The Safety Net: Crop Insurance And Its Vital Role For Farmers

Agricultural producers, including farmers, can purchase crop insurance to protect against the loss of their crops due to natural disasters or the loss of revenue due to declines in the prices of agricultural commodities. In the United States, the federal government subsidizes an average of 62% of the premium. The USDA's Risk Management Agency oversees the federal crop insurance program, which supported about 1.2 million policies covering 493 million acres in 2022. The program offers protection against a range of risks, including adverse weather conditions, failure of the irrigation water supply, and the inability to plant due to excess moisture. Crop insurance helps farmers manage the risks associated with price volatility and unexpected disasters, providing a vital safety net to keep their businesses operating.

There are two main types of crop insurance: crop-yield insurance and crop-revenue insurance

Agricultural producers, including farmers, ranchers, and others, can purchase crop insurance to protect against the loss of crops due to natural disasters or the loss of revenue due to declines in the prices of agricultural commodities. There are two main types of crop insurance: multiple peril crop insurance (MPCI) and crop-hail insurance.

MPCI covers crop losses, including lower yields, caused by natural events such as destructive weather (hail, frost, damaging wind), drought, excessive moisture, freeze, disease, and other natural causes. It is federally supported and regulated and is sold and serviced by private-sector crop insurance companies and agents. MPCI is available for more than 120 different crops, though not all crops are covered in every geographic area. Policies must be purchased each growing season by deadlines established by the federal government and before a crop is planted.

Crop-hail insurance is generally available from private insurers because hail is a narrow peril that occurs in limited places, and its accumulated losses tend not to overwhelm the capital reserves of private insurers. Crop-hail insurance can be purchased at any point in the growing season and often has a low or no deductible. It is not part of the Federal Crop Insurance Program and is sold by private insurers, regulated by state insurance departments.

In addition to these two main types of crop insurance, there are various other plans and products available, including revenue protection, yield protection, and supplemental coverage options. These plans can vary by crop and county and may be offered by different providers.

Crop-yield insurance covers the loss of crops due to natural disasters

Farmers have access to crop insurance to protect themselves from financial losses due to poor harvests and declines in market prices. This insurance covers the loss of crops due to natural disasters, such as hail, drought, and floods ("crop-yield insurance"), and the loss of revenue due to declines in the prices of agricultural commodities ("crop-revenue insurance").

In the United States, the federal government subsidizes, on average, 62% of the premium. In 2019, crop insurance policies covered almost 380 million acres, with new liabilities exceeding $110 billion. The federal crop insurance program is the primary risk management program available to agricultural producers and is a vital component of the farm safety net.

There are two main types of crop insurance: Multiple Peril Crop Insurance (MPCI) and crop-hail insurance. MPCI covers crop losses, including lower yields, caused by natural events such as destructive weather (hail, frost, damaging wind), drought, excessive moisture, and unusually hot weather. It is federally supported and regulated and is sold by private-sector crop insurance companies and agents. More than 90% of farmers who buy crop insurance opt for MPCI.

Crop-hail insurance is generally available from private insurers because hail is a narrow peril that occurs in a limited place and does not typically overwhelm the capital reserves of private insurers. It can be purchased at any time during the growing season and covers losses due to hail damage and, in some cases, fire and lightning.

Farmers can also purchase crop revenue insurance, which helps them in years when crops have low yields or when the price of the crop is low. The amount the insurer will pay reflects how much lower a year's revenues are compared to previous years' earnings. This insurance helps farmers protect their earnings against drastic swings in crop prices, regardless of the cause.

Crop-revenue insurance covers the loss of revenue due to declines in the prices of agricultural commodities

Farmers can purchase crop-revenue insurance to protect their earnings against drastic swings in crop prices, regardless of the cause. Crop-revenue insurance covers the loss of revenue due to declines in the prices of agricultural commodities. It is one of the two major types of crop insurance, the other being multiple peril crop insurance (MPCI).

