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Federal crop insurance was first authorized by Congress in the 1930s in conjunction with other initiatives to help agriculture recover from the impact of the Great Depression and the Dust Bowl. In 1938, the Federal Crop Insurance Corporation (FCIC) was created to administer crop insurance. Federal crop insurance was generally an “experiment”, providing limited coverage in limited areas for only major crops, like corn and wheat, until the Federal Crop Insurance Act of 1980. This Act expanded the crop insurance program to include many more crops and regions. It also encouraged expansion to replace the free disaster coverage offered under Farm Bills in the 1960s and 1970s. To grow participation in the program, the 1980 Farm Bill subsidized 30% of the crop insurance premium owed by the farmer.1
Despite the premium subsidy offered, farmers did not participate in crop insurance in significant numbers until the 1990s. In 1988, a major drought resulted in an ad hoc disaster assistance bill to keep farmers in business. A second disaster bill followed in 1989, a third in 1992 that covered a three-year span, and a fourth to counteract a very wet, cool growing season in 1993. This quick succession of disaster assistance led Congress to enact the Federal Crop Insurance Reform Act of 1994 (“the Act”).
The Act “made participation in the crop insurance program mandatory for farmers to be eligible for deficiency payments under price support programs, certain loans, and other benefits.”2 In 1996, the Risk Management Agency (RMA) was created to administer the federal crop insurance program under the USDA. Through the Act’s new requirements and geographic and crop expansion, crop insurance participation jumped to 180 million acres of farmland insured by 1998, three times the number of acres insured in 1988.3
Congress passed the Agricultural Risk Protection Act in May 2000. This law made it “easier for farmers to access different types of insurance products including revenue insurance and protection based on historical yields.” It also increased premium subsidy levels to farmers “to encourage greater participation and included provisions designed to reduce fraud, waste and abuse.”4
Crop Insurance is legislated under Title XII of the Food, Conservation, and Energy Act of 2008 (H.R. 6124) (Farm Bill) and will be a separate title under the new Farm Bill once such legislation is passed. For Crop Insurance, the Farm Bill amends the Federal Crop Insurance Act (the Act) in Section 7 of the U.S. Code (U.S.C.).5
Such amendments may result in new programs that must be explored or implemented by the RMA; specific policy language and procedural requirements; dollar amounts available to the RMA for administration of various insurance programs; premium subsidy percent regulations; waste, fraud, and abuse rules; restrictions on certain actions, such as any form of rebating; setting administrative fees per crop insured; instructing how price elections are arrived at; and much more. Essentially, any portion of the Act can be revised through the Farm Bill.
When a new Farm Bill is signed into law, all language included is recorded in the Federal Register and the changes affecting crop insurance are mandatory for the RMA to implement.
Changes that are within the scope of the Act and the powers granted to the FCIC and RMA are allowed without needing a new Farm Bill. Policies that are “permanent” (not a pilot or limited offering) must go through a review and comment period and be published in the Federal Register; changes to such things as procedures, rates, prices, and data collection guidelines can be made by the RMA without a comment period and without public input, although they do generally seek input from all insurance providers.
There are currently two types of crop insurance available to United States farmers and ranchers: Federal crop insurance programs, generally discussed as multiple-peril crop insurance (MPCI), and crop insurance products that are developed and underwritten solely by private insurance companies (private products) and are not subsidized by any entity. The most common private product is crop-hail coverage.6
With rapidly increasing expenses, including land purchase or rent; loan fees (which require collateral, often crop insurance); seed costs; labor expenses; equipment and fuel; and chemical or other soil or crop treatments,7 it is apparent why farmers purchase crop insurance to protect their investments and remain in business.
Farmers often purchase both federal and private crop insurance policies as part of their operational risk management: private policies allow “spot” coverage, often on a per-acre basis, for a specific peril that is either inadequately covered or not covered under an MPCI policy; MPCI policies provide broad coverage with higher values, revenue and yield protection options, and subsidized premium. The premium is subsidized by government (taxpayer) funds but is not a direct payment to farmers; it is a reduction in the calculated premium amount the farmer owes for the policy he or she purchased.
