Crop Insurance Awareness Among Farmers During Hurricane Harvey

Hurricane Harvey caused more than $200 million in crop and livestock losses, according to Texas A&M University agricultural economists. Unfortunately, I was unable to find the exact number of farmers who had crop insurance during Harvey. However, it is worth noting that crop insurance participation has been steadily increasing over the years, with more than 400 million acres enrolled nationwide as of 2021. The Federal Crop Insurance Program (FCIP) offers financial protection to agricultural producers against losses due to adverse events, including drought, excess moisture, damaging freezes, hail, wind, disease, and price fluctuations.

The Federal Crop Insurance Program (FCIP)

The Federal Crop Insurance Act of 1980 expanded the program to include more crops and regions. This Act also encouraged the expansion of the program to replace the free disaster coverage offered under previous Farm Bills. Despite this, participation in the program remained low, leading to the enactment of the Federal Crop Insurance Reform Act of 1994, which made participation mandatory for farmers to be eligible for certain benefits.

Following the 1994 Act, participation in the program increased significantly. In 1998, more than 180 million acres of farmland were insured under the program, more than triple the acreage in 1988. The Risk Management Agency (RMA), created in 1996, administers the FCIC and offers risk management and education programs to support U.S. agriculture.

The USDA, through the RMA, oversees FCIP and offers financial protection to agricultural producers against losses due to adverse events, including drought, excess moisture, damaging freezes, hail, wind, disease, and price fluctuations. From 2000 to 2021, FCIP provided support for 133 unique agricultural commodities, covering an average of 284 million acres annually.

The total cost of maintaining FCIP has increased with program participation. Premium subsidies, which have been the primary tool to increase participation, represent the largest share of total program costs. In 2020, premium subsidies totaled $3.11 billion. FCIP also incurs costs due to its public-private partnership structure, with private insurance companies selling and servicing insurance policies while the federal government subsidizes producers' purchases and companies' administrative and operating expenses.

In 2022, federal costs for the program were $17.3 billion, with about $12 billion going towards subsidizing premiums and the rest towards insurance companies' administrative costs and government losses related to the policies. The federal crop insurance program is a vital tool for farmers to protect themselves from financial losses due to crop price declines and poor harvests caused by natural events.

The impact of Hurricane Harvey on farmers

Hurricane Harvey, a Category 4 hurricane, struck the Gulf Coast of Texas in August 2017, bringing unprecedented rainfall and causing record-breaking flooding. The storm's impact on Texas farmers was significant, with crop and livestock losses estimated at over $200 million.

Texas is a major agricultural producer and exporter in the United States, leading the nation in cattle and cotton production and contributing significantly to wheat, corn, and soybean exports. The state's agricultural sector suffered extensive damage from Hurricane Harvey, with cotton farmers being among the hardest hit. The storm's intense rainfall and flooding affected both unharvested crops and stored produce, with water damage reported in grain and vegetable crops, food warehouses, and transportation routes, disrupting the food supply chain.

The hurricane also resulted in substantial livestock losses, including industry infrastructure and animals such as hay, cattle, and calves. The total livestock losses were partially mitigated by donations and assistance from various sources, including the U.S. military and neighbouring states.

In addition to crop and livestock losses, Hurricane Harvey caused damage to agricultural infrastructure, such as grain bins, storage facilities, and transportation networks. The storm's impact extended beyond Texas, affecting farmers across the United States due to the disruption of supply chains and transportation routes.

Overall, Hurricane Harvey had a devastating impact on farmers, with long-term consequences for their livelihoods and the Texas agricultural industry as a whole. The recovery process for farmers was expected to be challenging, and organisations like Farm Aid stepped in to provide critical support, resources, and disaster relief funds to assist farmers and ranchers in their recovery efforts.

The history of crop insurance in the US

The Early Years:

In the 1930s, Congress first authorized federal crop insurance to aid the agricultural sector in recovering from the devastating impacts of the Great Depression and the Dust Bowl. This initiative was part of President Franklin D. Roosevelt's New Deal policies. The Federal Crop Insurance Corporation (FCIC) was established in 1938 to oversee the program, marking the beginning of federal involvement in crop insurance. However, the early years of the program were challenging due to high costs, low farmer participation, and insufficient reserves to cover catastrophic losses.

Experimental Phase:

The crop insurance program during its initial years was considered an experiment. It was primarily limited to major crops in the main producing areas. Despite its limited scope, the program struggled to gain traction among farmers, and it remained in this experimental phase until the passage of the Federal Crop Insurance Act in 1980.

Expansion and Reform:

The Federal Crop Insurance Act of 1980 brought significant changes to the program. It expanded the number of crops and regions covered, aiming to replace the free disaster coverage provided under previous Farm Bills. To encourage participation, the Act authorized subsidies for crop insurance premiums. However, even with these incentives, farmer participation remained lower than expected, leading to repeated requests for ad hoc disaster assistance from Congress.

Mandatory Participation and the Risk Management Agency:

In 1994, Congress passed the Federal Crop Insurance Reform Act, which made significant changes to the program. It mandated that farmers participate in the crop insurance program to be eligible for certain benefits and deficiency payments. This act also led to the creation of the Risk Management Agency (RMA) within the United States Department of Agriculture (USDA) in 1996. The RMA was tasked with administering FCIC programs and providing risk management and educational support to farmers.