Crop-revenue insurance is based on the deviation from the mean revenue. The Risk Management Agency (RMA) uses the futures prices on harvest-time listed in the commodity exchange markets to determine the prices. By accessing the futures market, farmers can gain revenue protection even before the crop is planted. There is a single guarantee for a certain number of dollars. The policy pays an indemnity if the combination of the actual yield and the cash settlement price in the futures market is less than the guarantee. In the United States, the program is called Crop Revenue Coverage.

Crop-revenue insurance covers the decline in price that occurs during the crop's growing season. It does not cover declines that may occur from one growing season to another. The guarantee is based on market prices and the actual yield on the farm. The projected price and the harvest price are used to compute the revenue coverage and guarantee. The projected price is determined during February, while the harvest price is determined by averaging the new crop futures prices during October. The final revenue guarantee is computed by multiplying the higher of either the projected price or the harvest market price by the chosen coverage level.

The actual revenue for insurance purposes is computed by multiplying the actual yield by the harvest price. An indemnity payment is made if the actual revenue falls below the revenue guarantee. The payment is equal to the difference between the two amounts. The amount of insurance protection is based on the greater of the projected price or the harvest price. If the harvested production multiplied by the harvest price is less than the amount of insurance protection, the producer is paid an indemnity based on the difference.

In the US, the federal government subsidises an average of 62% of the premium

In the United States, the federal government subsidises an average of 62% of the premium for crop insurance. This insurance is purchased by agricultural producers, including farmers, ranchers, and growers, to protect against the loss of crops due to natural disasters or a decline in revenue caused by fluctuating market prices. The federal crop insurance program is a public-private partnership between the government and private insurance companies, with the latter selling and servicing policies to farmers.

The US Department of Agriculture (USDA) plays a crucial role in implementing the federal crop insurance program. In 2022, the program supported about 1.2 million policies, covering approximately 493 million acres, at a cost of $17.3 billion to the federal government. Of this amount, about $12 billion was allocated to subsidising premiums, while the remaining funds went towards administrative costs and compensating insurance companies for their services.

The federal crop insurance program has evolved since its inception in the 1930s, with significant reforms in 1994 and 2000. These reforms included the introduction of catastrophic (CAT) coverage and substantial increases in premium subsidies. The program is now the primary risk management tool for US agricultural producers, providing a vital safety net against price volatility and natural disasters.

While the program offers essential protection, there have been suggestions to reduce federal costs. The Government Accountability Office (GAO) has recommended that Congress consider reducing premium subsidies for high-income participants and adjusting compensation for insurance companies to align with market rates. These changes could potentially generate significant savings for the government, which could then be allocated to other agricultural priorities.

Farmers can buy additional coverage beyond the free catastrophic (CAT) coverage offered by the USDA

The USDA's Risk Management Agency (RMA) offers free catastrophic (CAT) coverage to agricultural producers who grow an insurable crop. This coverage is authorized by the Federal Crop Insurance Act and administered by the RMA. CAT coverage provides protection against crop losses caused by natural disasters such as hail, drought, excessive moisture, and hurricanes.

However, farmers can also buy additional coverage beyond the free CAT level. This is often referred to as "buy-up" coverage. Under the buy-up program, the federal government subsidizes a portion of the premium. The amount of the subsidy can vary depending on factors such as income and crop type.

There are two main types of additional coverage available:

Multiple Peril Crop Insurance (MPCI)

MPCI is federally supported and regulated and is sold by private-sector crop insurance companies. It covers crop losses, including lower yields, caused by natural events such as destructive weather (hail, frost, damaging wind), drought, excessive moisture, and disease. MPCI policies must be purchased before planting and are available for more than 100 different crops, though not all crops are covered in every geographic area. More than 90% of farmers who buy crop insurance opt for MPCI.

Crop-Hail Insurance

Crop-hail insurance is generally provided by private insurers and can be purchased at any time during the growing season. It covers crop damage caused by hail and may also include extended coverages like fire, lightning, transit coverage, and vandalism. Crop-hail insurance is often purchased as a supplement to MPCI, especially in areas where hail is a frequent event.

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