Federal crop insurance offers separate, tailored policies for more than 100 commodities, both conventional and organic.8 A definition section later in this paper provides details on plans of insurance, but in summary, there are 15 different plans of insurance, with six plans based on a farmer’s individual historic production records, five based on an area average (a county or weather grid), two using a producer’s business tax information, and two livestock plans based on a combination of market pricing and producer sale records. Within these plans, some offer yield-only coverage, some provide yield and revenue coverage, and some cover the producer’s risk using a set dollar amount of insurance. Please review the Federal Crop Insurance Plan of Insurance Summary later in this paper.
Additionally, there are several policy endorsements and options, a growing number of third-party-developed programs that are offered as a pilot program through the RMA (not all such policies are subsidized), and a variety of levels of coverage that determine what portion of the farmer’s historic crop productivity he or she will “self-insure” (the deductible). All federal crop insurance policies consist of the general crop insurance provisions (basic provisions), crop-specific provisions, special provisions, and, if applicable, policy endorsements and commodity exchange price provisions.9
A crop insurance policy is a contract between the farmer and their insurance provider, called an Approved Insurance Provider (AIP). For the 2014 reinsurance year, there are 18 AIPs10 in the United States. Farmers work with independent agents who are contracted with one or more AIPs to consider insurance options and make a purchase that fits their operation.
Under this contract, the farmer agrees to insure all the eligible acreage of a crop planted in a particular county. This requirement reduces adverse selection. Adverse selection refers to a market process in which undesired results occur when buyers (here, the farmers) and sellers (the AIP and RMA) have access to different information. If, for example, a farmer could insure select acreage, he or she may choose only to insure poor acreage that does not produce well; this would negatively impact the overall loss ratio of crop insurance and eventually drive rates higher, a negative impact on all parties involved.
The crop insurance policy contract also requires the farmer to report acreage and required production accurately, meet policy deadlines, pay premiums when due and report losses immediately.11 The insurance provider agrees to indemnify the insured farmer against losses due to perils beyond the farmer’s control that occur during the crop year.12 Most commonly, these perils are generally weather perils, such as drought, excessive moisture, plant disease, frost/freeze, and the results of such perils, such as excessive loss of crop quality, inability to plant, and the expense of replanting a crop.
The Insurance Cycle13
“Changes to the insurance policy may be made by RMA from one year to the next. Such changes will be available on RMA’s website not later than the contract change date contain[ing] the applicable crop provisions. The insurance provider will notify the policyholder in writing of any changes to the basic provisions, crop provisions, Commodity Exchange Price Provisions, if applicable, and special provisions of insurance not later than 30 days prior to the cancellation date for the insured crop. The [insured farmer] will have the opportunity to review the changes and, if desired, continue the insurance coverage for the following crop year, change the policy coverage, or cancel the insurance coverage. Any changes to the policy coverage that the policyholder makes must be made no later than the crop sales closing date. If the [insured farmer] wishes to cancel the policy, a written notice must be submitted to the insurance provider on or before the crop cancellation date.”14
RMA summary of business data15 provides the following nation-wide crop insurance totals for crop years 2008, 2012, and 2013 (year-to-date):
|2008||2012||2013 YTD (10/28/13)|
|Net Acres Insured||272,260,028||282,927,660||294,385,379|
The following issues are currently being debated in Congress and discussed among various organizations, media outlets, and individual citizens.
There are arguments on each side of the following issues:
RMA briefly defines each listed plan on their website policies overview.33 We provide RMA’s definition for all plans of insurance below.
Risk Management Agency website resources, http://www.rma.usda.gov, accessed 11/19/13. If you want to read policies, view actuarial pricing and coverage levels, or learn anything about the federal crop insurance program, the RMA website provides it to the public at large. This is the same information used by AIPs, agents, and farmers.
