America’s largest farms are far less risky than smaller operations and typically have fewer crop insurance claims, according to a new working paper from top agricultural economists. And proposals to exclude those farms from crop insurance could drive up costs for small farmers.
The study comes as Congress takes up debate on the future of America’s farm policy.
In crop insurance, farmers pay significant premiums for insurance coverage that is delivered by the private sector. Those premiums are discounted to encourage more farmers to participate, which reduces taxpayers’ exposure to costly disasters.
The resulting insurance coverage kicks in only if there is a loss – weather disaster or sharp price declines – and only after farmers shoulder a deductible of at least 25%.
The system has become an essential risk management tool for most farmers, with 1.2 million insurance policies now protecting $106 billion worth of crops on 311 million acres in all 50 states. Farmers have spent more than $15 billion from their own pockets on policies in the last 4 years alone.
Its popularity is one reason farm policy opponents are targeting insurance coverage in the next Farm Bill. Specifically, critics have their sights set on larger farms – looking to cap premium discounts for some farmers and exclude other operations altogether.
Study authors Keith H. Coble and Brian Williams, economists with Mississippi State University, examined indemnity payments to farms growing corn and soybeans to determine risk levels. What they found is the average per acre yield indemnity declines dramatically for farms larger than 4,000 acres.
Coble and Williams note for corn, the indemnities dropped from $10.44 per acre for farms of 100 acres to less than $7.00 per acre for farms with over 4,000 acres – a 33% difference.
For soybean, the indemnities dropped from $4 an acre for farmers of 100 acres to less than $3.25 an acre for farmers of more than 4,000 acres – a 19% reduction.
If the findings of this study are representative, then the result of excluding larger farms from crop insurance would be more losses per acre, and, over time, more costly premiums for the farmers remaining in the program..
Tom Zacharias, president of the National Crop Insurance Services, a trade group representing crop insurers, explained.
“Insurance is about spreading risk among as wide a base as possible, and in crop insurance that means enrolling as many acres as possible,” he said. “Having large farms that are less risky in the system effectively makes the whole system less risky and makes premiums cheaper for everyone else.”
Conversely, removing less risky participants drives up costs for everyone else, much like removing safe drivers from auto insurance or young, healthy people from life insurance.
That could have negative consequences for the agricultural industry, said Art Barnaby of Kansas State University’s Department of Agricultural Economics, an expert in the field of crop insurance. He authored a similar joint paper with KSU Professor Mykel Taylor on Kansas farmers in October 2017.
“The negative consequence is you have people uninsured, which increases political pressure for disaster aid. Ad hoc disaster programs can be more expensive and don’t provide the same level of certainty for farmers,” Barnaby said. “With crop insurance, you have something to make a business on.”
Work by Barnaby and Taylor showed that when you get out of the Midwest and into areas with high-valued fruits and vegetables – areas like California and the Northeast – the proposed caps could ensnare some smaller farms as well, limiting risk management protection for crops that have no other safety net.
“Crop insurance works because Congress made investments throughout the years to ensure it is affordable, widely available and economically viable,” Zacharias concluded. “Any effort to reverse those investments will ultimately hurt farmers and taxpayers.”
Source: Farm Policy Facts
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