2001 Crop Insurance A Better Buy

Lower price election for some crops, however, including wheat

By Tracy Sayler

Although crop insurance price elections have slipped a bit for some crops in the 2001 growing season, producers will find that the “new and improved” federal crop insurance program (Agricultural Risk Protection Act of 2000, or ARPA) provides better value for most coverage levels.

Price elections this year for multi-peril coverage in Minnesota declined for some crops ($2.80 for wheat, versus $3.15 last year; $36/ton sugarbeets, versus $40 last year) stayed the same for some crops (like canola, at 9.3 cents/lb) and actually increased for other crops (Corn for grain is $2.05 this year compared to $1.90 last year; Soybean is $5.26, compared to $5.16 last year).  Price elections for 2001 were actually determined late last summer, to allow policy preparation time for the spring crops.

According to the USDA Risk Management Agency’s web site (http://www.rma.usda.gov) “RMA is required to use prices from the Department of Agriculture (USDA), when available, to determine the price election for crops covered under the federal crop insurance program. RMA uses prices from USDA’s National Agricultural Statistical Service (NASS) for each state’s price election. For each federally insured crop, RMA determines what the average prices would be statewide assuming average weather and yields. We have determined that the average price over time is the best indicator of what the price might be for an average year.

“We understand producers’ interest in obtaining the highest price election possible for their crop. RMA makes every possible effect to provide producers with a realistic price election for their crop, and carefully reviews the available data to assure that no errors are made in the computations. RMA is happy to make changes to the price election when NASS and USDA’s Cooperative State Research, Education, and Extension Service data call for an increase.”

Better coverage, value
The ARPA provides $8 billion over fiscal years 2001-2005 and provides additional premium assistance; provisions to address multiple year losses; increased flexibility in planting of a second crop after a failed or a prevented plant crop; strengthened requirements to protect against fraud waste, and abuse; and increased investment in risk management research, development, and education.

A key benefit of last year’s crop insurance reform is the higher federal subsidy for all coverage levels (except catastrophic or CAT coverage, which only protects against losses greater than 50% of the yield and at only 55% of the expected market price). For producers, the increased federal subsidies provide better value to crop insurance coverage, particularly at higher buy-up levels (see table).  For example, a producer who bought a policy under the old law to protect 70% of his yield paid 68% of the premium. Now that same farmer will pay 41% of the premium. The savings for most products and coverage levels amount to about 30%.

The better buys for higher levels of coverage should encourage buy-ups, and stronger interest in revenue products such as Crop Revenue Coverage (CRC— Production guarantee (Actual Production History or APH) plus price protection with optional, basic, and enterprise units), Income Protection (IP—APH plus price protection with enterprise units only) and Revenue Assurance (RA—APH plus price protection with optional, basic, enterprise, and whole farm units).

Though no insurance premium is charged for bare-bones CAT coverage, its administrative fee jumps from $60/crop/county to $100/crop/county, while the fee for additional coverage levels is $30 ($20 less for coverage up to 65%, and $10 more for 65% or greater).

                 Federal Crop Insurance Subsidy Levels

“Old” “New” Coverage Level Crop Insurance Crop Insurance  50/100 55% 67% 55/100 46% 64% 60/100 38% 64% 65/100 42% 59% 70/100 32% 59% 75/100 %24% 55% 80/100 17% 48% 85/100 13% 38%

Other ARPA Changes
APH Yield Adjustment Election—The APH Yield Adjustment Election is tailor-made for production areas that have suffered through multiple years of crop losses, such as the Red River Valley, where an erosion of their APH resulted in insurance coverage that for many became inadequate. The APH Yield Adjustment Election helps repair that damage. It allows producers to substitute a yield equivalent to 60% of the county yield (T yield) for each of the actual yields that fall below that mark in the event of natural disasters such as drought or excessive moisture. This “adjusted history” will be used to establish the coverage. The true history will continue to be used to derive the rate. Essentially, the provision allows a producer to get a better yield guarantee at the same premium rate. Selection of this option must be made in writing on a policy change form or application no later than the established sales closing date.

Quality Loss Adjustment protection—Quality loss adjustments will continue to be available under ARPA. In addition, producers will now have the option of purchasing quality loss adjustment protection on a basis that is smaller than a unit. These provisions add better protection when crops are sold on an identity preserved basis, with adjustments paid on the variability from a standard federal grade or base quality.

Added land—The procedure for insuring new land has become more restrictive: If it exceeds 50% of your existing insured cropland, or if it exceeds 640 acres, then a variable T-yield (with the number of years of records for the crop/county as determining criteria for percentage of T-yield applied) will be used to establish APH.  Or, the insured may request (through his or her crop insurance agent) establishment of an approved APH yield for the added land, accomplished by a review from the RMA’s Regional Service Office. The procedure for insuring added land was changed after some policyholders abused the system, applying reference (existing) unit yields to less productive land or excessively adding land to an existing unit, resulting in overstated APH yields. Some crop insurance officials say the administrative pendulum may have swung too far, however, and expect this new rule to be streamlined next year.

Fraud and abuse—ARPA strengthened the compliance aspects of the crop insurance program. Agents and adjusters whose claims records exceed 150% of the mean of claims by all other agents and adjusters operating in the same area will be audited. Further, the Farm Service Agency will now be involved in monitoring and fact finding relative to allegations of program fraud, waste and abuse.

NDSU Insurance and Marketing Simulator Online
Matthew Diersen, SDSU Extension and Andy Swenson, NDSU Extension, have developed an online worksheet (Microsoft Excel spreadsheet) which allows producers to calculate revenue from different crop insurance options (MPCI and CRC) and marketing strategies. You can find it online at http://www.ag.ndsu.nodak.edu/aginfo/cropmkt/cropmkt.htm.