Crop Insurance in America, http://www.cropinsuranceinamerica.org/, accessed 11/19/13. This website is generally supportive of crop insurance. It offers a variety of basic facts, farmer interviews and scenarios, links to primary source information, and a set of common questions, answers, and refutations of other organizations’ and news media’s statements concerning crop insurance.
Zulauf, C., Schnitkey, G., and Barnaby, A., “List of Alternatives Being Discussed to Reduce Farm Premium Subsidies in Crop Insurance,” FarmDocDaily, February 6, 2013, http://farmdocdaily.illinois.edu/2013/02/list-of-alternatives.html, accessed 11/19/13. This summary and associated paper provides an academic look at select proposals to alter the crop insurance subsidy structure.
Choices Magazine, 3rd Quarter 2013, is dedicated to “Current Issues in Risk Management and U.S. Agricultural Policy,” and includes articles on crop insurance http://www.choicesmagazine.org/choices-magazine/theme-articles/current-issues-in-risk-management-and-us-agricultural-policy, accessed 11/19/13. Choices Magazine includes older crop insurance papers that can be located through a key word search on the magazine homepage.
1. UDSA, Risk Management Agency, “A History of the Crop Insurance Program,” http://www.rma.usda.gov/aboutrma/what/history.html, accessed 10/25/13
3. “About Crop Insurance: Crop Insurance: A Look Back,” Crop Insurance in America, http://www.cropinsuranceinamerica.org/about-crop-insurance/#.UrNLE6Mo670, accessed 10/29/13.
5. Title XII of the Food, Conservation, and Energy Act of 2008 (H.R. 6124), http://www.gpo.gov/fdsys/pkg/PLAW-110publ246/pdf/PLAW-110publ246.pdf, accessed 10/31/13.
7. Briggeman, Brian C. and Mickelsen, Chuck, “Rising and Changing Costs in Production Agriculture,” Kansas State University, Dept. of Agricultural Economics, ACCC Fact Sheet Series—Paper #5, August 2, 2013, http://www.agrisk.umn.edu/Library/Display.aspx?RecID=5109, accessed 10/29/13.
8. National Sustainable Agriculture Coalition, “USDA Makes Progress on Improving Crop Insurance for Organic Farmers,” March 1, 2013, http://sustainableagriculture.net/blog/organic-surcharge-removed/, accessed 10/30/13.
10. USDA, Risk Management Agency, “Crop Insurance Provider List for 2014,” http://www3.rma.usda.gov/tools/agents/companies/indexCI.cfm, accessed 10/31/13.
11. USDA, Risk Management Agency, “Policies, Overview.” op. cit.
12. USDA, Risk Management Agency, “A History of the Crop Insurance Program.” op. cit.
13. “The Insurance Cycle,” USDA, Risk Management Agency, http://www.rma.usda.gov/policies/cycle/insurance_cycle_g.html, accessed 12/19/13.
14. USDA, Risk Management Agency, “The Insurance Cycle,” http://www.rma.usda.gov/policies/cycle/insurance_cycle.html, accessed 10/31/13.
16. “Amendment 2186—To reduce crop insurance premium subsidies by 15 percent for those with an AGI of $750,000 or more” [Coburn Amendment], http://www.coburn.senate.gov/public/index.cfm?a=Files.Serve&File_id=28ebecb7-8914-4da5-80ab-8f2c864fecd5, accessed 10/30/13.
17. Abbott, Charles, “Reformers hail limit on U.S. crop insurance subsidies,” October 14, 2013, Reuters, http://www.reuters.com/article/2013/10/14/us-usa-agriculture-crop-insurance-idUSBRE99D0JT20131014, accessed 10/30/13.
18. Government Accountability Office, “Crop Insurance: Savings Would Result from Program Changes and Greater Use of Data Mining,” March 2012, http://www.gao.gov/assets/590/589305.pdf, accessed 10/30/13.