Private Sector Involvement:

The 1994 reforms also encouraged private sector involvement in crop insurance. The public-private partnership between the government and private insurance companies aimed to improve the efficiency and viability of the program. Private entities were allowed to develop and market new insurance products, with the government providing subsidies and reinsurance support.

Increasing Farmer Participation:

Following the reforms of the 1990s, farmer participation in the crop insurance program increased significantly. By 1998, over 180 million acres of farmland were insured under the program, representing a substantial increase from previous years. This trend continued, and by 2019, farmers purchased 1.1 million crop insurance policies, protecting almost 380 million acres of farmland.

Ongoing Enhancements:

The crop insurance program has continued to evolve, with Congress passing additional legislation to strengthen and expand its reach. The Agricultural Risk Protection Act of 2000, the Agricultural Act, and the Agriculture Improvement Act of 2018 introduced new products, increased premium subsidies, and targeted underserved farmers. These efforts solidified crop insurance as a cornerstone of farm policy in the United States, providing vital risk management support to agricultural producers.

The cost of crop insurance

Premium Rates

Premium rates are a significant component of the cost of crop insurance. These rates are set by the Federal Crop Insurance Corporation (FCIC) for the insurance products they develop. Additionally, insurance providers can create their own products with the approval of the FCIC. Premium rates can vary based on the type of crop, with certain crops having higher inherent risks and, consequently, higher premium rates. For example, crops like corn, soybeans, and wheat may have different premium rates due to their distinct characteristics and vulnerabilities.

Subsidies

To make crop insurance more accessible and affordable for farmers, the government provides subsidies to offset a portion of the premium costs. These subsidies are built into the program guidelines and can significantly reduce the financial burden on farmers. The level of subsidy may vary depending on factors such as income, with high-income participants receiving lower subsidies. In recent years, the average subsidy has been over 60% of the premium, demonstrating the substantial support provided by the government.

Administrative Costs

Administrative costs are another factor in the overall cost of crop insurance. These costs cover the expenses incurred by insurance providers in marketing, underwriting, and adjusting claims for crop insurance policies. The government partners with private insurance companies to deliver the program, and these companies receive compensation for their administrative efforts. The administrative costs are included in the total program cost and are typically a significant expense.

Unit Structure

The unit structure refers to how a farmer chooses to group their fields or acreage for insurance coverage. There are several types of units, including basic units, optional units, enterprise units, and whole farm units. The choice of unit structure can impact the premium rates and overall cost of insurance. For example, breaking up acreage into smaller units may increase the chances of a claim payment but will also result in higher premium costs.

Coverage Level

Farmers can select different coverage levels for their crops, typically ranging from 50% to 85% in increments of 5%. The coverage level represents the percentage of the total potential loss that the insurance will cover. Higher coverage levels provide greater financial protection but come at a higher cost, as the premium rates tend to increase with the level of coverage chosen.

Indemnities

Indemnities, or loss payments, are made to insured farmers when they experience losses during the crop year due to unavoidable events beyond their control. The amount of indemnity is based on the difference between the guaranteed yield or revenue and the actual yield or revenue achieved. The cost of indemnities is included in the total program cost, and they can vary significantly from year to year depending on weather conditions and other factors.

Private Crop Insurance

In addition to federal crop insurance, farmers can also purchase private crop insurance, also known as named peril insurance. This type of insurance is not part of the federal program and is often added to supplement federal coverage. Private crop insurance typically covers specific perils such as hail damage and may have different premium structures and payment methods.

Public-Private Partnership

The cost structure of crop insurance is influenced by the public-private partnership between the government and private insurance companies. The government subsidizes premiums and shares administrative costs and losses with private insurance providers. This partnership allows for greater efficiency and a more sustainable risk management system for agriculture.

In conclusion, the cost of crop insurance is a multifaceted topic with numerous factors influencing the final price. The interplay between premium rates, subsidies, administrative costs, unit structure, coverage level, indemnities, and the public-private partnership determines the overall cost of crop insurance for farmers. By understanding these factors, farmers can make informed decisions about their insurance choices and manage their risks effectively.

The benefits of crop insurance

Crop insurance is a vital safety net for farmers, protecting them from financial losses due to poor harvests, market price declines, and natural disasters. It helps farmers recover from catastrophic events, such as floods and droughts, by providing financial support to pay their suppliers, landlords, and bankers. It also enables them to purchase production inputs for the next season and encourages long-term investments to increase production efficiency.

Crop insurance is particularly important given the variable weather patterns and intense global weather events that challenge food production systems. Without it, production losses would have a devastating impact on the rural economy, leading to farm failures, job losses, and reduced investment in agriculture.

Additionally, crop insurance supports new and beginning farmers by providing access to credit and helping them enter the industry to meet the growing global demand for food, fiber, and energy.

The U.S. government has also recognized the importance of crop insurance in supporting the agricultural sector. The Federal Crop Insurance Program (FCIP), overseen by the USDA's Risk Management Agency (RMA), offers financial protection against adverse events, including drought, excess moisture, damaging freezes, hail, wind, disease, and price fluctuations.

The program has evolved since its inception in the 1930s, with legislative changes and the introduction of new insurance products increasing participation rates. As of 2021, the aggregate crop coverage level reached an all-time high of 74%, with FCIP offering financial and administrative support for 133 unique agricultural commodities and covering an average of 284 million acres annually.

Crop insurance is, therefore, a critical tool in maintaining a financially stable agricultural sector and ensuring the nation's food security.

Frequently asked questions