Tuesday, August 07, 2012

Crop Insurance, Farmer Income and the Drought

JenLast week I checked in with Scott Marlow, executive director of our partner organization Rural Advancement Foundation International-USA (RAFI), on the issue of crop insurance. The media has repeatedly reported that the vast majority of farmers have crop insurance and would weather this historic drought just fine. But we know from the calls we're receiving on our hotline that that is simply not the case. Here's what Scott had to say:

On July 31, the Wall Street Journal online ran an article entitled “Crops Hurt, But Farmers Will Still Get Paid.” The article begins “A historic drought across the middle of the U.S. is shriveling crops—but not many farmers' incomes.” Citing USDA statistics that 70% of crops are covered by crop insurance, this article is part of a growing voice that crop insurance means that there is no financial emergency behind this historic drought. Numbers like these look good from behind a desk, but not from behind the wheel of a tractor. Here’s why.

The Covered 70%
Certainly crop insurance for commodity farmers and strong commodity prices over the last few years help – and will keep some farmers from losing their farms. That is what crop insurance is designed to do. But looking behind the numbers shows a more complicated story.

Let’s start with the 70% coverage number. That 70% number is by acreage, not number of farmers or crop value, and it only includes crop acreage, not livestock. In addition, 70% coverage of farm acreage means farmers have coverage at some level, but the level of loss coverage is not more than 85% of anticipated income, and often much lower. Bottom line, having crop insurance does not make any farmer 100% covered. Not even close.

Farmers have the same problems with their crop insurance that all of us have with our home or car insurance. Crop insurance does not cover all of the loss. The highest rate of coverage (think about your car insurance deductible) is 85% of the anticipated income from the crop. Crop insurance coverage ranges between 85% of the value of the crop all the way down to catastrophic coverage that is just 27.5% of expected income, which doesn't pay the bills.

Corn is a good example of the best case scenario. Approximately 90% of corn acreage across the affected area has some level of crop insurance. According to the corn crop budget at Iowa State, the net return on corn at a price of $6.25 per bushel is around 32%, with the remaining 68% needed to cover the farmer’s cost of production. So in the very best case, 85% crop insurance coverage means the farmer loses almost 50% of their net income. If we take away 50% of your income for this year, would you feel like there is no emergency?

Many farmers also “book” their corn or beans at the beginning of the season to lock in prices, contracting to deliver a certain amount of the commodity at harvest at a specific price. Farmers with crop failure face having to buy corn or soy at inflated prices to replace the crop they didn’t grow in order to fulfill that contract.

The Uncovered 30%
There is also an assumption that the 70% is spread across all of agriculture. The 30% of uninsured crop acreage includes some uninsured commodities, but also includes most of the fruit and vegetable acreage. Because the value per acre of vegetables and specialty crops are usually much higher than corn or soybeans, that 30% of acreage represents much more than 30% of farm income. Again using Iowa as an example, the rate of crop insurance participation by acreage for corn is 90%. The rate of crop insurance participation for tomatoes is 0%, because there is no crop insurance available for tomatoes in Iowa.

The disaster assistance program designed for specialty crops - the Supplemental Revenue Assistance Program or SURE - expired in September of 2011. There is a program that provides benefits for uninsured crops - the Non-Insured Crop Disaster Assistance Program or NAP - but it only provides catastrophic benefits or 27.5%, so the return is often not worth the cost of the time spent signing up and the premium paid by the farmer.

The Rest of Agriculture
The 70% plus the 30% still doesn’t represent all farmers. While farmers who grows corn or soy may be helped by crop insurance and high prices, farmers who have to buy corn or soy, like for livestock feed, are far worse off. Anyone who grazes livestock right now is hurting since their pastures stopped producing weeks ago. Dairy or cattle farmers who should be harvesting excess hay for winter are instead buying expensive feed. Their income is based on being able to graze their animals and put up hay for the winter, and right now they can do neither.

The two programs that were passed in the 2008 farm bill to help livestock farmers - the Livestock Indemnity Program and the Livestock Forage Program - which help with losses of animals and forage respectively, also expired at the end of the 2011 fiscal year - last September. The two crop insurance policies available for livestock producers are very new, and have very low participation rates.

Anything more than wholesale
Disasters also hit very hard on the fastest growing segments of agriculture, those who sell crops into higher value local and specialty markets like farmers markets and organic. USDA disaster assistance programs provide benefits at the wholesale conventional price, which covers a much lower percentage of anticipated income for specialty or direct market farmers.

Fortunately, for the first time this year, organic corn, soybean, cotton and processing tomato growers were able to get crop insurance with an option to purchase benefits based on the organic price rather than the conventional price. But often specialty market producers are left to deal with disaster losses on their own.

Price versus Value
Finally, even if the crop insurance really did cover 70% of the farm losses, it does not address the effects of the drought on people and communities. Drought is a cruel disaster. Farmers watch their crops shrivel and die before their eyes over time. Livestock producers face having to buy feed with cash that they don’t have. Unlike a storm, you never know when a drought is going to end.

The farmers in this drought are facing decisions right now that have no good answer. We can put a price on the sale of livestock, but what is the cost of selling off a herd with genetics that a farmer worked for a lifetime to get right? We know that the stress of dealing with this drought will have significant adverse effects on the individuals, families and communities across the area.

Of course we need to make sure that the help we provide as a country reaches those with the greatest need. But make no mistake, there is no farmer who is well off in this drought, and some are facing absolute devastation. These are our neighbors and families, they are feeding our nation and they need our help. Farmers don’t need someone telling them they are better off than they think.

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