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.