Written by John Morris / Kansas Wheat Growers Association Wednesday, 16 May 2007 06:29Ask any Kansas farmer and the answer will be the same. Crop insurance is one of the more complicated risk-management issues with which the Kansas farmer needs to deal.
Because of that complicated nature, it is confusing to consumers, taxpayers and the media. With the damage in many parts of Kansas resulting from the Easter weekend deep freezes, crop-insurance questions sprouted anew.
Here’s how the system works.
First, crop insurance can protect the Kansas wheat producer from many hazards, including freeze damage and drought losses.
The producer needs to determine the coverage he wants to purchase for his farm operation. Again, using the wheat producer as an example, he can purchase coverage ranging around 50 percent up to 85 percent. The higher coverages cost the producer much higher premium rates.
We might draw an analogy with the purchase of auto insurance. The consumer must decide the amount of various types of insurance to be assigned to a specific vehicle, and can even select 100 percent coverage— which the farmer cannot select on his crop insurance.
The car insurance allows a total loss to be settled based on the potential value of the vehicle at the time it is destroyed, while a farmer would settle with a valuation based on an average yield over many years rather than the potential value on the date of loss.
These differences can translate into possibly a few thousand dollars at most for the consumer on his car insurance, but many tens of thousands of dollars for the farmer’s crop insurance.
One of the key flaws in crop insurance has shown up in states like Kansas, where producers have been suffering through five to seven years of severe drought.
The flaw comes to light because the percentage of coverage is not based on production in a normal year, or expected production this year, but on an average over several years, which, in most parts of Kansas, is heavily weighted downward because of drought.
In general, that production history number uses actual production over a period of, say, 10 years, tossing out the highest and the lowest yields, and then averaging the other years.
To illustrate the problem, let’s assume an example farm has a long-term normal production level of 40 bushels per acre with 1,000 acres of wheat ground. The normal production cost for this farm is $220 per acre, including land rent, equipment and repair, bank loans, fuels, fertilizer and herbicides, and a return to management, which amounts to putting food on the table and a roof over the head of the farmer and his family.
Each year, yields in Kansas have dropped due to drought or other disasters, such as freeze.
The resulting production number used as the basis for a total crop loss from the freeze after five years of drought-affected production would be calculated like this. Let's assume this farmer has insured at the 75 percent level:
n Over the past 10 years, the average yield has dropped from 40 bushels to 28.75 bushels per acre.
n At the 75 percent insured level, the coverage level is on 21.5 bushels per acre.
n As a result of being insured, the producer would receive $107.50 per acre from his or her insurance for the total crop loss.
n However, the operating cost per acre remains at $220.
n So, in spite of having insurance, the producer will face a loss of $112.50 per acre.
n If all 1,000 acres were destroyed due to drought or freeze, then this would amount to a total loss of $112,500 for that farmer.
Although these calculations are rough, and no farm operation is the same, some facts stand out clearly.
First, a farmer could not afford, nor is he offered, a 100 percent-coverage crop insurance for his farm.
Second, crop insurance in its present incarnation, at its very best, would pay some of the input costs of the farm operation, but not all of them—and certainly would not provide a living for the farmer and his family, his equipment and his land.
And, remember, many Kansas farms and food producers have been fighting and trying to survive this same scenario through up to seven years of drought and now a spring of late freezes.
The problem for consumers is that the outcomes from these disasters must be controlled and turned positive, with U.S. agriculture maintaining the flow of a safe, affordable and readily available food supply.
The alternative is to allow food producers to fail because of these disasters, and turn to the whims of governments and farms in the Middle East, Europe and other parts of the world to provide our food. We know how that works through our need for petroleum from those parts of the world.
As a farm manager, a major responsibility of the food producer is the managing of risk in his or her farming operation, and one facet is the selection and purchase of crop insurance.
Kansas producers are attempting to manage their risk by evaluating the costs and benefits of applying varying amounts of crop insurance to their operation.
The good news, according to the Risk Management Agency of the U.S. Department of Agriculture, is that 85 percent of the planted wheat acreage in Kansas does have crop insurance coverage, and those acres are insured at an average level of 68 percent.
John Morris is director of communications for the Kansas Association of Wheat Growers.