congress. Current proposals eliminate direct payments, cash subsidies made based on historical figures regardless of need. Price support mechanisms still exist, but at much-reduced levels. These programs are less necessary because crop insurance has assumed the role as the primary risk management tool for farmers.
Crop insurance saves taxpayers’ money.
When disasters struck in the past, recovery was paid for completely by taxpayers. And that doesn’t consider the other trade-distorting supply controls and price support policies enacted in response to farm crises. Last year, in contrast, when farmers were decimated by drought, many had crop insurance and didn’t need a disaster bill to help them plant this year.
It is a vast improvement over the price support system and direct payments of the past. But farmers must put “skin in the game.” Many even complain about the money lost over the years purchasing crop insurance. Moreover, farmers lose a hefty deductible – 15 percent minimum – before any claims are paid out. Last year, this deductible was $12.7 billion. Coupled with $4.1 billion in premiums paid last year, farmers lost or paid nearly $17 billion before crop insurance kicked in.
It’s a major expense for farmers, but one they’re happy to pay for because it provides something this new “normal” rarely allows: peace of mind.
Crop insurance helps young farmers because it serves as “stop-loss” collateral to back credit – a crucial transition tool given the high capital costs of farming. In this sense, it is a bridge to the future for America’s farmers.
Crop insurance also supports farmers’ working capital, allowing cash to flow back into the economy. Paying down debt and investing in newer, more sustainable technologies faster is possible because crop insurance covers the risk of big losses.
Most importantly, crop insurance allows market forces to work; farmers can fail or succeed. It protects “good” farmers – those who apply new technologies, manage risk and preserve soil – from circumstances beyond their control, like last year’s drought or a market collapse. In contrast, it allows “bad” farmers to fail. The free market still works, just with a buffer that ensures stability in an unstable environment.
But in light of budget concerns, why does agriculture warrant crop insurance while other sectors lack such tools? Unlike other business owners, farmers negotiate with the whims of Mother Nature, cater to consumers in foreign and domestic markets, and compete with farmers two miles up the road, farmers two states over and farmers outside our nation’s borders.
Andrew Bowman is a fifth-generation farmer, Certified Crop Adviser and full lines insurance agent, including crop insurance. He lives in Illinois.