I’ve met some pretty awesome people while doing my blog, including my new farm buddy Mark in Minnesota. Mark and his dad have a 1400 acre farm near the center of the state.
Last year, around September, the crops were looking good and getting close to harvest. That’s when it happened: a hail storm battered the area and pretty much ruined the crops. As you can see from the photos, it was pretty much a complete loss.
A season that started off well, was looking promising, and then nothing. Obviously, Mark and his dad were devastated about crops. Luckily, they had purchased crop insurance at the beginning of the year. While it wasn’t the same as harvesting and selling the crop, the insurance at least kept them from financial collapse.
So, what is crop insurance and how does it work? Insurance policies can be filled with confusing statements and legal jargon. But no worries — I’ve made it easy to understand!
Federal Government Involvement
Oversight of the program is done through the Risk Management Agency of the federal government. Private companies contract with the RMA, according to this contract, to participate in the crop insurance program. The agency sets the rates that can be charged, determines eligibility criteria, and also underwrites some of the loss. It also helps farmers by paying a portion of the premiums and pays the company for some of the overhead costs.
In return, the federal government does obtain a portion of their underwriting gains in years where there are not as many claims. According to Crop Insurance America, the federal government saw $3.99billion in crop insurance gains for the years 2001 to 2010. However, they also saw losses, which offset those gains, in 2011 and 2012.
The insurance policies which are issued, referred to as Multiple Peril Crop Insurance (MPCI), must be purchased prior to planting and protect against loss from any natural losses. Some newer policies may also protect farmers from price reductions.
Private Lending Institutions
On the flip side, there are 18 private companies that actually administer the crop insurance program. On the one hand, the companies are required to sell crop insurance to any farmers that request it and meet the eligibility requirements. Therefore, the insurance is available to a broad group of farmers. The downside for the companies is obviously that this increases the risk they take on, which is one of the main reasons the federal government is involved in the program at all.
You can find local agencies that issue crop insurance policies, according to state, here.
Mixed into the crop insurance structure are various conservation practices. If farmers are going to purchase crop insurance and participate in the program, the government requires you to also participate in other programs designed to protect the environment. If at any point a farmer decides he doesn’t want to purchase crop insurance or participate in the conservation programs, he is required to pay back any and all benefits he received under the crop insurance program.
Why Do We Need Crop Insurance?
Quite frankly, without some type of government support, the risk would be too large for the private companies to continue.
Imagine the difference between a grocery store buying insurance against customers that may come into the store and get seriously injured. Although most businesses have such an insurance policy and they pay premiums each year, the likelihood that a patron will get significantly injured while grocery shopping is quite low. That means the insurance companies are not taking on a high risk. Premiums are paid by several stores and claims are made sparingly.
On the other hand, the risk for providing crop insurance is much, much greater. Assuming there was no government assistance, imagine if all the farmers in a region are paying premiums to an insurance company that insures crops. If the there is severe weather, an outbreak of a new type of pest, or a disease to the crops, it generally will hit many farmers in the same area. That means the insurance company has to take on a huge risk — lots of farmers are paying premiums, but if any claims are made, they’re most likely going to be made by lots of farmers.
The federal program is a mixture of government and private companies. It provides the stability of the U.S. government with the efficiency of a private company. Without this support, the risk for the insurance companies would be too unreasonable for them to offer insurance and, even if they did, the premiums would be unattainable for most farmers.
While some people claim we should remove all crop insurance support and let the free market decide, it is important to remember that the market is not really involved in these types of losses. If the grocery store is careless and allows its floor to remain wet and hazardous, that is due to the store’s negligence. However, weather is an equal opportunity force of destruction — it hits whether you’re a good or bad farmer. There really is only so much that can be done to protect farms from weather related losses. As a result, it isn’t hard to imagine that one bad storm or new disease could wipe out and bankrupt an entire region of farmers.
If you’re interested in learning more about this topic: Crop Insurance America and Risk Management Agency.
I disagree with you on this topic. I am benefitting from this program myself, having purchased insurance after seeing how much is subsidized. But I also see how it is unfair to non-farmers, who are now bearing part of the risk that should be mine alone. It is also economically inefficient, since resources are being directed to owners who would otherwise not be able or willing to purchase insurance.This seems to me to be another example of favors given to politically powerful groups, such as farmers. Another even more egregious example is ethanol, and I benefit from that, too. Both are examples of rent seeking, and the country as a whole is poorer for it.
Ah, and we had such a good thing going, Charles! 😉 I totally understand where you're coming from on this issue too. I used to be quite the conservative and an issue like this isn't necessarily a small government one. However, I think I've decided that everyone is getting something from the government. If we're going to give out unemployment benefits for 5 years, the least we can do is help farmers out a little. 😉 Farming is a high regulated industry and with lots of risks. If this is the least we get for a "safety net," no big deal.I think we can both agree that without the federal government's involvement, you're not going to be buying crop insurance on the open market though. The risk is just too great and, as I explained in the article, it doesn't get spread around, it usually happens in a big area. I think it would be inefficient if you had farmers going out of business every year because they had some bad weather. Plus, there would be a lot of consolidation into the hands of a few. But, like I said, I do get where you're coming from! Thanks for your comments!
And I completely understand your perspective as well. Without subsidies many farmers would not choose to buy insurance, and may then suffer losses due to reasons beyond their control. Some may lose their farms, which would be then be bought by someone else less unlucky. And it is also quite true that practically everyone else is getting some sort of "help" from the government because they, as well, have their own set of problems. Why not farmers as well? That is, after the ethanol boondoogle, and the checks the USDA sends every year just because I own a farm, etc.It's also easier for me to be objective since the quarter section that I own, but don't farm, is about one tenth the size of the operation in Minnesota you describe. The dollar amounts are in the hundreds for me, but thousands for them and similar farms. Plus, the farm is not my only source of income.But I am not proud of the fact that I receive such benefits, much less expect them as entitlements. I believe they undermine the respect that farmers otherwise deserve. Of course I am totally out of the mainstream on this. I would guess that the vast majority of people, not just farmers, agree with you. But the entitlement philosophy at work just makes me sad.
Charles, I admire your fairness considering you benefit and yet dislike the way these benefits are handled, I agree with your principle. I'm involved in crop insurance and yet am very much opposed to the overall amount govt. is spending, financial reform is desperately needed. So I too have some mixed feelings; yet see the program and subsidies overall as a good thing.TFD – excellent article on the basics of crop insurance. Some very good points you made. Easy to understand and accurate, good job.