Midlands farmers hit hard by drought in 2012 were prepared for the heat-induced yield losses thanks to an aggressive federal crop insurance program.
More than 90 percent of all acres planted in Nebraska and Iowa were protected by insurance, according to the U.S. Department of Agriculture’s Risk Management Agency.
Claims for yield and revenue losses could approach $1 billion in both Nebraska and Iowa.
The payouts reflect a change in the way Congress has structured farm programs, moving from an era of production limitations and direct disaster payments to one of risk management.
“Farmers were extremely well positioned (for the drought),” said William Murphy, administrator of the Risk Management Agency.
Murphy said new genetics in corn have been a boon to farmers and the crop insurance program.
“These new GMO crops are really having a lot of impact,” Murphy said. “(The drought) is as bad as 1988, but we are having much higher yields.”
As a result of high levels of crop insurance coverage — combined with high prices at harvest time and new drought-resistant genetics in corn — revenue in Corn Belt states like Nebraska and Iowa remained at near-record levels in 2012.
In years past, a drought like 2012 might have resulted in a crisis debate in Congress to enact billions of dollars in disaster assistance to farmers across the Corn Belt. Though billions of dollars in taxpayer subsidies for insurance premiums are still being spent — $6.9 billion in 2012 — much of the risk is borne by insurers.
“Crop insurance has become the foundation of the federal safety net,” said Brad Lubben, an agriculture policy economist at the University of Nebraska-Lincoln.
The idea of insurance is an easier sell with people who have no connection to agriculture, Murphy said. “To lay people in this country . . . it’s more acceptable than the direct payments.”
Today’s heavily insured farms are the result of the evolution of a crop insurance program that goes back to the 1930s, when farms were devastated by heat and lack of rain during the Great Depression.
But for nearly 50 years, the crop insurance program was considered an experiment that covered a limited number of crops.
That changed in 1980 with passage of the Federal Crop Insurance Act. The idea was to shift to crop insurance instead of the free government disaster payments that had been paid to farmers for various losses.
The 1980 legislation provided a government subsidy of 30 percent of the premiums for 65 percent coverage.
Still, farmers were reluctant to take on crop insurance payments at a time when Congress typically stepped up to provide ad hoc disaster relief after adverse weather conditions cut into yields — as it did in 1988, 1989, 1992 and 1993.
The movement toward widespread use of crop insurance began in 1996, when Congress decided that only farmers who purchased crop insurance would be eligible for disaster benefits for any crop year.
Crop insurance participation jumped. The number of policies purchased to protect yields on Nebraska corn went from 22,805 in 1992 to 49,362 in 1997.
Since then, Congress has continued to enact policies that move support for farmers from direct payments to crop insurance.
Currently, the RMA creates or approves crop insurance products that are sold by private insurance companies, providing subsidies that hold down the cost to farmers. In Nebraska, the $427.8 million in premiums for corn policies in 2012 included $255 million in subsidies.
Insurers must be licensed by the RMA’s Federal Crop Insurance Corp. to participate.
The RMA has also simplified the rules to help farmers understand their options. One policy manual now covers 10 insurance options. In the past, five insurance options once required farmers to read five different manuals.
New insurance products and new rules have proven attractive to farmers.
The most popular policy is one called “revenue protection.” It allows farmers to buy policies that establish a county-targeted price for the crop — such as $5.68 a bushel for corn in Douglas County for 2012 — but receive the harvest price if crop prices increase. In 2012, the $5.68 price guaranteed in the insurance policy turned out to be $7.50 at harvest time.
Crop insurance policies cover only a portion of the losses, depending on farmers’ decisions at the time of purchase. The level of coverage, say up to 75 percent of losses over 50 percent, determines the size of the premium.
That harvest-time price run-up, due to supply-and-demand dynamics during a drought year, is the key to a big revenue year on the farm in 2012.
Although many Nebraska farms use irrigation and had no losses in 2012, 34.8 percent of corn policies in the state had turned in claims by mid-December. That compared with 10.2 percent in 2007.
In mid-December, with a small percentage of claims yet to be finalized, the U.S. Department of Agriculture’s Risk Management Agency reported that 8.97 million acres of Nebraska corn were insured, and the claims payout was already at $624.9 million. The indemnity for soybeans had reached $9.9 million.
Lubben said historical trends would suggest the total losses for Nebraska crops in 2012 could go beyond $900 million by the time all claims are finalized.
The 2012 drought is a perfect example of how crop insurance is intended to work, Lubben said.
“Widespread drought led to losses across the Corn Belt, and the indemnity of crop insurance helped to fill the void,” he said. “This is not a windfall by any calculations. It’s lost crop revenue.”