19. Wingfield, Brian, “Crop Insurance Critics Make Push to Curb U.S. Subsidies,” Bloomberg News, September 12, 2013, http://www.bloomberg.com/news/2013-09-12/crop-insurance-backers-step-up-lobbying-to-blunt-critics.html, accessed 10/30/13.
20. “Editorial: Texas representatives should support curbs on crop insurance payments,” Dallas News Opinion powered by Dallas Morning News, June 19, 2013, http://www.dallasnews.com/opinion/editorials/20130619-editorial-texas-representatives-should-support-curbs-on-crop-insurance-payments.ece?nclick_check=1, accessed 10/30/13.
21. Union of Concerned Scientists, “The Healthy Farmland Diet”, 2013, http://www.ucsusa.org/food_and_agriculture/solutions/expand-healthy-food-access/the-healthy-farmland-diet.html, accessed 10/30/13.
22. “Union of Concerned Scientists advocates whole-farm revenue crop insurance,” Agri-Pulse, April 24, 2012, http://www.agri-pulse.com/UCS-farm-bill-insurance-04242012.asp, accessed 10/30/13.
23. Union of Concerned Scientists, “Investing in Healthy Food Will Save Lives and Dollars,” August 7, 2013, http://www.ucsusa.org/food_and_agriculture/solutions/expand-healthy-food-access/11-trillion-reward.html, accessed 10/30/13.
24. “Do crop insurance companies make too much money and should there be a reduction in rate of return?” Crop Insurance in America, http://www.cropinsuranceinamerica.org/just-the-facts/there-are-those-who-say-that-crop-insurance-companies-make-too-much-money-is-this-true/#.UrNWj6Mo670, accessed 10/30/13.
25. “Fact Sheet: Crop Insurance Administrative Policy Changes,” Taxpayers for Common Sense, January 30, 2013, http://www.taxpayer.net/library/article/crop-insurance-administrative-policy-changes, accessed 10/30/13.
26. Ackerman, Kenneth D., “New Obama Budget Includes Cuts for Federal Crop Insurance,” Ag/FDA Blog, April 10, 2013, http://agfdablog.com/2013/04/10/new-obama-budget-includes-cuts-for-federal-crop-insurance/, accessed 10/30/13.
27. Townsend, Laird, “How You Pay Farmers to Watch Their Crop Shrivel Up and Die,” Mother Jones, October 30, 2013, http://www.motherjones.com/environment/2013/10/crop-insurance-west-texas-gmo, accessed 10/30/13.
28. “Soil conservation measures would lower crop insurance payouts, group says,” Business Record, August 27, 2013, http://www.businessrecord.com/Content/Ag---Environment/Ag---Environment/Article/Soil-conservation-measures-would-lower-crop-insurance-payouts--group-says/163/787/59795, accessed 10/13/30.
29. Bronson, Caitlin, “Looming crop insurance cuts will decimate demand, trade assoc. says,” Insurance Business America, October 21, 2013, http://www.ibamag.com/news/looming-crop-insurance-cuts-will-decimate-demand-trade-assoc--says-15967.aspx, accessed 10/30/13.
30. Good, Keith, “Video: Crop Insurance by the Numbers,” FarmPolicy.com, September 24, 2013, http://farmpolicy.com/2013/09/24/video-crop-insurance-by-the-numbers/, accessed 10/30/13.
31. “Crop Insurance Leader Asks Congress to Do No Harm,” American Agriculturist, December 10, 2013, http://farmprogressportal.inetsgi.net/story-crop-insurance-leader-asks-congress-harm-9-58423, accessed 10/30/13.
32. “NAWG Tells Farm Bill Conferees—Do No Harm to Crop Insurance,” Oklahoma Farm Report, October 25, 2013, http://oklahomafarmreport.com/wire/news/2013/10/06294_NAWGFarmBillLetter10252013_062653.php#.UszpWbx2uK4, accessed 10/30/13.
33. USDA, Risk Management Agency, “Policies, Overview.” op. cit.
© January 2014 League of Women Voters. Produced by the Agriculture Update Committee